Executive Summary

This project has analysed Lulu supermarkets inventory management, specifically focussing on

the replenishment process, so as to identity a core weakness that lies within this process, and

hence find ways through which such weakness can be addressed and improved in a manner that

ensures operational excellence for Lulu hypermarkets and also ensure that the company is able to

cut costs and enhance efficient inventory management. In completing the project, the ‘As-Is

replenishment operation in Lulu hypermarkets is analysed and mapped, from this, it is identified

that the core weakness within the replenishment process is delay time where delays at the

bottleneck are longer: the time taken in completing the critical activities such as assembling of

the required merchandise to be taken to the stores, or ordering of the required merchandise from

the suppliers to fulfil market demand (longer lead time). In most instances a FIFO discipline

most likely have higher delay time and lower outflow rates even in the best case scenario where

there is regularity in processing of the merchandise. Such impact constrains the output rate at the

bottleneck. The core solutions derived from the problem analysis to develop a “To-Be”

replenishment process aimed at increasing operational excellence includes: Optimising lead time

through adoption of just in time technique; the selection of a few strategic and trusted suppliers

for whom a strategic partnership is made and the company’s replenishment process is integrated

into such supplier’s systems; Vendor managed Inventory system which give control to the

suppliers and ensures effective flow of accurate information on the level of merchandise

required, which can be enhanced through incorporation of radio frequency Identification (RFID)

system in the products; and cross docking where products are transported directly from the

suppliers to the stores with the merchandise undergoing little to nil handling.
Introduction

Attaining operational excellence is critical for any business as organisations cannot afford

to have quality issues, high cost operations or even long market cycles (Oracle 3). Notably, one

of the core advantages that businesses often attain to achieve is effective inventory management

to not only ensure high quality fresh products but also lower costs. Optimal inventory

management is vital for any business organisation. The core benefits of having a much leaner

inventory includes reduction in operation costs, higher customer satisfaction, and increased sales.

In deed Lee (1) points out that the key differentiator between poor performing and high

performing companies is the ability to increase inventory turns.

Inventory management can be a daunting task for a mass retailing business with hundreds

of products coming from a wide array of suppliers. Such a challenge can be even greater when

the suppliers are located in different echelons of the organisation’s distribution network. Usually,

most retail chains often use central distribution centres which source products from the suppliers

and distribute them to the retail stores. Though this proves effective in most cases, if not well

managed and executed, it may result to excess inventory in terms of redundant safety stock,

stock outs, and product allocations that are not optimal (Lee 2). This paper analyses LuLu’s

hypermarket’s inventory management to identify a weakness and propose a re-engineered

improved operation.
Company Overview

Lulu Group operates some of the biggest and well performing hypermarkets, Lulu

Express and shoppingmalls in the United Arabs Emirates and in other cities within the Gulf

region (Retail Business Review 1). The hypermarkets which are the retailing division of EMKE

Group, a multinational company dealing in a wide array of sectors, prides itself in providing high

quality consumer merchandise across the Gulf region through its 103 stores. Like any other mass

merchandising store, LuLu hypermarkets offers a wide array of consumer goods and services

under one roof (LuLu Hypermarkets 1; Hemalatha and Sivakumar 52).

LuLu hypermarkets deal in a wide array of products ranging from grocery products,

apparel products, baby products, cleaning products, beverages, health and beauty aids, electronic

products, pet supplies, seasonal merchandise, home furnishings and home decor, kitchen

appliances, tools and power equipment, office supplies, outdoor living, gardening products, as

well as footwear. All these products are from a wide array of brands, in different sizes and type.

Lulu hyper market deals both in well known brands such as weetabix to private label items

specifically under Lulu owned brands such as Ikon products (mainly home electronic appliances)

and the Lulu branded products (mainly household consumer products such as baby wipes, jam,

etc) (Lulu hypermarkets (a) 1).

The company has an average of 480,000 shoppers per day, in its 103 stores located in 21

countries (LuLu Hypermarkets 1). Within the UAE, there are a network 78 Lulu stores with

more than 320,000 customers daily. The company has about 32% market share of the retail

market within the Gulf Coast Countries with the company bringing in an annual turnover of

about $3.75 billion (Market line Industry Profile 20). With the wide store networks and the
diversity of products within which the stores dealt with, for the stores to ensure that their

shoppers have a unique shopping experience and for the stores to be able to meet their goal of

providing high quality products to their customers, where the store shelves have enough fresh

products that customers need, the company needs to ensure that the inventories are optimally

managed and the shelf replenishment strategy is effective (Bensoussan, Cakanyildirim, and Sethi

241).

