Supply Chain - Reliance Fresh

Executive Summary
The grocery industry is an ideal example for examining extended supply chains that is at once universalwe all shop and eatand also the most challenging supply chain environment. The industry has unique characteristics like hyper completion with avg. profit margins of 1-2% of sales, fragile products, highly perishable and customers are choosy on tastes and have a high demand for low price. For all these reasons, extending the supply chain for groceries (so that consumers have an experience that is more service-oriented) provides a unique opportunity for companies to differentiate themselves. For example, customers can place orders online from the comfort of their homes, and have their orders filled and delivered to their doorstep. There are substantial costs involved in extending the supply chain into consumer homes, which does not seem to fit with an extremely price-sensitive industry. And yet, it is precisely by turning this reasoning on its head that there is a quiet insurrection occurring. Extending the supply chain for groceries works, despite its challenges. It provides a means of enhancing the customer's experiences and breaking away from the crushing "price, price, price" strategy exploited by leading retailers, such as Wal-Mart. It creates the type of customer experience that leads to greatly increased customer loyalty. The idea is to re-forge links with customers that have been severed by decades of price promotions that have eroded customer loyalty to specific brands and to individual stores. If extending the supply chain can be used to create a loyalty effect in the ultra challenging world of retail grocers, there are important lessons for a broader range of retailers and manufacturers.

Reliance Fresh
Reliance Fresh is the convenience store format which forms part of the retail business of Reliance Industries of India which is headed by Mukesh Ambani. Reliance plans to invest in excess of Rs 25000 crores in the next 4 years in their retail division. The company already has in excess of 560 reliance fresh outlets across the country. These stores sell fresh fruits and vegetables, staples, groceries, fresh juice, bars and dairy products. A typical Reliance Fresh store is approximately 3000-4000 square feet and caters to a catchment area of 23 km. Chain Management is a comprehensive approach to manage Reliance interactions with the organizations that supply goods and services. The goal of Supply Chain Management (SCM) is to streamline and make more effective TRANSPARENT processes between RIL and its suppliers. SCM practices create a common frame of reference to enable EFFECTIVE COMMUNICATION between RIL and suppliers by encouraging online activities. SCM increases the EFFICIENCY of processes associated with acquiring goods and services, managing inventory and processing materials. SCM ensures BETTER QUALITY BUT LOWER PRICED end product.

Merchandise details

 Product width: Fruits, Vegetables, Juices and other FMCG Products Product length: Fruits and vegetables both Indian and imported are available FMCG Product length includes detergents, hair products, perfumes, cosmetics, household products etc

Daily Operations of the Store

Store opens by 5:30 AM with the help of an armed guard and the supervisor Daily indent of fruits, vegetables and milk products reach by 5:30 AM Merchandise are received by the customer associates and the store is made ready for customers by 6:30am Store manager updates the opening stock He Revises the rate list sent by the head office He updates the discounts and the promotions on various product categories Perishable merchandise are put on discount of 20% after 4 pm The merchandise is checked properly from time to time by the supervisor The house keeping people clean the outlet at least 7 times a days span Refrigeration and temperature are checked regularly by the store manager In the latter half of the day, indent of the next day merchandise is prepared by the store manager with the help of the supervisor At the end of the day the closing stock is checked and further details of replenishment are forwarded to the head office by the supervisor The cash manager checks the balance and compares it with the sale The store winds up for customers around 10 pm The accounting procedures are completed and the operators shut down the outlet at 11 pm

Store Operators and their responsibilities

STORE MANAGER Responsible for day-to-day operations of a particular outlet VISIUAL MERCHANDISER Setup merchandise so as to maximize sales CATEGORY HEADS Responsible for promotion schemes, Discount rates, Gather information related to performance of various products SUPERVISIOR Co-ordinates Cash Manager, Customer Associates, Guards, and House Keepers CASH MANAGER Works at Point-Of-Sale (POS) by receiving payments and issuing receipts

