Executive Summary

The following report discusses the major operational management issue at iD Fresh
corresponding to lost sales and wastage of unsold products due to absence of accurate and
scientific forecasting. After analysis, two recommendations were proposed namely 1- sales
forecast by exponential smoothening, 2- managing supply by providing incentive. Cost
analysis was then carried for both the cases and after a comparative study, it was found out
that recommendation 1 is relatively more profitable.

Introduction

This assignment required us to investigate the daily operations of a company, find an issue
and suggest two possible solutions to it. The company chosen by us is iD Fresh.It is an
Indian Fast Moving Consumer Goods (FMCG) company that mass produces Indian batters,
snacks, and meals such as Idli, Dosa, Paratha, and Chapati. Their products are entirely
natural and preservative-free and thus have a shelf life of 4 - 7 days. The company was
founded in 2005 by PC Mustafa and his four cousins. The company expanded rapidly from
making 10 packets of 1 kg batter in a day in 2005 to manufacturing 50,000 packets a day in
2016 with a team of 1,300 employees working at various locations around India and Dubai.
iD had a turnover of 100 crores (approximately 15 million USD) in 2017 and has plans to
further expand into international markets such as US, UK, Singapore and Malaysia.

The major issue faced by the company is over and under supply of products to retailers. This
occurs because the quantity of products delivered to stores is solely based on the gut feeling
of the salesperson. Inaccurate supply causes opportunity cost of lost sales in the case of
under supply and returns of expired products in the case of oversupply. We have thoroughly
investigated this issue to identify the problem, causes of it, appropriate tools to analyse it
and propose two of the most suitable recommendations along with their validation by Cost-
Benefit analysis.

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Description
The business model of Id Fresh was primarily based on daily sales in which retailers acted
as the immediate customer for the company. Everyday vehicles were loaded with different
types and quantities of SKU’s(Stock Keeping Unit) depending upon the beat location and the
salesman’s gut. The main issue in hand is in relation to the heavy dependence on the
judgement of salesman to refill the stock in the vehicle for the next day. Moreover this
judgement was based on the indication given by the retailer and the gut feeling of the
salesman which does not leave any tolerance and thus the company is often finding itself
with under or over supply situations.
As mentioned in (Raman Narsimahan, 2017) 2017, there was a huge gap between the
number of SKU’s distributed to different retailers ranging from 3 to even as high as 100+.
This meant that only the store keeper and the salesman were influencing the number of units
to be placed on shelf, which is not at a very realistic approach for a company like id Fresh
which aims to capture majority of the nation as its market. In the nascent stages of the
company, a business model like this was favourable as it provided effective targeting and
brand placement in the market. However, (Raman Narsimahan, 2017) , often the salesman
skip around 25% of the stores in their designated beat region due to a depletion of stock
which results in irregular supply of the products along with diminishing trust among the
retailers. Another aspect of the issue is that in major markets like Pune and Mumbai, a lot of
retailers would prepare their own batter and promote it and so the visibility of iD products
were being compromised. This was due to the fact that store keepers had a major influence
on the product placement. So both the aspects of competition from the retailers and
inconsistency of the supply lead to extremely poor forecasting of the SKU’s to be filled in the
van for each beat region and thus, in subsequent sections, a detailed analysis will be carried
out to find an optimum solution to the problem in hand.

Analysis of the issue

The management issue of poor forecasting is extremely important as the company is now
planning a global expansion to target countries like United States, Singapore, Malaysia and
United Kingdom (Raman Narsimahan, 2017). These markets are completely different from
the native Indian market and thus the company would require a more systematic model to be
successful in effective and profitable brand placement and revenue. A mere indication from
the retailer will not be sufficient and the company will find it impossible to rely on the gut
feeling of their salesforce in global markets as the number of variables influencing the
demand in each region will increase rapidly.

The issue can be deconstructed into two major components -:

1. Inconsistent supply
2. Competition from retailer products

Inconsistent Supply
The issue of poor forecasting deals with a primary consequence of inconsistent supply to the
retailer which is hampering the brand’s image in market along with inability to capitalize on
possible sales. Moreover the salesforce is not unanimously completing the designated sales
in there regions and often miss out on 25% of the retailers. It has been noted that in a
business model like this, the major influence on sales is on the workforce and retailer and
poor judgment by the salesman often leads to stock outs or oversupply.

