Inventory Management at Big Bazaar

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Gregory Lloyd
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1 Inventory Management at Big Bazaar Submitted to Dr. P. K. Dash Associate Professor Quantitative Techniques and Operations Management IMI-Bhubaneswar Submitted By: Group I PGDM

2 Introduction Ever been to a store and not able to find the exact product that you were looking for? Or you found the item you were looking for but the quantity you want to purchase is not there? Or perhaps the product you were about to purchase has expired? All of us have been through this situation at one point or another and these can be seen at the local kirana store or at the supermarket. And these situations are the result of a poor inventory management system. An inventory can be defined as a stock of goods which is held for the purpose of future production or sales. The stock of goods may be kept in the following forms: 1. Raw Materials 2. Partly finished goods 3. Finished goods 4. Spare parts etc. The objective of an inventory problem is to minimize the total (actual or expected) cost or to maximize (actual or expected) profit. Inventory Management: Inventory management can be briefly described as: Acquiring an adequate supply and assortment of merchandise from which customers can buy. Providing safety stocks to meet unexpected demand or delays in inventory replenishment. Maintaining clear, correct, and current records. Purchasing the proper assortment of goods in quantities that will maintain inventory levels consistent with business requirements, while providing adequate safety stocks.

3 Reducing excessive inventories promptly, so that the dollars realized from clearing overstocks can be invested in merchandise with a greater market potential. Inventory Investment Control Inventory investment control is accomplished in two ways: Prompt elimination of overstocked items Whenever a particular item is overstocked, the overstock should be reduced as promptly as possible. Naturally, the most effective and profitable way is to sell it to customers, even at a discount. However, there are other possibilities. There may be a wholesale market available for certain kinds of inventory. Excessive consumer goods inventories are often sold to "bargain basements" or warehouse outlets. Perhaps you can even arrange wholesale sales to a competitor. Frequently, it is wiser to scrap inventory that shows no sales activity for an extended period of time. In this way, you reduce a misleading overstatement of inventory on your company's books. At the same time, you make space available for inventory that can be sold at a profit. Inventory replenishment: The key to successful inventory management is adherence to procedures for inventory replenishment. Your ability to anticipate customer demand for certain items will help you plan your inventory purchases so that sufficient stocks are on hand to accommodate sales volume without excesses that cause other problems. Planning your purchases will also help you avoid shortages that can only be filled through forfeiture of discounts or absorption of premium shipping charges. Determining purchasing requirements involves answering two questions: What to buy? How much to buy? Both questions can be answered by establishing an inventory target for any item you carry expressed as so many days', weeks', or months' sales

4 Variables in an Inventory Problem: The variables associated with the inventory problems are classified into two categories. The Controlled variables The uncontrolled variables The Controlled Variables The variables that may be controlled, separately or in combination are following: 1. The quantity acquired By purchase, production, or some other means. The decision maker may have a control over the production or purchase level. 2. The frequency of timing of acquisition The decision maker may have control over how often or when the inventory should be replenished. 3. The stage of completion of stocked items The decision maker may have a control over the stage which the unfinished items are held so that there is no delay in supplying customers. The Uncontrolled Variables The variable that may not be controlled in an inventory problem are divisible into cost variables and others. Cost Variables (or the costs) involved in Inventory Problems: The main cost variables involved in inventory problems are as follows: Holding or storage cost The costs associated with the storage of the inventory until it is or used are known as the holding or storage costs. This cost is directly proportional to the various components of the holding costs are as follows: o Handling costs Which include the cost of labor, transportation charges etc. o Rent of the space or interest and the cost of depreciation on owned space. o Cost of the staff to keep records. o Insurance and taxes. o Interest on the money locked for inventory. o Deterioration cost etc. Which arises in the case of fashion items or items that changes chemically during storage such as medicines, foods etc.