 CUSTOMER ASSOCIATES Arrange merchandise, Set price tags, Help customers, Inform customers about discounts and promotions, and Check temperature, etc. HOUSE KEEPER Ensure Cleanliness and Hygiene at all times in the outlet by cleaning frequently
GAURDS Work in 2 shifts by aiding locking, unlocking the outlet and also checking the bills

when customers exit the outlet

Supply Chain Strategies at Reliance Fresh

Procurement
Grocery industry is unique in terms of suppliers, in this industry suppliers are fragmented and produce usually in smaller quantities. Reliance Fresh makes most of its procurement for vegetables, fruits, dairy products, bakery items directly from the suppliers based on the pre-negotiated contracts. By procuring directly they weed out the middleman commissions, costs of loading and unloading, transportation costs and wastage due to exchange of hands. They provide the farmers with high quality seeds and technical knowhow and later buy their produce and prices higher than the wholesale market prices. They make the farmers aware of the market prices of different crops to enable them to choose the crops that provide them best yield on their investment and hard work. The prices for the produce are determined based on the quality of the produce and the prevailing wholesale market prices. They source the perishable produce from the areas which are near to their distribution centers which enables them to maintain lower price and maintain short cycle times. Non-perishable produce as FMCG products which have longer shelf life are procured centrally by their merchandising department. This allows them to procure in bulk and bargain a better price from the supplier. In certain areas where demand exceeds supply, their model includes the following Procure the produce from the suppliers by grading their produce and offering them a better than market price Procure good quality produce directly from the wholesale market in bulk Their distribution centers not only provides to their retail stores but also to other business concerns. This ensures whatever has been bought from the supplier is sold ensuring the assured demand to the supplier and reliance fresh has the benefit of locked in suppliers. The perishable produce like fruits and vegetables is not kept for more than 2 days, whatever is left over is sold back in the wholesale market and prices lower than the market price. This strategy allows them to consistently maintain quality of produce in their stores and also get rid of the unsold produce before it becomes waste. The non-perishable products like FMCG goods are kept till their expiry and after that usually returned to producers. The farmers are made payment on the spot when their produce is bought at their farms. The perishable goods like fruits and vegetables once bought are moved through sophisticated cold chain of cold storages and special trucks.

Large distribution centers are established to economize on the cold storage infrastructure costs and minimize inventory levels.

Supplier Contracts
Reliance fresh procures most of its perishable produce through contract farming with farmers from nearby areas of their collection/distribution centers. The contracts involve a pre-agreed price, payment term, measures of quality, quantity and duration of the contract Dairy products are procured from the dairy cooperatives or locally operating vendors such as Amul in Gujarat, Nandini and Heritage in Karnataka etc. The cooperatives act as partners and are provided with the daily demand forecasts to supply directly to their distribution centers. Bakery items are sourced from multiple suppliers located in the vicinity of the collection or distribution centers. These products are usually contracted such that they are returned to suppliers after the products expiry date. The merchandising department procures the non-perishable goods from the suppliers using variety of contracts. This includes the contracts to return goods at lower price on expiry, bulk purchase at lesser prices, minimum purchase contracts etc.

Logistics Perishable
The produce from the farmers is collected at the collection centers. Which are smaller and do not have cold storage facilities. A preliminary quality check is done here. Then the produce is moved to the distribution centers where they are sorted, graded and packaged. Here, the data (product type, quantity, grade, cost price etc.) is entered into the SAP system for easier tracking of the inventory. Every day the retail store manager raises a purchase order for the next day based on the estimated demand, which is received by the cluster manager at the distribution center. Based on the availability of the products the ordered items are delivered to the area manager daily in full or proportionately when overall demand exceeds availability.

Logistics Non-Perishable
Items are collected from the manufacturer or national level distributor and delivered directly to the various distribution centers. Each store has the minimum order quantity level for each type of product which is tracked by SAP system. Based on the sales data, as soon as the product level goes below its minimum order quantity the SAP system automatically places the order.

Inventory
Most of the inventory is kept at the distribution center level to minimize the overall inventory across the supply chain. Perishable items are stored usually in cold storage, and are supplied based on first in first out basis. Non-perishable items are stocked and reordered based on the minimum order quantity levels. However, retail stores are usually provided with small storage facility based on the forecasted demand at that store. Store inventory is usually to store the nonperishable items. Perishable are usually kept for more than 2 days, and after that period they are thrown provided they perish.

