You are on page 1of 40

KPIs of supply chain of retail sector - August 6th, 2008 Abstract

This paper attempts to track key performance indicators (KPIs) in order to figure out the performance of the Supply Chain in the retail sector. It also focuses on inventory replenishment strategies and capacity utilization in the retail sector. In recent years, this sector has spent considerable amount of time and money trying to improve its operations in such a way so as to respond efficiently to customers needs. This has led to several developments like the introduction of automated store ordering, usage of RFID and etc.

The KPIs helps in directly analyzing the performance of every specific activity and operation and hence also helps in zeroing down to the exact root of the problem, if any, and thus helps the managers to rectify them. The Improvement Opportunities are further explained in detail for achieving a better performance.

The

Key

Performance

Indicators

(KPIs)

The

KPIs

are

segregated

into

different

categories

accordingly

as

follows:

Supply Chain and Logistics: The network of retailers, distributors, transporters, storage facilities and suppliers that participate in the sale, delivery and production of a particular product.

% of time spent picking back orders: Number of hours spent on picking back orders as a percentage of working hours.

Sales order by FTE : This indicator measures the number of customer orders that are processed by full time employees per day. This helps evaluate the workforce cost per order. Scrap (or leftover) value %: Scrap (or leftover) value as a percentage of production value. Inventory Accuracy: Most Advanced Planning Systems calculate net inventory requirements. If the book inventory used as the basis for these calculations has a high error, the net inventory requirements generated will not reflect the true inventory needs. The inventory error should be factored into the safety stock calculation to protect

service levels from variance in inventory due to inventory count accuracy. Assertive continuous improvement programs should be in place to support a decrease in inventory count errors.

Inventory Accuracy = (|book inventory - counted inventory|)/book inventory Inventory Carrying Costs: Inventory Carrying Cost = Inventory Carrying Rate x Average Inventory Value

Inventory Carrying Rate: This can best be explained by the example below 1. Add up annual Inventory Costs: Example: Storage =Rs800k, Handling= Rs400k, Obsolescence =Rs600k, Damage= Rs800k, Administrative= Rs600k, Loss (pilferage etc)= Rs200k. Hence Total=Rs3,400k

2. Divide the Inventory Costs by the Average Inventory Value: Example: Rs3,400k / Rs34,000k = 10%

3. Add: Opportunity Cost of Capital (the return you could reasonably expect if you used the money elsewhere) = 9%, Insurance =4%, Taxes= 6%. Hence, total= 19% 4. Add the percentages: 10% + 19% = 29%. The Inventory Carrying Rate = 29% Missed Deliveries per Million (MPM): Measures supplier on time delivery by part reference ordered using the same logic as the quality measure PPM.

Several missed categories are defined such as ; Missing part reference, undershipped, overshipped, delivery window missed etc.

MPM = (Total number of missed deliveries / Total number of part references ordered) x 1,000,000 Delivery Schedule Adherence (DSA): Delivery Schedule adherence (DSA) is a business metric used to calculate the timeliness of deliveries from suppliers. Delivery schedule adherence is calculated by dividing the number of on time deliveries in a period by the total number of deliveries made. The result is then multiplied by 100 and expressed as a percentage.

Customer order promised cycle time: The anticipated or agreed upon cycle time of a Purchase Order. It is gap between the Purchase Order Creation Date and the Requested Delivery Date. This tells you the cycle time that you should expect (NOT the actual). Inventory replenishment cycle time: Measure of the Manufacturing Cycle Time plus the time included to deploy the product to the appropriate distribution center. Material value add : Sell price minus material cost divided by material cost. Supply chain cycle time: The total time it would take to satisfy a customer order if all inventory levels were 0.

Fill Rate: The number of items ordered compared with items shipped. Fill rate can be calculated on a line item, SKU, case or value basis.

On time ship rate: What percent of orders where shipped on or before the requested ship date. On time ship rate can be calculated on a line item, SKU, case or value basis. Perfect Order Measure / Fulfillment: The error-free rate of each stage of an order. Error rates are captured at each stage (order entry, picking, delivery, shipped without damage, invoiced correctly) and multiplied together.

Customer order cycle time: The average time it takes to fill a customer order. % of backorders: The number (or percentage) of unfulfilled orders.

Inventory: Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials. Independent demand ratio: For manufacturers that also supply replacement parts and consumables this metric helps to define the % mix of demand for an item from

independent (outside sources) vs dependent (inside sources). The ratio is calculated by dividing the unit usage for customer orders by the total unit usage of the item from all sources (work orders, sales samples, destructive testing, inventory adjustments, etc.) Early receipts to MRP date (required date): Early receipts to MRP date - This is a measure on your Planning efficiencies. Some planners or warehouse personnel may request that the material be brought in long before the plant/operators need the parts. Reasons for doing so may be quality, lead time variance, buffer stock etc. Early receipts to MRP produce higher levels of inventory that are not required yet. In a way, this is at the other end of the scale than JIT. Measure: MRP due date vs Receive to Dock (stores) date. Early PO Receipts to PO due date: Early receipts to PO date - This is a measure on your suppliers and their diligence to supply per the contract date. Early receipts to PO produce unexpected deliveries turning up, congested goods inwards and of course higher that projected inventory levels. Measure: PO due date vs Receive to Dock (stores) date.

Sell through %: A percentage of units sold during a period and is equal to Units sold divided by (units sold + on hand inventory). This can also be described as Units sold

divided

by

Beginning

Inventory

Quantity.

Inactive Stock: Products with Stock (in units or Rs), and without movement -sales in a given period of time (depending on movement of the market). Useful to define continuity of a specific product-size (SKU), or promotion campaigns. Most useful in companies with a big number of SKUs.

Average age of inventory: The (average) age of each product in stock. For example, product received in Jan, but remains until Aug.

Unit Cost per batch: Unit Cost per batch = (Cost/Quantity) for each batch Primarily used in FIFO (First In First Out) Method Assumes an inventory of non-unique goods (that is, every one is similar to every other one) Generally preferred inventory valuation method. Assumes inventory is sold in the order that it is stocked, with the oldest goods sold first and the newest goods sold last. Uses the unit cost per batch of acquired/produced goods, and counts the inventory backwards from the newest batch. Inventory Value: Inventory Value = (Average Unit Cost) x (Units of current Inventory) Stock cover: Stock cover is the length of time that inventory will last if current usage continues.