Aims and objectives of this project

The core aim of this project is to analyse Lulu supermarkets inventory management

(replenishment strategy) so as to identity a core weakness that lies within and hence find ways

through which such weakness can be addressed and improved in a manner that ensures

operational excellence for Lulu hypermarkets and also ensure that the company is able to cut

costs and enhance efficient inventory management giving the company a competitive advantage

over other core rival companies such as Carrefour, Spinneys, Choithram and Geant

Hypermarkets within UAE market. In essence the objectives that this research project seeks to

fulfil are:

 Analysing and mapping the existing ‘As-Is’ inventory management operations

(replenishment strategy) in Lulu hypermarkets

 Identifying the core weakness in the organisation’s inventory operations

 Analysing and mapping ‘To-Be’ operational solutions to the identified problem and how

technology can be leveraged to enhance optimal operations

 Evaluating how the solution given out will increase operational excellence
Existing Organisational ‘As-Is’ replenishment process

Lulu hypermarket’s inventory management is mainly done by the Lulu Logistics division

which is not only responsible for storing of over 50,000 different merchandise which include,

apparel items, groceries, electronics, household products among others, but also responsible for

distributing these to the more than 100 stores across the country and across the Gulf Coast

Countries. The core distribution centre is located in Abu Dhabi spreading over two million

square feet of space, with this acting as the Master Distribution Centre. Another core facility in

the UAE is located in Dubai spanning 700,000 square feet of floor. It is from these facilities that

core inventory management decisions are made to ensure that products which are needed are

where they are at the right time, and also works to find strategies by which to reduce inventory

costs while ensuring at the same time that the stores are fully replenished at all times. The Abu

Dhabi facility though makes the core decisions and strategies on how inventory is to be managed

and optimised (DCS 1; Croucher, 1).

Lulu logistics mainly uses the LFS400 warehouse management system to ensure

efficiency in the movement of goods from the warehouse to the stores (Croucher 1). In

replenishment operation, Lulu has set up applications that help tracking and tracing products

from goods sold to those in storage and synchronising its existing warehouse management

system (WMS) with store sales systems. This system enables Lulu to capture data from the

moment the goods enter the distribution centres to storage to order processing, where goods that

have been sold are automatically updated in Lulu’s warehouse management system in real time,

and those that are required to be replenished are dispatched to respective stores (DCS 3).
 The logistics division uses mobile scanners which help in remote access to the company’s

warehouse system, whereby the sales data and information are sent to the warehouse system for

updating on replenishment planning. They mainly use first in first out strategy with regard to

product replenishment. The system which enables the distribution centres to record the best

before dates and other crucial information ensures that goods that are distributed to the stores are

those which were purchased first rather than later in order to avoid the dates being overdue (DCS

3-4; Lulu Group). Mapping out Lulu’s replenishment operation for products in their stores can be

noted in the diagram below:

Mapping of Lulu’s ‘As-Is’ Replenishment process

Customer Real time Data Orders from Merchandise are Merchandise The Store
point of sale captured the data loaded onto trucks, is delivered to restocks the
purchase
data transmitted captured are while on the other the relevant shelves with
captured to WMS generated for hand merchandise store necessary
replenishment orders are made to merchandise
planning supplier’s for more
products

From the ‘As-Is’ Replenishment Operation in Lulu hypermarkets, it can be noted that

after the purchase of a product from the store, real time point of sale data on the item purchased

is captured and automatically transmitted to the warehouse management system through remote

access of mobile scanners (DCS 3), and these are used to derive necessary orders for the various

stores based on the quantities of specific products sold. These replenishment products are chosen

based on first in first out strategy (DCS 3), and loaded onto trucks for transportation to the

specific stores. After delivery, the merchandise is then immediately restocked on the store

shelves to ensure that the customers are able to get the products that they need.
 Identifying bottlenecks in the organizations replenishment process

One of the core values of Lulu hypermarkets is to provide high quality products. One of

the strategies in ensuring this cross docking where merchandise are transferred directly from the

manufacturing plants to the stores with little handling of such products, or considerable storage

periods (LuLu Hypermarkets). While ensuring that the distribution centres have enough safety

stocks for the more than 50,000 different merchandise sold at the hypermarkets is critical, higher

levels of inventory set aside for replenishment purpose may not only increase the cost of storage

but may also compromise on the quality of the products.