Distribution Center
Reliance Fresh has strategically placed their distribution centers taking in to account both collection centers and retail stores. Replenishment of the stock to the stores has a lead time of 2 days, that means each store has to provide a forecast 2 days in advance. Perishable goods, once arrived at distribution center, are graded into different lots based on the quality of the produce and then data is entered into SAP system. Based on the demand they are shipped to reliance retail stores and other party stores. Left over is moved to cold storage or sold back in the wholesale market. Certain produce like pulses, porridge, rice, sugar are procured in bulk, graded and packaged and then sold as private labels under the name Reliance Select. The powerful brand of Reliance provides them good margins on their private labels than other brands.

Retailers
A typical reliance store is ranges from 2000 to 4000 sq.ft. And layout is done to maximize shelf space taking into account the ease of movement within the store. Product arrangement is done in a way that similar items are stocked together on the shelves. Due to better margins stores provide better and larger shelf space to private labels and restocking is done based on the forecasted demand. They provide customers with a variety of fresh fruits, vegetables, dairy products and bakery items. Pulses and staples are available both under reliance and other company labels. The stores are well lit and kept clean to provide a world call ambience to the customers. Stores do not extensively use IT systems and almost all of the restocking requirements are inspected and forecasted manually. However, they have implemented SAP systems to enter the sales data as and when the sales happen. Pricing Reliance fresh follow the everyday low price policy for most of the products. Usually the private labels are priced a little lesser than the popular brands for the same product.

Problems encountered at Reliance Fresh

R-fresh has a problem of holding inventory as most of the FMCG goods mainly fruits and vegetables that R-Fresh holds doesnt get consumed the same day, which leads to wastage and later the branch has to dump the goods leading to extra cost to the branch with regards to inventory. It was noted that there was an average of 800 customers who used to walk in daily to the mart, and more than 1000 during weekends. Stock does get consumed during the weekends but there was a problem of holding inventory during weekdays. Bringing in less stock during weekday could not be done as R-fresh did not want a lack of inventory in case of a larger sale during the weekdays. Most often, the stock held in by R-Fresh (FMCG) needed to be dumped and the cost of dumping came out to be at par with the profits earned by R-fresh but this continued. R-fresh increased the preservation cost so that it could hold the inventory for a longer time but this was not a feasible solution due to quality constraints and still the problem with regards to inventory holding continues, R-fresh has now reduced its inventory to some extent so that there is inventory available for all its customers based only on their demand and it avoids extra stock.

Problem in Detail
Inventory is nothing more than a cost until it is sold. The larger inventory, the less money we have available for marketing, for new equipment, or simply drawing interest in a bank account. Major manufacturers and retailers work very hard to keep inventory levels low and constantly moving. Retail outlets like reliance fresh lose money through poor inventory management. Industry sources say Reliance Retail's has managed its front expansion to 600 stores across various retail formats extremely fast, its supply chain leaves a lot to be desired, with customers not being able to find adequate supplies at goods on Reliance's food and grocery outlets. Following are some of the complaints given by some customers of reliance fresh. 1. Reliance Fresh is NO MORE FRESH and is NO MORE COOL either. 2. Stale and expired items are the problem with reliance stores. Their inventory management is really poor and you need to check every item before adding it to your cart.

Inventory Level
Economic Order Quantity (EOQ)
Another solution could be the EOQ through which the optimal quantity to be ordered can be determined.EOQ is a mathematical formula designed to minimize the combination of annual holding costs and ordering costs. It is the level of inventory that minimizes the total inventory holding costs and ordering costs. The formula is

Where, C = fixed cost of placing order D = annual demand per year H = holding costs per year EOQ can be a very effective tool for helping to optimize inventory. However, in order for it to be effective, it requires good and thoughtful data. Reliance could use this formula to estimate its optimal inventory.