Stockouts in period: Stockouts indicate where a demand cannot be met due to the absence of the required inventory.

Inventory lead time: Lead time is the length of time it takes to obtain inventory from suppliers. Inventory Turnover: The number of times that a companys inventory cycles or turns over per measurement period (month, quarter, year).

Inventory months of supply: Inventory On Hand / Avg Monthly Usage

SCOR: The Supply-Chain Operations Reference-model (SCOR) is a process reference model that has been developed and endorsed by the Supply-Chain Council as the crossindustry standard diagnostic tool for supply-chain management. SCOR enables users to address, improve, and communicate supply-chain management practices within and between all interested parties.

Order fulfillment cycle time: Order Fulfillment Cycle Time is a continuous measurement defined as the amount of time from customer authorization of a sales order to the customer receipt of product.

Total supply chain management cost: Total Supply Chain Management Cost is a

discrete measurement defined as the fixed and operational costs associated with the Plan, Source, Make, and Deliver supply chain processes.

Upside supply chain flexibility: Upside Supply Chain Flexibility is a discrete measurement defined as the amount of time it takes a supply chain to respond to an unplanned 20% increase in demand without service or cost penalty.

Direct Product Cost: Sum of costs associated with manufacturing a specific product. Direct Labor Cost: Sum of costs associated with payment of the employee insurances, taxes etc.

Direct Material Cost: Sum of costs associated with acquisition of support material. Time needed to recruit/hire/train additional labor: Amount of time required to achieve a certain substantial improvement concerning the number of employees. Time needed to obtain additional capital: Amount of time required to achieve a certain substantial improvement concerning capital.

Time needed to obtain additional equipment: Amount of time required to achieve a certain substantial improvement concerning equipment acquisition.

Finished product cycle time: Average time associated with finalizing activities, such as: package, stock, etc.

Test cycle time: Average time associated with testing and trying out activities. Cost of managing processes: Periodic costs of managing processes, usually based on the number of FTEs involved in management functions for processes.

Cost of goods sold (COGS): Cost of Goods Sold includes all ex penses directly associated with the production of goods or services the company sells (such as material, labor, overhead, and depreciation). It does not include SG&A.

Perfect Order Measure / Fulfillment: The error-free rate of each stage of an order. Error rates are captured at each stage (order entry, picking, delivery, shipped without damage, invoiced correctly) and multiplied together.

Cash Conversion Cycle (CCC): A metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. Also known as cash cycle. Calculated as: CCC =

DIO + DSO - DPO Where: DIO represents days inventory outstanding, DSO represents days sales outstanding, DPO represents days payable outstanding. Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery. This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the companys bottom line.

Improvement

Opportunities

in

Retail

Logistics

In general, the logistic decisions taken by the retailer can be improved by increasing: the level of differentiation when controlling the operations;

the

level

of

sophistication

in

the

Decision

Support

Systems;

the level of integration of multiple decisions (made by the retailer company and/or its supply chain partners).

Below, several examples are given to illustrate how each of these general guidelines can be translated into specific solutions, taking into account the fact that different retailers and/or different products need different logistic solutions.

The

Level

of

Differentiation

when

Controlling

the

Operations

Different types of items need different ways of replenishment. For example ABCclassification, based on the perception that items with large turnover (A-items) need to be treated differently compared to items with low turnover (C-items). While there is some value in this approach, we propose a different classification for retail-items. We distinguish the following five main product categories:

1. Phasing-in/out items (including items with a short Product Life Cycle) 2. 3. 4. Purchasing Capacity Promotion driven driven items items items

5.

Regular

items

Below, each of these five product categories is discussed in more detail. The phasing-in/out items (including items with a short product life cycle) are different from other items since there is either very little demand history available, or it becomes very risky to carry inventory due to obsolescence. Thus, for these items, special attention is given to issues like demand forecasting and inventory management in an environment with high risk of obsolescence and/or markdown policies. Improvement opportunities reported in the literature are:

Using similarity in forecasts made by different individual people as an indicator of forecast accuracy when no sales data are available yet;

Using early sales data to improve demand forecasts in the case of style goods; Using repeat rate information from customer cards to improve demand forecasts when Using new optimal markdown products policies to reduce are the risk of introduced; obsolescence.

The demand forecasts for items with a short product life cycle (like style goods) can be improved substantially in two ways. The first improvement applies when an initial

production or buy decision has to be made and no sales data are available yet for the new assortment. When each member of a buying committee makes an independent demand forecast for every product, the variance in these individual forecasts is an almost perfect predictor of the overall demand forecast accuracy. This allows the manufacturer and/or retailer to select the items with a high demand forecast accuracy, which can be manufactured at the beginning of the production season. The production of items with low demand forecast accuracy is postponed until a group of large retailers placed their first orders (called the Early Write program). These first orders typically make up approximately 20% of the total orders. While this procedure was first applied at a manufacturer, a similar procedure may also be used at a retailer, when he/she receives his/her first actual sales data in the new season. Fisher et al. (2001) report how the inventory replenishment of products with a short product lifecycle can be optimized for a retailer, when the retailer has two buying opportunities: an initial buy and a reorder opportunity.

Another tool to quickly evaluate the performance of items that are phasing in is applied by Dunnhumby at Tesco (Hill and Dowle, 2003). The strength of their approach is that they use detailed information on the buying behavior of individual customers. This is

possible thanks to the retailers customer card, which is providing them with information for more than millions of customers. When a new product is introduced, they measure not only the sales rate, but also the repeat rate, which is defined as the proportion of customers who come back to the store for the new product. This information enables them to tell within weeks of the launch whether a product is successful or not. To forecast demand, they identify the 10 most similar product launches (in terms of how the repeat rate evolves over time) that have taken place in the same product category in the last 2.5 years.

