The Evasiveness of Inventory - Whether you have it or not you still Loose Sales

Rishi is a market leader in the men’s fashion market in India. It designs, produces and sells several top brands in a chain of more than 500 stores it owns, plus thousands of stores of other retailers. It enjoys a high market position and maintains its leadership for many years now. Still, in spite of the company’s success in keeping its leading position and delivering top line growth year on year (slightly above the market rate of growth) the company has not been successful in more than 20 years to deliver meaningful profits (it mostly makes a small loss, and occasionally a small profit). A management decision to focus on supply chain for achieving business performance improvement lead to the exposure of a few exceptional opportunities that through a few simple changes in their IT system and operational procedures resulted in a nice growth in sales and mainly a dramatic improvement in profitability and consumer satisfaction.

In light of the disappointing results at the end of 2008, the owners of Rishi decided to replace the company’s CEO. The new CEO performed a thorough evaluation of Rishi’s reality as he stepped into his role and initiated a line of projects aimed at cutting cost. He managed these initiatives giving them high importance and significant attention and the results started to accumulate. 2008 ended, for the first time in many years, with 4% profitability. It is important to note, that for retailers profitability of 4% is a relatively good performance. The best retailers, worldwide, especially in the fashion world mostly experience profitability that is not higher than 8%. Nevertheless, at the end of that year, the CEO felt that there is much more that can be achieved. Together with the rest of the management team, they chose the supply chain as the next focus area.

The fashion retail market has a few important characteristics to understand so that the logistical challenges the market players face become clearer. These characteristics include:

-         Long cycle times especially in product design and fabric production (ranging from 60 to 120 days)

-         Product market life is short and restricted to the relevant season only (in Rishi’s market two six-months seasons are the common practice)

-         Every collection has a huge number of end-products (from hundreds to thousands)

As an outcome of these characteristics, the following operating practices are common:

-         The collection design work starts about 12 months prior to the beginning of the specific season

-         Fabric is ordered six to eight months prior to the season start

-         Each end-product (SKU) is produced in the smallest possible quantity (mostly just enough to fill up the stores), so that there are as little as possible left-overs at the end of the season.

-         As left-overs are still a non-negligible portion of the quantities produced it is common to hold “end of the season” sales in which discounts of 30% to 50% are offered

-         The left overs that still “survive” the end of the season sales without being sold, are sold to depletion channels for discounts of 70% to 90%.

Now that some of the characteristics of Rishi’s business environment are clear we can take a deeper look into their supply chain, the opportunities they present and the benefits the company realized from acting upon them. The company’s supply chain starts with product design, as already in this stage the fabric suppliers are chosen. In every season the company has about 6,000 different fabrics purchased from tens of suppliers worldwide. The ready-to-use fabric is delivered to the company’s own stitching facilities and to its central warehouse from which it is delivered to subcontracted stitching facilities (that produce garments the company’s own plants do not have the capabilities for, such as knitwear). These factories convert fabric to garments and ship the finished garments to the company’s central warehouse.

From the central warehouse the garments are shipped to one of the following destinations: The Company’s own stores that are located near-by, distributors’ warehouses for further stores and small retailers and central warehouses of larger retailers that will then send the garments to their own stores. The following diagram depicts the general structure of Rishi’s supply chain:

Rishi’s operational model – As soon as the collection is approved each business unit performs its own sales forecast for each SKU and for each selling location (company’s own stores, distributors and large retailers). Based on these forecasts, purchase orders for fabric are generated and sent to the appropriate fabric producers. The ready fabrics are sent from the producers to the company’s own stitching plants, or to the central warehouse for fabrics that are to be sent to stitching sub-contractors, and from there they are sent to the appropriate sub-contractors. According to the sales plan for the season (as not all tens of thousands of SKU’s are sold from day one of the season), the producers produce the garments and send their finished goods to the company’s central warehouse. In the central warehouse the received shipments are split to shipping units for the stores and distributors, and sent according to the sales plan.

In the stores, the merchandise is received and almost all of it is arranged on the store’s shelves. Some of the items may be placed in the store’s backroom. For most products, every store will only have one set (a set is all the relevant sizes for the specific garment, for example: shirts will have 4 sizes per set). As mentioned, the produced quantities are limited and thus most SKU’s will have no additional inventory anywhere in the system.

In spite of the above description, about 20% of the SKU’s are defined as “core” items (items like white buttoned shirts). These are not fashion items and they are consumed across seasons for at least one full year and often times longer. The operational procedure for these items, start with inventory planned by the business unit per store, followed by “pushing” this inventory to the store plus central warehouse inventory and then the stores reorder from the central warehouse. The company’s policy for these items is called NOS – Never Out of Stock.

The analysis of the supply chain operations brought up a few interesting points; this article is focused on the first three that were chosen for implementation.

First Point – Even when inventory is available – It is missing and sales are lost

As every item has one set at the store (with no additional inventory elsewhere) and as items are sold according to the sizes required by the consumers very rapidly, the sets on the shelves start being partial (i.e. one, or more of the sizes is no longer available).

For Rishi cost is a meaningful and strong consideration (please remember they just came out of a year that was fully dedicated to cutting cost) and accordingly any item sent to the store stays there for the whole season (which also allows for it to be inventory for end-of-the-season sales). As a result partial sets are “parked” on the shelves for the entire season.

