Warehousing at Savemart

It was Friday, September 12, 2014 and Rajesh Gupta was preparing for his
meeting with the CEO, scheduled for the following Monday. Rajesh
has been hired a month earlier as the director of logistics for Savemart, which runs
many hypermarket stores in India. At the request of the CEO, Rajesh was preparing
a detailed plan that would identify the major steps he intended to take in his new
position. Savemart is a major Hypermarket retailer in the country. First Savemart
store was established in Bangalore in early 2004 and has grown to 154 hypermarkets
in 2014.

In India, the phenomenon of modern retailing began in early 2000s. Till then Indian
retailing industry was largely unorganized and fragmented. With the liberalization
in 1991, Indian economy grew faster, clocking more than 6% average annual GDP
growth during the period 1991-2000 and more than 7% average annual GDP growth
between 2000 and 2008. This made India one of the fastest growing among large
economies. With the economic growth, the size of the Indian middle class grew
phenomenally during the 2 decades between 1991 and 2010. The aspirations of
Indian middle class gradually became similar to that of the middle classes in any
developed country. Their spending power increased multi-fold and they also
expected better quality in all the products and services they bought , be it Cars,
Soaps, airlines, hotels etc. When it came to retailing, in the past Indian customers
bought all kinds of products they required from the local retailers. They purchased
groceries from Kirana stores, fruits and vegetables from the push-cart vendors or
from the local fruits and vegetable market, apparels from the local cloth merchants
or stores which are popular brands in their town or city. But as with other products,
the Indian customer’s expectations from Retailers also underwent a sea change.
They wanted better shopping environment, self-service, electronic checkouts, better
customer service etc. Many major Indian corporates entered the Indian Retail sector
beginning from 2003-4 to cash in on this new trend. Beginning from 2009, Indian
retail sector has been experiencing a tremendous growth in e-commerce. E-
commerce has been growing at the rate of more than 40% CAGR since 2009 and
expected to maintain or even improve this growth rate in the near future.

Savemart’s Warehousing and Logistics

Savemart has 10 warehouses across the country and each warehouses serviced 10 to
20 hypermarkets in the region. In major cities, Savemart has about 5-7
hypermarkets. These stores are located at distance of more than 7-8 kms from each
other so that there is less chance of cannibalization between the stores. Each
warehouse handles multiple product categories that are sold in a typical
hypermarket like FMCG products, Apparels, Plastics, kitchenware etc.

The company has implemented an ERP system. Category managers raise the
purchase orders on the vendors. Each warehouse has some vendors who are local
but the sizeable number of vendors are not local but outstation. Once the goods are
received at the warehouse, the cartons are opened and the items are scanned
individually for preparing the GRN (Goods Receipt Note). Once the GRN is done,
the items are taken to the ear-marked storage location. As mentioned earlier, each
warehouse caters to 10 to 20 hypermarkets. Stores raise their requirement of items
on the warehouse through STOs (Stock Transfer Orders). Stock-transfer orders
contain the list of items and the quantities required at the store. Every morning, the
warehouse generates the category-wise pick-lists from the STOs and give it to the
respective pickers. Pickers will go to the respective storage locations to pick the
items as per the quantities mentioned in the STO. Once the picking process is
complete, the items are scanned for preparing the STNs (Stock Transfer Note). Each
Savemart’s warehouse has a fleet of dedicated trucks. The company has hired these
trucks on monthly rental basis. Merchandise is dispatched from the warehouse to
the different stores through these dedicated trucks.