5 Set up (or replacement or ordering) costs This is the cost associated with the placing of an order for purchasing goods, or it is the cost of setting a machine before it starts production. This cost may depend on the quantity of goods purchased because of price breaks or quantity discounts. Besides these cost variables there are other variables that may not be controlled in an inventory problem: Demand Demand is the number of items required per period which is not necessarily equal to the amount sold as some demand may go unfulfilled because of storage or delays. The demand may be of two types: o Deterministic Demands If the number of items required (i.e. demand) in a subsequent period of time is known exactly then such demand are called deterministic demands o Non deterministic Demands If the demands over a subsequent period of time is not known with certainty then such demands are called non deterministic or probabilistic demands Lead Time The time gap between the time of placing an order or the starting of the production and the time of arrival or delivery of goods to the inventory is called Lead Time. Also the time gap between the time of demand and the time of filling the demand from the inventory is called lead time. If this time is known (constant) and not zero then one may order in advance by an amount of time equal to the lead time. If it is a variable i.e., known only probabilistically than the question of when to order is difficult. Amount Delivered The supply of goods may be instantaneous or spread over a period of time.

6 Need of Inventory: The inventory in any business is maintained to decrease the set up costs and the shortage costs. If the demands of the customers are not fulfilled then in then it may result in the loss of their good wills. If the orders are cancelled then it results in the loss of the business. Thus, there is always a need of inventory for the smooth running of any business. Advantages and Disadvantages of Inventory: Advantages: i. The economics of production with the large run sizes. ii. The smooth and efficient running of the business. iii. The economics in transportation. iv. The advantage of price discounts by bulk purchasing. v. Faster and adequate service to the customers and, vi. Profit from speculation in the market where price are expected to rise. Disadvantages: i. Warehouse rent. ii. Interest on invested capital. iii. Physical handling. iv. Accounting v. Depreciation and determination. Classification and Categories of Inventory Models: The inventory problems (models) may be defined in to two categories. 1. Deterministic Models These are inventory models in which demand is assumed to be fixed for a subsequent period of time, and 2. Probabilistic Models These are the inventory models in which the demand is a random variable having a known probabilistic distribution. Here the future demand is determined by collecting data from the past experience.

7 Some general notations used in inventory models: We shall use the following general notations in inventory models: I = the cost of carrying one rupee in inventory for a unit time. C1 = Holding cost per unit time. C2 = Storage cost per unit time. C3 = Set up cost per production run. q = Lot size per production run. (I.e. The quantity produced per production run) r = Demand rate. K = Production rate. C = Average total cost per unit time. t = Time interval between two consecutive replenishments of inventory. z = Order level or stock level. L = lead time. q*, t*, z* = Optimal values of q, t, z respectively for which the cost C is minimum. Deterministic models: Economic Lot size Model: The most common inventory problem faced by industry concerns the situation where stock levels are depleted with time and then are replenished by the arrival of new item. The situation is given in the following economic lot size models. The inventory problems in which the demand is assumed to be fixed and completely predetermined are known as the Economic Lot Size Problem or Economic Order Quantity (EOQ) Problem.

8 Model I: Economic Lot Size Model with Uniform Rate of Demand Infinite Production Rate and having no Shortages To determine an economic lot size formula and the minimum average costs under the following assumptions. Demand is uniform at the rate of r units per unit time. Production is instantaneous. (I.e. Production rate is infinite). Lead time is zero. C1 = Holding cost per unit time. C3 = Set up cost per production run. Shortage costs are not allowed BIG BAZAAR Big Bazaar generally deals in national level brands like Lee, Levis, etc. Other than this it also deals in some Private label brands DJ&C in apparel, Korean electronics etc. Other items carried by Big Bazaar are FMCG, FOOD & NON- FOOD junction, Staple items, fruits & vegetables, fashion & apparels,chill section home decorator, footwear,book zone, CDs, etc. Types of inventories maintained. The inventories maintained in the outlet, are of different product category. Mainly Cycle inventory is maintained for FMCG product category & Food Category. Safety level of inventory for FMCG Products. For Apparel, Seasonal inventory is maintained, because of fluctuation in demand. Inventory management in Big Bazaar: Inventory management In Big Bazaar is managed using SAP (System, Application and Product in data processing). It is used by back office for maintaining a data, general ledger, generating