A look at Lulu hypermarkets records show that while they have a low flow time for

merchandise from the distribution point to the store shelve, they have a medium flow rate by

which merchandise flow through the distribution centres, and they have a relatively high

inventory. For instance as at 2009, the inventory level as a percentage of the capital was 53.1%

with the average days inventory stayed in warehouse being approximately 81.3 days (Lulu

Hypermarket (b); Business week; DCS 3). This may present some problems to some of the

products. Though the replenishment strategy tackles this issue by taking the products that were

first in the system, this replenishment can further be improved to ensure that products are high

quality and fresh. Analysing the process flow of replenishment operation, critical activities that

can further be improved can be noted as shown in the diagram below:

Identifying Improvement areas:

Customer Real time Data Orders from Merchandise are Merchandise The Store
point of sale captured the data loaded onto trucks, is delivered to restocks the
purchase
data transmitted captured are while on the other the relevant shelves with
captured to WMS generated for hand merchandise store necessary
replenishment orders are made to merchandise
planning supplier’s for more
products
 These are the Critical activities needing improvement.
Problems:
-Longer critical activity time (Merchandise ordering from
suppliers)
-Lack of optimal usage of data captured within the replenishment
cycle
From Lulu’s replenishment cycle above, the core areas that can further be improved to

ensure operational excellence within the company areas where data captured from the stores are

used to gather up required products based on the first in first out basis, and then making further

orders to the supplier of such products for more of the merchandise. The problems identified in

these critical activities are the time it takes to accomplish them and lack of optimal usage of such

data at this level. The time taken to complete the critical activities can be improved. Normally,

using the first in first out approach within the store, the first-in merchandise would tend to be

placed further from reach than the lately brought in merchandise, and therefore takes relatively

some time to reach these merchandise. On the other hand, the manufacturers or suppliers may

not be able to predict the demand for their products in the store, and hence have to supply

products based on the orders made from hypermarket. This may at times take time especially in

the case where demand is higher than the suppliers can meet at a given time period. Such areas

of weakness in the replenishment cycle need to be improved in order to ensure operational

efficiency within the company. While the amount of safety stock that the company keeps in cases

of unexpected spikes in demand are quite essential in preventing stock outs, such strategy is

essentially not optimal in ensuring optimal inventory management (Sui 51).

Analysing operational solutions to the problem

Various scholars have argued that the best way to ensure high organisational operational

efficiency, organisations need to continually improve their processes in ways that the whole

organisational performance is improved as well as customer value enhanced and developed

(Psychogis and Priporas 44-45; Roy 235). Such purposeful continuous improvement of processes

and products are critical for the competitiveness of an organisation and also in ensuring that

customer’s needs are continually met. Though, Lulu’s replenishment cycle is working well, there

is an opportunity to further improve it be more efficient in critical activities that would have the

highest impact. From the operational bottlenecks noted in Lulu’s replenishment strategy, a

number of strategies can be adopted to make the mentioned critical steps more efficient.

First and foremost, a critical solution to removing bottlenecks within the system in order

to avoid delays is through minimizing of the lead time from the moment the product are ordered

from the suppliers to the time such products are sold through the store. As can be noted above,

the time taken in completing the critical activities such as assembling of the required

merchandise to be taken to the stores, or ordering of the required merchandise from the suppliers

to fulfil market demand. Indeed Mikati (2009: 5526) notes that in most instances a FIFO

discipline most likely have higher delay time and lower outflow rates even in the best case

scenario where there is regularity in processing of the merchandise. Such impact constrains the

output rate at the bottleneck.

In essence therefore, such lead time can be optimised through adoption of just in time

technique. This technique ensures that only enough materials are on hand to meet current

demand. In such a strategy safety stock kept in warehouses are almost negligible with the core
reasoning being that merchandise stored in distribution centres accumulates cost in terms of

warehouse management, space, personnel, and liability of possible damage or spoilage (Silver

and Zufferey, 2011: 925). Furthermore, placing a big amount of capital on inventory deprives the

company of interest it could have earned from capital. A just in time technique would make it

possible for lead times to be minimised as the time taken from the moment a product is

manufactured to the time it is accessed by the customers becomes shortened. This solution will

increase operational excellence in the company in the sense inventory costs would be lower, the

replenished products will be fresh, and effective scheduling and flow rates would be higher

(Mikati, 2009).