The promotion items are items that are part of the regular assortment, but are either offered temporarily at a reduced price or offered at the regular price but with additional visibility (e.g. via advertisements or via a special location in the store). Some of the possible Improvement opportunities are:

Using marketing intelligence and/or econometric models to forecast demand for the promotion Using Coordinating items a the and push-strategy promotion their with with two the substitutes waves supplier

For these items, demand should no longer be forecasted based on extrapolation of time series (e.g. via methods like exponential smoothing or moving average, which are typically used when the item is not promoted), but based on marketing intelligence taking into account price-elasticities and/or the impact of promotions and advertising on consumer buying behavior. Since the sales during promotions may well be a (large) multiple of regular sales, promotions should be typically coordinated with external suppliers to make sure enough products are available in time in the retailers DC. For items in the same product category as the promoted item, substitution effects may occur, which have to be taken into account when forecasting their demand. While regular items are typically pulled by the retail stores, promotion items are typically pushed by a central decision maker. For example, the shipments from the DC may typically be based on a so-called alpha-policy: the items are distributed in two waves, and, in the first wave, alpha % is pushed to the stores. Often, the optimal value for alpha is somewhere between 70 and 80%. A few days after the promotion started, the remaining 20 to 30% is distributed based on the early sales data.

The purchasing driven items are one-time-items that are not part of the regular

assortment, but are bought by the Purchasing department. The reason might be that they spotted a special buying or selling opportunity. The purchasers buy a certain quantity of the product, and when this lot is sold-out, no replenishment from the supplier takes place.

The amount purchased is often determined by purchasing considerations (e.g. based on discount-opportunities) rather than by demand forecasting. For the distribution of the purchasing driven items to the stores, a push-strategy with two waves, like the alphapolicy, may be adopted.

The capacity driven items are items used by the Operations department to smooth handling and/or transportation capacities. If, for example, the demand for these capacities varies within the week, smoothing may lead to a reduction in the total assets needed. To smooth handling-capacities in the DC and the stores, the review period for items with sufficient excess shelf space1 may be increased by decreasing the delivery frequency. For example, a store may order part of its assortment on a weekly basis, while another part of its assortment is ordered on a daily basis. The items ordered on a

weekly basis can be ordered in the quiet part of the week, in order to smooth the handling capacity in the retail supply chain. Ordering with a lower frequency often leads to higher lot-sizes per item, implying also higher handling efficiency. Another way to benefit from reduced ordering frequencies is to redesign the retailers DC. If all items ordered on a weekly basis are stored in a separate part of the DC, the total walking distance for the order pickers per week can be reduced substantially. A prerequisite for this is that all items in this part of the DC have excess shelf space in all stores. To smooth transportation capacities, large volume/large sales items may be used. In groceries, these are typically items like soft drinks. On Tuesday and Wednesday, the regular replenishment quantities ordered by the stores may be low, while on Thursday and Friday these quantities may be high. By ordering these items in advance on Tuesday and Wednesday instead of on Thursday and Friday, the capacity load is smoothed. If the retail store has little storage space available, this option may not be feasible. . The regular items are all items that are not phasing in or out, are not on promotion, and

are not purchasing or capacity driven. Before discussing the operational control of the regular items in the store, a few notes should be made on the trade-off between inventory holding costs and customer service, and its impact on the control of the entire supply chain. In several projects with retailers, it has been noted that at the operational level (where the size of the store and the assortments are given), the space in the retail store should be considered as a constraint rather than a cost factor. Moreover, handling costs at the retailers DC and particularly at the store level usually outweigh t he relevant

1 The items with sufficient excess shelf space are often slow-moving items and/or (physically) small items.

inventory holding costs for regular items by far. In addition, the inventory contributes most to the service level of the final customer, if this inventory is stored mainly downstream in the supply chain. Therefore, the supply chain should often aim to handle goods as long as possible in the most efficient handling units (trucks or pallets (or even layers) when distributed from the manufacturer to the retailers DC), and

accept the higher inventory levels in the retailers DC. The goods can be shipped as soon as they are produced. This concept is called Supply Driven Coordination or Chain Synchronization. Moreover, from the retailers DC one might ship inventory as soon as possible to the store, when it fits on the shelves (given the number of facings, determined at the tactical level in the planograms).

In current ASO systems, the regular items often follow a traditional (R,s,nQ)-policy2. This means that every review period (R), the inventory position is checked to see whether it is below the reorder level (s). If so, n times Q items are being ordered with Q being the case pack size and n the minimal integer number of case packs needed to make sure that, after reordering, the inventory position is equal to or higher than s. These parameters still leave a number of options open to further differentiate the inventory replenishment strategies within the regular items.

For example, the review period R may be different for different items. In a supermarket environment, we noted that perishables and non-perishables have clear distinct sales and logistic characteristics. By definition, perishables have a smaller Shelf Life than nonperishables. As a result, when controlling perishables inventories, the focus is more on reducing waste. For perishables with a very low Shelf Life, this reduction of waste may

be achieved by decreasing the review period (i.e. by increasing the delivery frequency). Not only the review period may be different for different items, but also the reorder level may be determined in a different way for different items. If we consider again the perishables with a very low Shelf Life, we note that apart from decreasing the review period, other options to reduce the waste are: reduction of the lead-time (e.g. by using cross-docking or direct delivery), keeping average sales per item relatively high (by keeping assortments limited) and/or using the customers willingness to substitu te demand within a product category.

2 Note that a full-service concept (fill the shelves as soon as a new case pack fits in) is a special case of (R,s,nQ) with s equal to the maximum shelf capacity minus the case pack size plus one consumer unit.

Apparently, for these items, the reorder level should not only be based on small leadtimes and high average demand, but also take into account the product substitution. Most ASO systems are primarily designed for non-perishables and do not take into account these substitution effects. For items with very high substitution rate (e.g. bread)

this

would

lead

to

unrealistic

reorder

levels.

For vegetables and fruit, reduction of waste is also important, and this can be improved by increasing the quality of the demand forecast. Note that the demand forecast is a major factor in the reorder level. The demand forecast might be improved by taking into account price-elasticity, the quality of the inventory on hand and seasonal effects. Finally, for perishables with multiple lots on the shelf, each lot having a different age, more complex models may be needed to determine the reorder level. There are numerous models in the literature dealing with perishable items.