9 purchase order, in warding of goods etc. REM (Rapid eye movement) used at POS (point of sale) to generate the cash memos. It keeps record of goods sold and uploads the information to SAP. Demand Forecasting: Sales of past sales of same quarter are taken. Weekly consumption is calculated on the amount to be ordered = (Weekly consumption+ safety stock amount depending upon the no. of days supplier supplies in the week). Generation of Purchase Order: It includes article no., description, MRP, cost price, tax, landing rate, quantity, total amount, payment terms, delivery dates, etc. In Warding Process: It includes physical inspection, quantity check, giving bar codes and making entry in system. Dispatch of Goods for Sale: Information about the position of stock: REM (Rapid Eye Movement) records all the sale of goods at POS (Point of Sale). It also keeps the record of the stock of hand at that time and automatically updates in SAP. Re- Order of the Goods: Orders are placed as and when required. However he told that there are no such measures, except in a few items. Previously apparels were ordered once there stock fell below 4 per item piece. For general merchandise, which includes, food and non-food items, it was 7 days.

10 However they always keep in mind the transit time of 2 days. Vegetables are taken on a daily basis, form local vendors. The Re-order point is 50%. Margins: Margins Mark down Methods: In this method we have MRP and we have to calculate the CP. Mark down Method: Here we provide with the CP and we have to calculate the MRP of the product. Big Bazaar purchases goods on MD margins. MAP (Moving Average price): Increase in price: When the price is increased then the MAP increases which shows the loss in the sale of every old stock and profits in new stock Decrease in price: When the price decreases then MAP decreases which shows profits in case of old stock and loss in the new stock. Fill Rate: It is used to evaluate the efficiency of suppliers on the bases of goods supplied as per the order. Stock Take: It is the process of matching physical quantity of stock with the system quantity. Stock take finds out the amount of shrinkage at that period. Shrinkage is the difference between the system inventory and physical inventory. Product Categories in Big Bazaar Big Bazaar generally deals in national level brands like Lee, Levis etc. Other than this it also deals in some Private label brands DJ&C in apparel, KORYO in electronics etc. Then we asked about the product categories, that are :FMCG, FOOD & NON- FOOD junction, Staple items, fruits & vegetables, fashion & apparels,chill section, home decorator, footwear, book zone, CDs etc.

11 Decision of How Inventories are Maintained Then coming to how the store manager decides the level of inventory, the store manager inspects the stocks time to time and also the demands of customers. Manager maintains the Stock in & Stock out, so that he can decide the level of inventory. He also has seen the trends in the requirement of inventories, as for e.g. he told that apparels are ordered approximately after 45 days. For every sample of clothes they have a backup of 10 pieces. Also Big Bazaar uses the concept of Minimum Base Unit (MBU) in which the minimum number of stock is maintained for every item present in the store. For example, if the stock for any item goes below 50, then immediately an Order Quantity report is automatically generated by the system which is sent to the vendor who then provides the required stock of items. Apart from these, the Goods Received Report (GRR) is maintained to check for the items which are actually provided by the different vendors. However in case, if more number of pieces is required, they first ask other big bazaar location such as that of Patia etc. but if, even then they fail to meet the demands of customers, they go for Transfer of Interest. In this they prefer sending the customers to pantaloons, as it is also of Future Group, instead of losing them. Besides these, the sales of items are affected by the seasons. For example, during winter the sales boost up and additional quantity is demanded from vendors. Recently Big Bazaar has undergone tremendous technological advancement, as its supply chain has become completely computerized. Once the product is sold, automatically, the computer sends the request for back up. Uncertain demands of customers The uncertain demands are met by either by getting it through other outlets of big bazaar or through transfer of interest, to other outlets of future group, like Pantaloons. Supply chain of perishable and imperishable goods Perishable goods like vegetables are maintained with great care. Vegetables are bought on daily basis on the basis of demand, and seasonal item. It is also ascertained that damaged vegetables are sold at a low cost to some other channels. Whereas imperishable goods like

12 utensils and staple goods and electronic items are brought from vendors. The distribution channel used in supply chain process is operated by Central Distribution Channel, from where goods are supplied to every Big Bazaar Store. The modes of transportation which are used in supply chain process are truck & rails, but in case of emergency, flights are also being used. The transportation is outsourced. Mainly the carriers for Big Bazaar are Quick & Safe, Gati, Deluxe Roadways, and TNT.

Inventory Control Model

Inventory Control Model The word 'inventory' means simply a stock of idle resources of any kind having an economic value. In other words, inventory means a physical stock of goods, which is kept in hand