Solution & Recommendations

Cross Docking Grading of the farm produce should be moved to collection centers from distribution centers. This will allow cross docking of the farm fresh products and non-perishable products. Store Inventory Management - currently reliance fresh requires stores to provide the distribution centers with daily forecasts. Now, this can induce bullwhip effect at the distribution center level causing high deviations in inventory levels at the warehouse. Reliance Fresh can use an approach of store inventory management for all of the stores products both perishable and non-perishable. They can also opt for consensus approach between the cluster managers at the distribution centers and store managers to arrive at forecasts. This would allow them to manage their inventory efficiently and reduce bullwhip effect across the chain.

Everyday low pricing reliance fresh at times provides products at discounts. This induces its customers to buy more when the price is low and buy less when the price is high. Rather reliance fresh can try to stabilize the price levels and provide an everyday low price to the end customers. This would also help to reduce the bullwhip effect and improve the supply chain efficiency. Procurement strategy reliance fresh should additionally focus on incentivizing suppliers to produce crops on rotation basis through long term contracts. This would allow better quality produce with lesser transportation costs

Implementation Plan
Plan sales: In order to effectively manage our inventory, we need to know what we expect to sell. For larger retailers that are stocking up a large inventory, sophisticated sales forecasting software are also being used. For many small retailers, however, developing a simple spreadsheet from our POS sales history, by month by key category, is most cost effective. Start with last years sales histories, and make adjustments for unusual events, such as weather, out of stocks, one-time promotions, etc. Then factor in the appropriate sales increase or decrease percentage, based on a reading of the sales potential for the category for the upcoming season. Finally, for larger categories, it may make sense to break the sales plan down by sub-categories, styles or vendors. Plan inventories: It makes little sense to bring in more inventory at any given time than we need to set our displays, support our planned sales until the next delivery, and provide a safety stock in the event of an unexpected sales spike or a late vendor delivery. Buying inventory too far in advance is one of the surest ways to find our self over-stocked down the road. For many small retailers, the best way to plan inventories is to plan to have enough on hand at month end to support the next two or three months sales. Plan inventory receipts: If youve planned sales by month, and ending inventories by month, its easy to calculate how much inventory to bring in each month. We need to bring in enough to cover that months sales plan and ending inventory, less the prior months ending inventory. In this way, a buyer can know in March, when preparing for the fall season, for example, how much inventory to plan on bringing in each month of the season. Plan markdowns: Planning markdowns goes hand in hand with planning inventories. If we plan the date of the first seasonal markdown before the season even begins, we can plan the inventory we want to have on hand at that point in time, and thus our markdown percentage, as well as our markdown sales before our second markdown, as well as all subsequent markdowns. Plan dynamically: Once weve completed our preseason planning, dont put it in a drawer never to be seen again. Use that plan as a dynamic tool to track the progress of the season. As each week goes by, and sales trends begin to develop, adjust future sales plans accordingly, and adjust inventory plans for those updated sales plans. If sales are exceeding plan, we want to be sure we have the inventory to keep the momentum going. Conversely, if sales are coming up short of plan, the sooner we adjust our inventory plans, and thus our scheduled receipts, the less likely we are to end up with excess inventory that needs to be marked down at seasons end. The root cause of many inventory problems faced by small retailers is the lack of adequate preseason sales and inventory planning. It may seem that theres never enough time for such

planning, as if its a luxury that just cant be afforded, but in reality, its a critical necessity, a vital investment in the future health of any small retailer.

References
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http://www.4shared.com/document/bkJ1gGHa/52_-_Operations_Management_at_.html http://www.scribd.com/doc/45635774/Operational-analysis-of-Reliance-Fresh http://en.wikipedia.org/wiki/Reliance_Fresh http://www.chillibreeze.com/articles_various/Reliance-Industries.asp Initiatives and Issues in Fresh Fruit and Vegetable Supply Chains in Indiahttp://globalfoodchainpartnerships.org/india/Presentations/Meeta%20Presentation %20-%20Linking%20farmers%20to%20Markets.pdf Operational Analysis of Reliance Freshhttp://www.scribd.com/doc/45635774/Operationalanalysis-of-Reliance-Fresh
Posted 9th May 2012 by Ashutosh