The

Level

of

Sophistication

in

Reorder

Systems

Thanks to economies of scale and cheaper and better information technology, large retail chains are trying to distinguish themselves from other retailers by increasing the level of sophistication of their reorder systems. At this moment, the quality of reorder systems varies greatly between retail chains, and, even within retail chains, it may differ substantially per retailer. The level of sophistication of their reorder system may differ with respect to:

1. 2. the

the quality

level of the

of input

automation; data;

3. the intelligence in setting the logistic parameters in the reorder system; 4. the ability to visualize economic trade-offs;

5. the ability of the personnel to make decisions or to evaluate proposed decisions. In some stores, the reorder decisions are still made manually, without any support from a computer. In other stores, the computer may give advice on the timing and the quantity to be ordered for most items. But even in those stores, part of the assortment may still be ordered without the help of a computer. At a grocers for example, we noted that the majority of non-perishables were ordered via an ASO system, while certain perishables were ordered manually, since they either required additional intelligence (like a judgment on the quality of the inventory for vegetables), or they had to be ordered via a separate ordering system (belonging to a particular supplier). Even when automated store ordering is implemented, the data quality has a large impact on the success of the system. It is known from empirical research that inventory data are highly inaccurate. To increase the sales data accuracy retailers may either apply more strict rules on how to register sales, or they may attach an electronic identification

device to each individual product, which is scanned automatically at the cash register. The intelligence in setting the logistic parameters in the system (i.e. the reorder level and the order quantity) also differs a great deal. Sometimes, a fixed reorder level is applied, and sometimes the reorder level varies over time, taking into account weekly sales patterns, seasonality and/or trends in sales. In some cases, the determination of the reorder level depends on many different variables like the weather, substitution effects, the review period, the price, etc. These more complex situations are often not dealt with by the ASO systems, but are often handled by store clerks who have considerable experience in their product category.

Also the order quantity is determined in many different ways. The simplest case is when the supplier determines the order quantity by fixing the case pack size (typically for most items in the supermarket). If, however, the item is made for one particular retailer only, the retailer can optimize the case pack size. This optimization should not only include the minimization of the inventory holding costs and the fixed ordering costs, but also take into account operational constraints like the maximum shelf capacity. Ideally, the computer should not only calculate the optimal solution, but also offer insight to the decision maker on the economic trade-offs between important

performances indicators. In the example of the case pack size, we can think of the following performance indicators: the number of orders per year, the total handling time needed, the expected total number of refills needed (if the case pack size is too big to put on the shelf), the total inventory and the resulting service level to the customers To be able to make this trade-offs the personnel needs good training. Purchasers for example, who are often responsible for setting the case pack size in cooperation with the supplier, may be more focused on and trained in getting the lowest price than in making an overall evaluation of the impact of the case pack size on all performance indicators. In addition, at the store level, where store managers or store clerks are responsible for the determination of the order quantities, the level of education may differ greatly.

The Level of Integration of Multiple Decisions (Made by the Retail Company and/or Its Supply Chain Partners)

The decisions with respect to inventory and capacity management are often affecting many different performance indicators, organizational units and hierarchical levels

within these organizational units at the same time. Often, in practice only partial effects are taken into account when decisions are being made. As a result, the quality of the decision-making can be improved by increasing the level of integration. We distinguish three types of integration:

1. Integration of all relevant performance indicators in the supply chain; 2. Integration of decisions made at different organizational units;

3. Integration or coordination of decisions made at different hierarchical levels. Below some examples are given, which are related to inventory and capacity management and which were encountered in retail supply chains. Each example includes one or more types of integration.

Example

When deciding on the case pack size, a non-food-retailer used the classical Economic Order Quantity formula. This formula is almost a hundred years old and applied successfully at many companies in multiple industries. The formula is derived from a model, which only considers the inventory holding costs and the fixed ordering costs. Cost analysis in several retail supply chains (including this one) showed that, in fact,

handling costs are often far more important than inventory holding costs, and should, therefore, be included in the decision-making. As a matter of fact, not only handling costs in the store, but also handling costs at the retailers DC and/or the supplier may be significant and affected by the decision on the case pack size. In this case, the handling at the retailers DC had to be taken into account as well, whereas the implications for the supplier were only minor. Finally, note that even a focus on total relevant costs in the entire supply chain may be too narrow-minded. The customer service level for example may also be affected by the case pack size.

Example

Within retail chains, Marketing and Operations are often separate departments. Marketing typically decides on issues like the marketing strategy, target customer service level, the store layout, depth and breadth of the assortment, pricing, promotions and shelf space allocation (via planograms). Operations typically decide on issues like (in) direct delivery, delivery frequencies, replenishment strategies (pull/push), reorder levels, minimum lot-sizes, etc.

Sometimes the decisions from both departments are interdependent, but this is not

always taken into account when the actual decisions are being made. For example, planograms and reorder levels should be matched. If the space allocated to a product is less than the space required for operations (which is mainly based on the reorder level and the case pack size), inefficient handling may be the result: if an order arrives at the store, it may not fit on the shelves, leading to leftovers, which are sent to the backroom and have to be taken back to the shelves again later on.

Example

A retailer typically aims for a particular market segment and designs his logistics strategy to meet the requirements of this market segment. For example, some retailers aim for high customer service, while others primarily aim for low costs. To make their strategies work, the retail companies have to ensure that their long-term marketing and logistics strategies are in line with the replenishment strategies applied at the store level every day. If, e.g. at the shop floor, the replenishment strategy is to fill the shelves completely as soon as a new case pack fits in, this would be in line with a high customer service objective, but not with a low cost strategy. In case the inventory replenishment strategy is determined locally (at the store level) by individual people, there is a serious

risk that either these people have different objectives, or they are simply not aware of the link between their decisions and the strategy of the retail chain.

Concluding

Remarks

In this paper, we have shown that with the knowledge of the KPIs both customer service and the capacity utilization in retail chains can be increased by improving the logistic decisions taken by the retailer. New technologies allow the retailers to improve their logistic decisions by increasing either the level of differentiation, the level of sophistication and/or the level of integration in their decision-making.