This carries two meaningful negative ramifications; the first one is that consumers in the store that find a specific item attractive but cannot find the appropriate size are disappointed and it is not likely for the store to loose sales. The second is that expensive shelf space is occupied by slow moving “left overs” thus preventing the store from using this space to promote better selling products.

And as such, even though the shelves are stocked (inventory is available) they are not stocked in the most appropriate way (sellable inventory is missing) and sales are lost.

Second Point – Even when items are supposed to be stocked they are missing and sales are lost

As mentioned earlier about 20% of the SKU’s are NOS. Still, it is not a rare occasion that the stores experience stock-outs of these items, in specific sizes and even full sets - while the inventory does exist in the central warehouse. This phenomenon is experienced as a result of the Min-Max procedure the stores are using. Such procedure results with stores placing orders which are relatively large, and only when the store’s inventory level is relatively low. Given the cost considerations in shipping to the stores, shipments are delayed until it is economical to send them- resulting with stores reaching a situation of no inventory before a new shipment arrives. The stores can at that time ask for an urgent order; however as many stores put forth the same request, the central warehouse experiences an accumulation of urgent orders arriving, forcing it to ask the business units to set priorities between the stores for replenishing resulting with further delays for some of the stores.

As a result not only are sales opportunities lost, but shortages of core products that are business anchor products carry negative effects beyond the lost sales- these shortages damage consumer loyalty and expose the consumer to the competition.

Third point – Even when inventory is missing, there is inventory, however not using it leads to lost sales

Although accumulated the company produces thousands of items every season, the production quantity for each item is limited to the minimum possible quantity. As such, and without the ability to tell ahead of time which items will be high-runners, an unavoidable consequence arises- some items turn out to be high-runners and are depleted within the first two weeks of the season, while other items continue to be sold in different rates week after week, with some of the items being sold-out completely.

As the stores are being stocked based on the season plan pre-made by the business units, inevitably empty shelf spaces are created while waiting for the new products to arrive. It is also important to note that the new arrivals are not necessarily replacing the ones sold-out (so if a blue polo shirt is sold out the arrival may be a buttoned pink shirt).

As a result, selling spaces are underutilized and sales opportunities of products with actual demand are lost.

To exploit the above opportunities, a few solution elements were developed and implemented (as mentioned, these are only the first three out of a sequence of solutions for Rishi’s supply chain management. These additional elements will be described in another article).

First Point – All the country one large warehouse

Though it was a relatively simple change in the IT system, a dramatic change to treating inventory was introduced. Inventory is no longer treated according to its specific physical location but rather as if it is entirely virtually located in one place. As an outcome of that any SKU that is not physically available in a given store can be immediately located wherever it is (and in most occasions it will be in some other store, as the rate of consumption varies between locations - items selling well in one store can find itself “lying” on a shelf for the whole season in another).  As soon as the item is located, the company guarantees a 24 hour shipment to the customer’s home (most cases) free of charge. To meet this service level, a system was developed that allowed for automatic notification of the transaction, a synchronized picks up of the garment form the appropriate store and the delivery to the customer’s home within the committed time. When the average contribution is about 1,000 Rupees and the service cost of such a system is under 30 Rupees per sold item, the worthiness of the new procedure is evident.

This change alone, contributed to 3% increase in sales (and as most of the company’s sales are happening in the thousands of stores it does not own, experiencing 3% increase in overall sales just from its own stores is remarkable). But, if we add to this fact, that the average contribution per item is 80%, the meaningful benefit is increase of additional 2.4% in profitability, which is 60% improvement that was achieved within 6 months.

Point two – Transition from periodical “push” to daily “pull”

For the core products, the change implemented discontinued the procedure of reordering based on min-max. Instead, a small modification to the IT system was made according to which at the end of every day a replenishment order is generated, for every store, and every core products sold that day. These orders are converted to warehouse collecting orders which early the next morning are picked by the warehouse workers, packed according to the destination store and delivered to the stores within 24 hours. The business mathematics is clear here as well.

This change contributed additional 2% to sales, and lead to doubling the profitability of the company, that reached 8% within 6 months.

Third point – Replenishing alternatives

The third change in the list took advantage of the system already in place for the replenishment of core products and applied the principle for fashion products as well, obviously with the unavoidable adaptation. The policy of producing as little as possible of each unique SKU results with almost negligible probability of having fashion products stored at the central warehouse for replenishment purposes. However, due to the very large amount of SKU’s produced in a season, there are (almost) always inventoried garments in the warehouse, that are similar enough to the ones consumed at the stores – alternative ones. So that if in a store a long sleeves, buttoned shirt is sold the IT system will identify a shirt in the warehouse inventory, as similar as possible, and will add it to the collecting order for the store. These items will be sent daily, together with the core items to the store thus ensuring the store always has inventory of products with high demand.

This third change brought additional 5% in sales and within a year of implementation Rishi reported 10% net profit on sales, quite extraordinary in this industry.

In addition these changes have positively affected customer satisfaction and loyalty and the company continues to receive appreciation letters from many customers that enter the stores and admire the service levels and availability they experience.

To summarize – a systematic analysis of the supply chain identified substantial opportunities to improve performance that are not realized due to the company’s own procedures. Developing simple and workable solutions enabled Rishi to embark on a new way and served as infrastructure to a series of changes in the supply chain ranging from internal work methods up to relationships with suppliers and customers. These solutions continue to be the enablers of Rishi’s impressive growth, profitability and resilience.