Issues Facing the Savemart’s warehouses

Company viewed the warehouse operation as a cost center. The warehouse’s goal
was to provide inventory to the retail stores in a timely manner, and deliver exactly
the goods the retail store ordered and in the correct quantity requested.
Furthermore, this had to be done with a conscious eye to the costs incurred to
deliver this service to the retail stores. Though on the surface it looks simple and
straight-forward, the warehouse operations face lot of challenge and criticisms. In
fact, several store managers commented to Rajesh Gupta during his interactions with
them during the last month that instead of operating as Distribution Centers, their
warehouses behaved as Disaster Centers. One store manager even went to the
extent of saying that the warehouse which caters to his store has permanent
Digestion problem. He said that it takes a long-time for the warehouse to inward
the goods and still longer time to dispatch the goods to the stores. There was a
general feeling in the company that because of poor performance of the warehouses,
the stores was losing the sales and valued customers. Many a time, stores
experienced stock-out situations though there was enough stock in warehouse but
not dispatched to the stores. Stores also lost sales because the goods arrived at the
warehouse from the Vendors were not in-warded on time and hence was not sent to
the stores on time. These problems were more acute during the high-demand festive
seasons.
In the last one month, Rajesh visited all the 10 savemart’s warehouses across the
country. He spent a good 2-3 days at each warehouse studying it’s operations in
detail and trying to find out the key problem areas. For his own clarity, he put down
the problems as below.

The warehouses faced challenges in almost all the areas of their operations. Some of
the problems were caused not due to the warehouses inefficiencies but due to other
factors. Firstly, Warehouses do not have any visibility regarding the receipt of
goods. Though the last date of delivery was mentioned in each PO, many a time
vendors delay the deliveries beyond the last date. The stated policy was that goods
should not be accepted beyond the last date but due to the pressure from the store
and category managers, warehouses accept even delayed consignments. They
modify the last date of delivery in the system and accept the goods. Also, it is
normal for vendors to send multiple shipments against a single purchase order and
even against a particular item. For example, if 150 units of a particular SKU was
ordered in the PO, vendor may supply 100 units in one shipment and the remaining
50 units in another shipment. Vendors do not intimate in advance regarding the
shipment against the PO, the transporter details etc . Also, there is no systematic way
to track it. Essentially, a warehouse will come to know that a particular consignment
against a PO has arrived only when a truck arrives at the warehouse. Due to this
problem, the warehouses cannot plan well in advance for the receiving process.
Sometimes, large numbers of trucks reach the warehouse on the same day which
delays the receipt process. As per the company policy, the warehouse should
complete the receiving process and prepare GRNs on the same day if the truck
reports at the warehouse before 2.00 PM and the next day if the truck reports after2
PM. Only 70% GRNs conformed to this policy. It is very common for the GRNs to
take even 3-4 days. Rajesh also suspected that 70% GRNs conformance may not be
the right data. Because, during the last month, he found that some warehouses do
not record the right truck reporting time. For example, if the truck bringing in the
vendor’s consignments actually reported at 10 AM in the morning, the warehouses
recorded the time as 3 PM in the system. He found this out by comparing the
manual data of truck reporting time maintained by the Security staff with the data
entered in the system. Some consignments also had a problem of items with wrong
barcodes or no barcodes. The warehouses will have to divert it’s manpower to put
the correct barcodes. This also delayed the goods receipt process.

Warehouses face the problem of high inventory and hence space shortage. Most of
the time, the actual inventory in the warehouses exceeds the target by 50 to 100%.
For example, if the target inventory at the warehouse is say Rs. 2 crores, the
warehouse stock may actually be Rs. 3 crores or even Rs. 4 crores. This is due to a
combination of factors. One reason for high inventory is due to wrong forecasting
on the part of category managers. Their first priority is to avoid stock-outs rather
than avoiding excess inventory. Many a times, the category managers make
purchase orders more than the realistic demand estimates. This is more frequent in
case of apparels category. Some part of the warehouse space was also occupied by
damaged goods, returns from the stores, apparels that belonged to the earlier
seasons etc. Another reason for higher inventory is the frequent delay in new store
openings. Many new store openings got delayed just a few days before the new
store opening. Inventory that had come to the warehouse for the new stores will
occupy the warehouse space till the new stores open.