We have described the KPIs by dividing it into different categories of its respective field: Supply Chain and Logistics, Inventory, SCOR (Supply-Chain Operations Reference-model), Cash Conversion Cycle (CCC). All these metrics aids in the supply chain management of the retail sector. In this paper, we described the meaning, formula and significance of each KPI.

In many retail chains, different items need different logistic solutions. In this paper, we

distinguished five product categories: items that are phasing-in/out, items that are on promotion, items that are driving the utilization of capacities, and regular items. All these categories require a different way of controlling the operations. Most ASO systems currently applied are primarily developed for regular items. In this paper, we describe how these ASO systems can be improved to also support other products. All these findings are based on observations at the retailers in Kolkata.

A final remark can be made on the importance of the analysis of the KPIs in retail chains, and its impact on the focus of Retail Logistics and its decisions.

References

Gunasekaran A, Patel C, McGaughey RE (2004) A framework for supply chain performance measurement.

Gunasekaran A, Tirtiroglu E (2001) Performance measures and metrics in a supply chain environment.

Michael Armstrong (3rd Edition) Performance Management: Key Strategies and Practical Guidelines

Peter

Meindel,

(2007)

Supply

Chain

Management

Schwarz LB (2004) The stat of practice in supply chain management: a research perspective, inapplications of supply chain management and e-commerce research in industry. Advertisement

Boom in the Retail Sector : Reliance Mart - June 27th, 2008 Boom in the Retail Sector : Reliance Mart By Aayush Patni Key People Mukesh Ambani, Reliance Retail Ltd (RRL), Chairman & Managing Director K. Radhakrishnan, CEO, Reliance Hypermarket Raghu Pillai, Reliance Retail, Chief Executive & President Launching of Reliance Mart Aug 15: Reliance Retail Ltd (RRL) launched its first Hypermarket named 'RelianceMart' at Iscon Mega Mall (biggest mall in Gujarat) in Ahmedabad. Reliance Mart, 3-storey Mart spread over 1,65,000 sq ft will have on its shelves over 95,000 products ranging from fresh produce, food and grocery, home care and health products, apparel and accessories, non-food FMCG products, consumer durables and IT, automotive accessories, lifestyle products and footwear with aggregate stocks of about half-a million pieces. This Hypermart is being opened in less than a year of Reliance's entry into the 300-billion-dollar booming organised retail business. Last November, it had set up a cluster of Reliance Fresh stores in Hyderabad. According to Raghu Pillai, President and CEO (operations and strategy), Reliance Industries Limited (RIL), each of the hypermarket "will be better than the best in the market." Services Offered

It offers some unique services to the shoppers like tailoring, shoe repair, watch repair, a photo shop, gifting services and laundry services all within the store under one roof and also it has its own bakery shop. The launch of RelianceMart is a step forward by Reliance Retail towards providing an international shopping experience to the customers at unmatched affordability, guaranteed quality and choice of products and services. RelianceMart will also provide easy and attractive finance options, including zero per cent financing for the purchases on select products. RelianceMart will continue to offer all its customers RelianceOne, a common membership and loyalty programme across all its formats, which follows the philosophy of 'Earn Anywhere, Spend Anywhere'. Future Plans The next two hypermarkets are to be opened in Jamnagar in Gujarat and in the NCR by next month with plans to open 30 such marts by the year. Raghu Pillai, President and CEO (operations and strategy), Reliance Industries Limited (RIL) said the company is planning to set up 500 hypermarkets across 784 towns by 2010. Reliance Retail is building a robust and state-of-the-art supply chain infrastructure spanning the entire country, besides setting up its own cold storage chain. It is expected to generate direct employment for half-a-million people and indirect employment to two million. Reliance hypermarket CEO K. Radhakrishnan said six malls under the RelianceMart brand would come up in the national capital region (NCR), five each in Punjab and Andhra Pradesh, three in Gujarat and two in Bangalore. Strategy The hypermarket would be selling the products on EDLP (every day low price) basis at prices 15-20 percent lower than market prices. In order to grow faster and better in local markets with higher margins, it has focused largely on local brands instead of national brands or private labels. Local brands includes Induben Khakrawalas Namkeens, Lijjat Papad, Wagh Bakri and Madhur (spices brand). This is in addition to 100 private labels that Reliance plans to display. Companys Sources says that the share of regional brands in the Hypermarts would be over 10%. Strengths Keeping local brands at the outlets is more profitable and also makes the supply chain more efficient. Being a bulk purchaser, Reliance Mart can offer products at very low prices. Also taking into consideration the local brands, the products at the outlets would be easily acceptable by the customers. And there would be comparatively less efforts needed by the marketer to explain the product to the consumers. Weaknesses In some cases, few regional brands strongly liked by the consumers offer lower margins than that offered by the national brands. It has to face a tough competition by big shopping malls ie. Big Bazaar, Spencer Hyper, Vishal Mega Mart nad the upcoming Wall Mart. Advertisement

Abstract Key words: Organized Retailing and Kirana Shops India's retail sector is going to transform and with a three-year compounded annual growth rate of 46.64 per cent, retail sector is the fastest growing sector in the Indian economy. Traditional markets are