Competition from retailer products

Another component of the issue deals with competition from the self produced products by
the retailers. The retailer will obviously prefer to display its own products which results in
diminished brand placement in the market. In addition to this, the pricing of the retailer’s own
products is hitting hard on the iD’s SKU segment which tend to be relatively more expensive
than home based products. Another major hurdle to overcome is that there exists a
consumer bias towards retailer products due to the goodwill established by the retailer over
time.
 Cause and effect diagram describing the issue at Id Fresh

Identification of two valuable recommendations

Forecasting using exponential smoothening

The data provided in Exhibit 1 shows the sales of SKU-95 from 1st August 2015 to 30th
November 2015 for two different beat locations identified by number 98 and 81. Since the
forecasting demand is for short term and the record keeping needs to be done for the most
recent sales, exponential smoothening seemed the most appropriate option to achieve
scientific and predictable sales forecast. There is a possibility of a trend in the sales,
however, it cannot be accurately identified by the sales’s of just four months and thus annual
sales data will be required to identify a trend in sales. The theory used for calculation is as
follows-:

F = F + α(A - F )
t t-1 t-1 t-1
Where F = predicted forecast for current period
t

F = predicted forecast for last period

t-1

α = smoothening factor
A = actual sales in last period
t-1

Analysis was carried out with 2 values of α = 0.1, 0.5. After careful analysis, it was
concluded that a lower value of α was supposed to be chosen as the underlying average of
sales was stable.

Actual vs Forecasted sales at Beat 81

Actual vs Forecasted sales at Beat 98

Incentivize retailers or cut supply

This solution is based on the issue that some retailers sell their in-house brand products
which drastically reduces the sales of iD products leading to huge amounts of returns of
expired products. The first step would be to conduct an audit on each beat and identify the
retailers that are selling their homebrand products identical to iD’s. Next iD would offer them
incentive of 10% lower wholesale prices so as to increase the profit margin of the retailer.
This would encourage the retailer to promote iD products, shift the customer bias and
furthermore allow them to try iD products so as to maybe change preference. After a period
of 6 months the sales trend of these retailers would be noted. If sales have increased then
the wholesale discount would be slowly cut down. If there is no considerable difference in
sales then the retailer would be removed from the beat. This would save time which could be
focused towards more important retailers, reduce wastage and subsequently lower losses so
as to maximize profit.

Cost Analysis of Recommendations

To justify the financial viability of both the recommendations, a cost analysis was conducted
separately for each solution and the net profit was then compared. Detailed analysis can be
found in the following subsections and the appendix -:

Due to lack of data and to provide a comprehensive result, following assumptions were
made to compare both the recommendations financially -:
 Cost of SKU-95 = 70 INR
 One employee/ beat required to forecast; wage of 30,000 INR/ month assumed.
 Negligible repair cost for equipment bought.
 An average sale/ day of 150 units for beat 81 and 80 units for beat 98(inferring from
the forecast graph)
 An incentive of 15% given for the 6 months analysis cycle to eligible retailers.

Recommendation 1 Beat 81-SKU-95 Beat 81-SKU-98

Total Cost 632000 226000

Total Benefit 819000 441000

Net Profit 187000 215000

Recommendation 2 Beat 81-SKU-95 Beat 81-SKU-98

Total Cost 191750 109538

Total Benefit 306180 198450

 Net Profit 187000 88912

It can be inferred from the above analysis that solution 1, which is to forecast the sales using
exponential smoothening is more profitable. Moreover, it will also aid the company to
accurately predict the sales in the global market as well. However, Solution 2 should be kept
as a ready to implement alternative in case of more competitive market.

Conclusion

The problem identified while analysing the daily operations was a lack of scientific and
accurate forecasting technique being used to predict the sales. Heavy reliance on
salesman’s gut were resulting in excessive returns and in some cases, the retailers were
facing stock out situations; both scenarios giving a bad reputation and loss of possible sales
to the company. A solution of sales forecasting using exponential smoothening yielded much
more profit than another solution which included giving an incentive to the retailers and
managing the supplies according to past sales. It should be noted that both the solutions
resulted in an enhanced profit, though comparatively, sales forecasting technique is
financially more viable and would even help the company in its future global expansion.