Due to excess inventory, the warehouse space management has become very messy.
For storage, each category has been earmarked a specific location in the warehouse.
But due to excess inventory, the warehouse could not maintain the discipline of
storing the items in their earmarked location. For example, consider a product like
Men’s shirts. Some quantities of men’s shirts will be stored in the space allocated for
Jeans because the inventory of men’s shirts has become so high that the allocated
space is not enough to store them. Similarly, one can find ketchups at multiple
places in the warehouse. There was inventory in every available spot in the
warehouse — underneath the conveyers and scattered across aisles. It was hard to
find room to unload trucks and receive the merchandise so that it could be sent to
the stores.

Stores raise STOs on the warehouses everyday in the evening for their requirement.
Next day morning, these STOs are converted into category-wise pick-lists at the
warehouse. The pick-lists are given to the pickers who are supposed to pick the
items as per the pick-list and bring them to the outward scanning area. But due to
the inventory being scattered at different places, picking process was very
inefficient. In fact, the picking process almost became like a treasure hunt to find the
merchandise. Due to the poor picking process, the warehouse could not send the
merchandise to the Stores on time. As per the company policy, STOs should be
serviced in one day (items should be sent by the warehouse to the stores as per the
STO within one day) but STO fill rate was only 70 to 75%.

Along with high inventory, there was also a problem related to error in system
inventory. Ideally, inventory in the system should be same as that of the physical
inventory. (Book stock should be equal to physical stock). But in certain SKUs,
though there would be no physical stock, system will show the stock and in certain
SKUs, though there will be physical stock, system will show no-stock. This
inventory discrepancy seriously affected the warehouse performance.

There was also a problem of warehouse through-put. Throughput is defined as the

number of units received and out-warded in a day. The warehouses follow piece-in
and piece-out model. Items are scanned individually twice - once while receiving
and once while out-warding the items to the store. Rajesh Gupta was aware of the
fact that many international retailers have gradually moved away from piece-in and
piece-out model to predominantly case-in and case-out model where cases are
scanned rather during receiving and out-warding rather than the individual pieces.
But though he knew that Case-in and Case-out model would significantly increase
the through-put, it has some disadvantages too. It cannot be done by the warehouse
department by itself but requires the support of merchandise managers and store
managers.

During the last month, Rajesh Gupta also had to hear complaints about high
packaging costs. Store and category managers said that warehouses buy many new
cartons to send the goods to the stores and these costs take away some of their wafer
thin margins. Rajesh looked into the issue and found that the company receive the
goods from the suppliers in cartons (corrugated boxes) at it’s warehouses and at the
warehouses, the goods are sorted and sent to stores as per the store requirements.
The company try it’s best to use Vendor’s cartons (cartons in which the vendor’s
merchandise has arrived) to ship to stores. But even then, it purchases new cartons
every month and the cost of each carton is Rs. 55. These cartons are not recyclable
and can be used only once. Across the warehouses, about 15,000 new cartons are
being purchased every month. Rajesh is looking at the viability of using recyclable
plastic crates to replace the purchase of new cartons. He thought that the plastic
crate can be used about 15 times a month and can be used for 3 years or 36 months
over it’s life time. The cost of the recyclable plastic crate is Rs. 500. Since the
company is using dedicated trucks between it’s warehouses and stores there will be
no separate costs for bringing back the plastic crates from the stores back to the
warehouses.

Rajesh Gupta had been hired with the expectation that he would bring a fresh
perspective to the Savemart’s logistics group, and he felt strongly that his
department could make a strong contribution to the company. For the meeting the
following Monday, he was expected to outline his detailed plan, including financial
justification for any capital expenditures recommended.

Discussion Questions

1. What are the major issues at Savemart’s warehouses?

2. What initiatives can Rajesh Gupta suggest for reducing the receiving,
excess inventory, stock-out and throughput issues?
3. How does inventory discrepancy affect the warehouse performance and
how to overcome the same?
4. What are the benefits of implementing case-in and case-out model and how
to implement it?
5. Regarding the packaging
a. What is the current annual cost of buying the cartons for
repackaging?
b. What is the payback period of buying the recyclable plastic crate?
c. How many recyclable plastic crates the company will have to buy to
completely eliminate the purchase of cartons?
d. What would be the cost savings over 3 years if they only use
recyclable plastic crates and stop buying cartons?