transforming themselves in new formats such as departmental stores, hypermarkets, supermarkets and specialty stores. Western-style malls have begun appearing in metros and near metro cities, introducing the Indian consumer to a new shopping experience. KSA-Technopak, a retail consulting and research agency, predicts that by 2010, organized retailing in India will cross the US$ 21.5-billion mark from the current size of US$ 7.5 billion. The Indian retail market is of enormous size about US$ 350 billion. But organized retail is not so huge and it is at only US$ 8 billion. However, the opportunity for growth is hugeby 2010, organized retail is expected to grow to US$ 22 billion. With the growth of organized retailing estimated at 40 per cent over the next few years, Indian retailing is clearly at a tipping point. This article is an attempt to analyse the areas where retail sector is growing and will grow, what will be the target market segment for the retailers and how will they try to serve this segment. Overview India is witnessing an unprecedented consumption boom. The economy is growing between 8 to 10 percent and the resulting improvements in income dynamics along with factors like favorable demographics and spending patterns are driving the consumption demand. Indian Retail Industry is ranked among the ten largest retail markets in the world. The attitudinal shift of the Indian consumer in terms of "Choice Preference", "Value for Money" and the emergence of organized retail formats have transformed the face of Retailing in India. The Indian retail industry is currently estimated to be a US$ 200 billion industry and organized Retailing comprises of 3 per cent (or) US$6.4 Billion of the retail industry. With a growth over 20 percent per annum over the last 5 years, organized retailing is projected to reach US$ 23 Billion by 2010. The Indian retail industry though predominantly fragmented through the owner -run " Mom and Pop outlets" has been witnessing the emergence of a few medium sized Indian Retail chains, namely Pantaloon Retail, RPG Retail, Shoppers Stop, Westside (Tata Group) and Lifestyle International. In the last few years, Indians have gone through a dramatic transformation in lifestyle by moving from traditional spending on food, groceries and clothing to lifestyle categories that deliver better quality and taste. Modern retailing satisfies rising demand for such goods and services with many players entering the bandwagon in an attempt to tap greater opportunities. According to the report of American Management Consulting Firm A. T. Kearney's 2006 Global Retail Development Index (GRDI), India is on the first position , continuing for two years (2005 and 2006), among 30 countries as the world's most attractive market for mass merchant and food retailers seeking overseas growth. On the other hand, China is loosing its attractiveness and making the way to India GRDI helps retailers to prioritize their global development strategies by ranking emerging countries based on a set of 25 variables including economic and political risk, retail market alternatives, retail saturation level, and the difference between gross domestic product growth and retail growth. The study quotes: "The Indian retail market is gradually but surely opening up, while China's market becomes increasingly saturated." The Growth Drivers The Indian Retail growth can be attributed to the several factors including * Demography Dynamics: Approximately 60 per cent of Indian population below 30 years of age. * Double Incomes: Increasing instances of Double Incomes in most families coupled with the rise in spending power. * Plastic Revolution: Increasing use of credit cards for categories relating to Apparel, Consumer Durable Goods, Food and Grocery etc.

* Urbanization: increased urbanization has led to higher customer density areas thus enabling retailers to use lesser number of stores to target the same number of customers. Aggregation of demand that occurs due to urbanization helps a retailer in reaping the economies of scale. Investment Opportunities * Potential for Investment: The total estimated Investment Opportunity in the retail sector is around US$ 56 Billion in the Next five years. * Location: with modern retail formats having made their foray into the top cities namely Hyderabad, Coimbatore, Ahmedabad, Mumbai, Pune, Chennai, Bangalore, Delhi, Nagpur there exists tremendous potential in two tier towns over the next 5 years. * Sectors with High Growth Potential: Certain segments that promise a high growth are o o o o o Food and Grocery (91 per cent) Clothing (55 per cent) Furniture and Fixtures (27 per cent) Pharmacy (27 per cent) Durables, Footwear & Leather, Watch & Jewellery (18 per cent).

* Fastest Growing Formats: Some of the formats that offer good growth potential are: o o o o o Specialty and Super Market (45 per cent) Hyper Market (36 per cent) Discount stores (27 per cent) Department Stores (18 per cent) Convenience Stores and E-Retailing (9 per cent)

* Supply Chain Infrastructure: Supply chain infrastructure in terms of cold chain and Logistics. * Rural Retail: Retail sector offers opportunities for exploration and investment in rural areas, with Corporates and Entrepreneurs having made a foray in the past. India's largely rural population has caught the eye of retailers looking for new areas of growth . ITC launched the country's first rural mall 'Chaupal Sagar', offering a diverse product ranges from FMCG to electronics appliance to automobiles, attempting to provide farmers a one-stop destination for all of their needs. There has been yet another initiative by the DCM Sriram Group called the 'Hariyali Bazaar', that has initially started off by providing farm related inputs and services but plans to introduce the complete shopping basket in due course. Other corporate bodies include Escorts and Tata Chemicals (with Tata Kisan Sansar) setting up agri-stores to provide products/services targeted at the farmer in order to tap the vast rural market. * Wholesale Trading: wholesale trading also holds huge potential for growth. German giant Metro AG and South African Shoprite Holdings have already made headway in this segment by setting up stores selling merchandise on a wholesale basis in Bangalore and Mumbai respectively. These new-format cash-and-carry stores attract large volumes from a sizeable number of retailers who do not have to maintain relationships with multiple suppliers for all their needs. * Cheap Consumer Credit Major Formats of In-Store Retailing Format Description

The Value Proposition Branded Stores Exclusive showrooms either owned or franchised out by a manufacturer. Complete range available for a given brand, certified product quality Specialty Stores Focus on a specific consumer need, carry most of the brands available Greater choice to the consumer, comparison between brands is possible Department Stores Large stores having a wide variety of products, organized into different departments such as clothing, house wares, furniture, appliances, toys, etc. One stop shop catering to varied/ consumer needs. Supermarkets Extremely large self-service retail outlets One stop shop catering to varied consumer needs Discount Stores Stores offering discounts on the retail price through selling high volumes and reaping economies of scale Low Prices Hyper- mart Larger than a supermarket, sometimes with a warehouse appearance, generally located in quieter parts of the city Low prices, vast choice available including services such as cafeterias. Convenience stores Small self-service formats located in crowded urban areas. Convenient location and extended operating hours. Shopping Malls An enclosure having different formats of in-store retailers, all under one roof. Variety of shops available to each other.