Secondly, another operational solution is the selection of a few strategic and trusted

suppliers for whom a strategic partnership is made and the company’s replenishment process is

integrated into such supplier’s systems. Pal, Chan Mahanty and Tiwar (2877) note that it is more

competitively advantageous to use a few strategic and trusted suppliers from a pool of

vendorsthan not having this core group.Through this an organisation can be able to integrate its

replenishment process with the suppliers’ production schedules and planning in manner that the

company leaves the management of inventory to the suppliers. Indeed an integrated supplier

network enhances sharing of costs between businesses and suppliers, and also provides a suitable

environment by which a just in time strategy can be executed in replenishing products (Pal, Chan

Mahanty and Tiwar 2877).

An environment where the company optimises its trusted supplier, a Vendor managed

Inventory system can help connecting the company’s processes and operations with the suppliers

in a manner that it is the supplier that make the replenishment process decisions for the retailer

ensuring continuous replenishment of the merchandise that are reducing within the stores. Sui
(44) notes that where it is the retailers who make decisions regarding the level of replenishment

required in a store and the shipment of such merchandise to the retailers, businesses are able to

reap a wide array of benefits from reducing the bull whip effect, to reducing any out of stock

scenarios to reducing of inventory levels as well as planning and ordering costs within the

company. This makes the company more efficient. The effective flow of accurate information on

the level of merchandise required can be enhanced through incorporation of radio frequency

Identification (RFID) system in the products. The RFID tags placed on products enable

operational excellence where by the data captured during a purchase are automatically

transmitted to suppliers in real time hence enabling the suppliers to readily assemble the products

and send directly to the stores (Wang, Chen and Xie 2513). RFID programs often track products

from point of supply to the point of end consumer purchase. The application of such program is

essential in cutting back both lead time and in ensuring effective information flow.

Upgrading the warehouse management system to be RIFD-based and digitally powered

would essentially be crucial in enhancing relationships between the company and its vendors to

improve operational efficiency. Such a system would enhance the connectivity between store

sales data, warehouse merchandise and supplier operations (Wang, Chen and Xie 2513). Incases

where sales are made, such sales data are automatically updated both within the warehouse

systems and also transmit such information to the different suppliers. Suppliers use such data to

make effective demand predictions. It is through this that cross docking can be possible, where

products are transported directly from the suppliers to the stores with the merchandise

undergoing little to nil handling. Cross docking offers a competitive advantage to an organisation

by improving operational efficiency (Arabani, Ghomi, and Zandieh 741). Not only does ensure

that the quality of the products are protected as damages and handling are minimised, reduces
 operational costs as few or negligible merchandise are warehoused implying lower inventory

levels, and also increases throughput while reducing product handling, storage and obsolescence.

An effective replenishment strategy is one which resolves the conflict between

maintaining low inventory to cut and control costs versus maintain a higher inventory for

ensuring availability of goods for unforeseeable demand (Roy 181). In essence therefore, such a

replenishment strategy should address three core issues. These are: how often the status of

inventory is determined, when a replenishment request need be placed and the size of the

replenishment order placed (Chin, Li, and Tsai, 495).

One of the operational solutions which particularly enhance improvement of the

replenishment strategy within a multi echelon supply chain is the Theory of Constraints

replenishment which enables decisions to focus mainly on the most critical issues and areas of

improvement. In this operation solution, the replenishment is mainly driven by actual demand

and consumption rather than forecasted data (Chin, Li, and Tsai, 496). This implies that the

replenishment strategy in this case is pull replenishment. In their empirical research analysing

traditional replenishment methods and TOC replenishment techniques, Chin, Li, and Tsai (501)

shows that TOC replenishment strategies (pull replenishment) perform highly in enhancing

operational efficiency. The ‘To-Be’ operational solutions as a shown below:

Mapping of Lulu’s ‘To-Be’ operational solutions

Customer Real time Data Orders from Cross docking: Merchandise The Store
point of sale captured the data Merchandise are is delivered to restocks the
purchase
data transmitted captured are loaded onto trucks, the relevant shelves with
captured to WMS generated for products store necessary
replenishment merchandise
planning
Seamless Supplier integration /
Digitally powered Merchandise technology system integration
Merchandise
RIFD-based produced
warehouse based on real transported to
management time actual the warehouse
system transmits demand data
data to suppliers and based
The calculation of productivity of “As-Is” & “To-be” processes

The core problem addressed in this analysis is delay in time. These delays are often time

dependant with delays at the bottleneck being longer than in other activities. This implies that the

output rate at the bottleneck would be a bit constrained (Mikati, 2010: 5524). From this

viewpoint the illustrated maximum throughput would be:

TH max = pw/T0, where p the productivity of w workforce at T0 time (time taken to get

the merchandise on FIFO, and load the trucks where there is no congestion, and there is ample

capacity. Pw is the critical level of merchandise that needs to be loaded. This implies that the

delay time would be T0 = pw / TH max if critical level of merchandise is ≤ pw (Mikati, 2010:

5525)

In the case where merchandise are collected from the suppliers through cross docking

straight to the stores, the maximum throughput would be THmax = pw/T1. Where p is

productivity, and T1 time taken to load the trucks. Taking into account that T0 comprises both

time taken to get the merchandise on FIFO, and load the trucks, and T1 comprises only of time

taken to load the trucks, reduced time spent on preparing and loading merchandise is (T0 – T1).

This presents increased productivity from the initial position.

Orderqualifier and order winner in the solution

An order qualifier is that aspect of products or services that is mandatory for such a

product to be considered by a customer while on the other hand an order winner is that aspect of

a product or service that gives a competitive advantage in the market place. This implies that for

Lulu’s products to stay in the market, they must have qualifiers where they need be as good as

their rivals in order to survive. In order winners, they need to be better than their competitors

(Hill 157- 161).

In this case, the order qualifiers for Lulu hypermarket in view of the addressed issue are

service level, price level and quality of the products. These are essentially critical within the

mass merchandising retailing sector where the products are high volume and have high demand

predictability (Childerhouse, Aitken, and Towill 680, 689). Where demand is highly predictable,

pull replenishment strategies are more efficient as demand collected from the real sale data

(which are often in high volumes) within a shorter time can effectively be used to determine

what amount suppliers need to produce and what level of replenishment is efficient enough to

meet demand (Chin, Li, and Tsai 501). Most retailers’ price, quality and service levels are as

good as their rivals, which imply they can survive in the market based on these.

On the other hand, the order winners for Lulu Hypermarket in view of the addressed issue

are lead time, cost and RIFD tagged products. Not all hypermarkets follow similar strategies in

cost cutting within the hyper market sector in UAE, and not all are able to attain higher

operational efficiency in cost cutting and revenue maximisation. For such high volume product

companies, the key winning in the market is mainly cost, and how such costs can be lowered,

especially taking into account that in retailing sector rather than compete on prices, they seek
ways to lower costs (Childerhouse, Aitken, and Towill 680, 689). Aside from the high volume of

products in this industry, the relatively stable and predictable demand point to lean principles as

the most appropriate in lowering costs, which is also a critical competitive advantage within this

industry.

Conclusion

From the above analysis of the replenishment process at Lulu Hypermarket, a core

problem that has been identified and analysed is the delays in processes either due to the FIFO,

or due to long lead times from the manufacturing of an item to how it finds itself on the shelf.

The solutions identified for this problem include: Optimising lead time optimised through

adoption of just in time technique. This technique ensures that only enough materials are on hand

to meet current demand; the selection of a few strategic and trusted suppliers for whom a

strategic partnership is made and the company’s replenishment process is integrated into such

supplier’s systems; Vendor managed Inventory system which give control to the suppliers and

ensures effective flow of accurate information on the level of merchandise required, which can

be enhanced through incorporation of radio frequency Identification (RFID) system in the

products. The RFID tags placed on products enable operational excellence with the data captured

during a purchase are automatically transmitted to suppliers in real time hence enabling the

suppliers to readily assemble the products and send directly to the stores; and cross docking

where products are transported directly from the suppliers to the stores with the merchandise

undergoing little to nil handling. Cross docking offers a competitive advantage to an organisation

by improving operational efficiency.

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