Indian Retail- expanding the number of formats In modern retailing, a key strategic choice is the format. Innovation in formats can provide an edge to retailers. Organized retailers in India are trying a variety of formats, ranging from discount stores to supermarkets to hypermarkets to specialty chains. Formats Adopted by Key Players in India Retailer Original formats Later Formats RPG Retail Supermarket (Foodworld) Hypermarket (Spencer's)Specialty Store (Health and Glow) Piramal's

Department Store (Piramyd Megastore) Discount Store (TruMart) Pantaloon Retail Small format outlets (Shoppe) Department Store (Pantaloon) Supermarket (Food Bazaar) Hypermarket (Big Bazaar) Mall (Central) K Raheja Group Department Store (shopper's stop) Specialty Store (Crossword) Supermarket (TBA) Hypermarket (TBA) Tata/ Trent Department Store (Westside) Hypermarket (Star India Bazaar) Landmark Group Department Store (Lifestyle) Hypermarket (TBA) Others Discount Store (Subhiksha, Margin Free, Apna Bazaar), Supermarket (Nilgiri's), Specialty Electronics Road Ahead; Plans of Large Retailers * Reliance Retail: investing Rs. 30,000 crore ($6.67 billion) in setting up multiple retail formats with expected sales of Rs. 90,000 crore plus ($20 billion) by 2009-10. * Pantaloon Retail: Will occupy 10 mn sq.ft retail space and achieve Rs.9,000 crore-plus ($2 bn) sales by 2008. * RPG: Planning IPO will have 450-plus Music World, 50-plus Spencer's Hyper covering 4 mn sq.ft by 2010. * LIFESTYLE: Investing Rs.400 crore-plus ($90 mn) in next five years on Max Hypermarkets & value retail stores, home and lifestyle centres. * Raheja's: Operates Shoppers' Stop, Crossword, Inorbit Mall, and 'Home Stop' formats. Will operate 55 "Hypercity" hypermarkets with US$100 million sales across India by 2015. * Piramyd Retail: Aiming to occupy 1.75 million sq.ft retail space through 150 stores in next five years. * TATA (Trent Ltd.): Trent to open 27 more stores across its retail formats adding 1 mn sq.ft of space in the next 12 DLF malls. Titan industries to add 50-plus Titan and Tanishq stores in 2006. Small is big for Indian retail It's raining malls in small-town India. Whether it's Kanpur, Ahmedabad, Indore, Agra, Baroda or Surat, the mall and multiplex culture has caught on in the country's smaller cities, powered by the burgeoning purchasing power of India's middle-class. From a handful of malls in the mid '90s, India today has nearly 200 malls spread across large and small cities. And 700 new malls are coming up all over India-40% of them concentrated in the smaller cities.

Small-town India is the next big thing in the retail business. Consider these numbers: in 2005, the contribution of smaller cities to total organized retailing sales was 15%. By the end of this year, that proportion is expected to grow to 25%. Organized retailing in small-town India is growing at a staggering 50-60% a year compared to 35%-40% in the large cities. The striking point is that it is the big names in the organized retail business that are eyeing these new opportunities. The Kishore Biyani-owned Future Group, India's largest retailer, plans to invest Rs 3,600 crore in 100 stores in 30 cities, increasing its retail space from 3.5 million square feet to 30 million sq feet. The RPG group plans to open malls in all cities with a population of over 8 lakh. Similarly, Wills Lifestyle, the garments and accessories retailing division of ITC Ltd, plans to increase its footprint by doubling the number of stores from 50 to around 100 in the next two to three years, mostly in smaller cities. Even Sunil Mittal's Bharti group has announced plans to get into food and farm products retailing. All these plans, however, are dwarfed by Mukesh Ambani's ambitions to do a Wal-Mart in India by investing $5.60 billion (Rs 25,000 crore) and covering 1,500 cities and towns. The small-town retail boom could be considered a show-case of India's free-market prosperity. It is being powered by healthy economic growth that is making more Indians more prosperous. Organised retailers have understood this and are hoping to ride the wave, exploit the first-mover advantage and establish strong brand loyalties in these relatively under-served markets. Indeed, this is probably the most compelling example of the trickle-down impact of liberalisation in India. Looking ahead, retail analysts suggest that the sustained success of the IT and ITeS industries in small towns is expected to create more jobs and enhance spending power. Typically, small cities offer a 15% to 30% cost advantage over larger cities, not just in terms of employee costs but real estate costs as well, not to speak of the gains that accrue from reduced staff attrition rates. This gap is expected to widen over the next few years, creating a pull for smaller towns that will, in turn, power the small-town retail revolution. At present, real estate costs present a major incentive for India's organized retailers. Average rental values for ground-floor space are Rs 50-60 per square foot a month, against Rs 100-120 per sq foot a month in the bigger cities. However, a strong demand for retail space has more than doubled rentals in cities like Jaipur, Chandigarh, Surat and Lucknow. While in the metros, retailers are filling gaps by increasing more stores, in small towns, these malls are way beyond the expectations of the consumers. These cities are untapped markets and retailers find it important to establish their brands there. Most smaller cities are seeing plenty of action. For instance, Ludhiana can already boast worldwide restaurant chains like KFC, McDonald's, Pizza Hut, Domino's Pizza, Ruby Tuesday and Subway. A new worldclass, 25-acre commercial centre and some seven new shopping malls-cum-entertainment centres are under construction. The Indian retail market is estimated at $350 billion. But organized retail is estimated at only $8 billion. However, the opportunity is hugeby 2010, organized retail is expected to grow to $22 billion. With the growth of organized retailing estimated at 40% (CAGR) over the next few years, Indian retailing is clearly at a tipping point. India is currently the ninth largest retail market in the world. It is names like Dehradun, Vijayawada, Lucknow and Nasik that will power India up the rankings soon. Small Local Stores / Kiranas The small local stores have dominated Indian retailing over the decades and are present in every village and local community, addressing the needs of the population in the area and being the point of contact with the consumer. The distribution networks of brands extend right upto this point to stay in touch with customer

needs and preferences. India like most other countries has a very large network of local stores. The retail industry in rural India has typically two forms: "Haats" and "Melas". You will find these in almost every village and locality. A lot of them function as paan and cigarette outlets with tea and coffee sometimes also offered. Besides this these stores stock and offer small eats and soft drinks including biscuits, soft drinks, chocolate, sweets, bread and baked products. Many of them also sell fruits like bananas and a range of toiletries and cosmetics like soaps, shampoos, toothpastes and some creams. These small stores cater to the needs of their own local population and travelers who stop by for a smoke or a snack. A little larger format is the neighborhood grocery store that focuses on grains, foods, snacks and toiletries besides other home essentials. Fruits and vegetables that are perishable are usually maintained and offered by exclusive vegetable stores and not by the normal groceries. Every fair sized village is likely to have at least one grocery store, a fruit and vegetable shop and a paan and cigarette shop. The new addition of the past decade is to have a telephone booth that lets locals and travelers make national and international telephone calls. This network is very large and spread all across India. It is not really a network since each store is individual or family owned and has no connection with the other. It does however represent a network since large consumer product companies like Unilever, Procter & Gamble, Colgate-Palmolive, Cadbury, Coca Cola, Pepsi and ITC uses them as their final point of retail to the consumer. While it is commonly believed that the new retail chains will drive these small stores out of business, reality points the other way and it is likely that these stores will continue even in the next two decades of growth. These small stores are very personal and have strong relationships with the local population. They are points of news and connection. They offer credit to the local population and help out in times of crisis. They also have a very good understanding of requirements of the local population and have very low overheads enabling them to offer the best price for their products. Shopping Malls The new shopping malls that have been expanding their footprint across Indian cities are well designed, built on international formats of retailing and integrated with entertainment and restaurants to provide a complete family experience. Over 300 malls are expected to be built over the next two years and most Indian cities with over a million population will be exposed to this modern method of retailing. Shopping malls have existed in India since several decades but were designed and built to house several shops in a single facility. These malls also known as Shopping Arcades offered only rows of shops, most of which were small stores that promised bargains for their various wares. These Shopping Arcades tried to maximize on their store space and did not offer any areas for recreation and entertainment. The present day malls are a creation of the past few years post 2000. They are designed professionally using a lot of international experience and combine shopping with a lot of brand building, recreation, food and entertainment. Malls also have a large format store that serves as their anchor for shopping and a prominent restaurant that anchors the food needs of visitors. Most malls also feature a multiplex cinema that offers entertainment to the visitors of the mall. Finally the mall has large atria and open spaces to allow visitors and families to hang-out. These new format malls are coming up in all the major cities of India. The cities that are seeing the first rush of malls are New Delhi, Noida, Gurgaon, Chandigarh, Mumbai, Pune, Bangalore, Ahmedabad, Chennai, Kochi, Hyderabad, Kolkata The next run-up of the malls will be the second level cities of India that includesVisakhapatnam, Coimbatore, Trivandrum, Raipur, Bhopal, Surat, Jaipur, Kanpur, Lucknow, Ranchi, Cuttack, Dehra Dun.

The new malls are air-conditioned and have spacious areas and accesses which make them a true breath of fresh-air from the earlier arcades and shop line streets that used to be the available options for Indian customers. Malls: The new face of retail market Robust GDP growth, stronger currency reserves and ever-improving market and operating environments are propelling the Indian market through a period of stellar growth - and the retail community is responding with newer formats and innovative products. The economy of India has shown a remarkable increase driven by overall political and social stability. The decade-old economic reforms have engendered a new, shop-till-you-drop breed of middle class Indians who, having tasted the shopping experience of big cities overseas, have fuelled a demand that was inevitable -- the rise of the shopping malls. Centrally air-conditioned malls with piped music, high-speed lifts and escalators, underground parking space, a multiplex movie theater, multi-cuisine restaurants and a host of national and international brands, these malls generates approximately 25,000 footfalls each, per day, with figures doubling on weekends. Sobha Group has set its eyes on launching the largest retail mall in the country. Retail Biz tracks this unprecedented move that is ready to add a new chapter in the history of Indian retailing.It is estimated that there are 450 malls in various stages of development across India, 60 in the greater Delhi area alone. This trend has attracted several major global retail players to India. International style shopping has finally come to India - and with a splash. Conclusion After analyzing the retail industry, we can conclude that the organized retail has opportunities to grow in India in spite of the kirana stores because these kirana shops will also get benefit of the growing economy. The argument that the kirana shops will be affected by these malls is only myth. The organized retail is attracting more and more Indian as well as foreign players of the retail industry. As our study shows that a major portion of the organized retail will be developed in small cities and towns, this opportunity has not been encashed by kirana stores and they are unable to meet the requirements of the customers. Therefore both the malls and kirana stores can play simultaneously in India so no need get afraid due to the malls.

By Amit Singla Faculty Finance ICFAI National College Panipat Anil Kumar Goyal Jr. Faculty Member Finance ICFAI National College Mathura.

Relinace Retail first store is opening in Hyderabad MUMBAI: Reliance Retail (RRL), the wholly owned subsidiary of Mukesh Ambani-led RIL will open its first

retail showroom in Hyderabad on November 3 with a pilot store called Reliance Fresh. The company will also introduce its own brand Reliance Select for packed staple foods. These would be followed by general merchandise, specialty products, etc. Commenting on the unveiling of the brand, Mukesh Ambani, CMD, RIL said: This is the first small step in our attempt to build and forge strong and enduring bonds with the millions of farmers and transform our relationship with the consumers to a new level. We are starting on a pilot journey of listening to customers and learning from them. We still strive to continuously delight them. By November, RRL plans to add another half dozen such stores in Hyderabad only. The company has identified 15 other cities in Andhra Pradesh, including Vijayawada, Visakhapatnam, Chittoor, Tirupathi, Adilabad and Karimnagar for entry. After Hyderabad, the company plans to launch its retail stores incities like Ahmedabad, Mumbai and Delhi. Overall, the company plans its multi-retail stores across 1,500 cities in India in a few years. RRL plans to generate close to $20bn by 10 . It is yet to be seen how successful Reliance will be in its retail venture assuming the stiff competition from other corporate houses like the Aditya Birla Group, Bharti, Tatas, RPG and Essar. Competition from foreign players will further intensify the market. Says KS Venugopal, CEO-customer operations, RIL-retail business: In India, there is enough space for everyone to flourish. The kirana stores and vegetable vendors will be sourcing fruits and vegetables from us. Analysts believe Reliance will get first-mover advantage. KSA Technopak estimates organised retail will fetch investments worth $25bn; $6bn will come from Reliance alone. RRL will adopt three pricing categories, depending on quality: premium, middle and lower ones. Potatoes and onions may be sold at the same price across the year. Nita Ambani has been involved with all the aspects of RRL: store design, branding, customer experience and people processes. Source : Economic Times Advertisement

You might also like