BAB013

Revised June 6, 2004

Velky Potraviny - Prague

Introduction
Juraj Zdenek (pronounced “Yurai”), the warehouse manager for the Velky Potraviny
(meaning Big Grocery in Czech) grocery chain, was examining the operating results from the
latest month when Jan, his senior warehouse picker came bursting into his office. “This is
ridiculous,” Jan said. “Last month was an incredibly busy month, especially with the addition of
another store to service. Now I pick up my monthly paycheck and find that this month’s bonus is
half of what it should be. I wasn’t happy with my last paycheck either, but I didn’t say anything.
If this happens again, I’m quitting. There are plenty of other jobs in the Czech Republic.”

This was not the first time an employee had complained about the bonus system, and
Juraj knew there was merit in their grievances. In fact, employee compensation was only part of
the entire problem that he faced in running the Velky warehouse. Juraj decided to call a meeting
that would include a representative of each of the job functions in the warehouse to discuss
compensation issues, along with any other issues that may arise. One thing was certain, Juraj
knew he had to do a better job of controlling all his costs.

Background
The Czech Republic was formerly a part of the Austro-Hungarian Empire for much of the
17th, 18th and 19th centuries until the end of World War I. With the help of President Wilson of
the United States, Czechoslovakia gained its independence in 1918. Between the world wars,
Czechoslovakia had one of the most prosperous economies in Central Europe, as capitalism
flourished. However, World War II and its aftermath proved to be devastating, as
Czechoslovakia lost its independence in all but its name. Throughout World War II,
Czechoslovakia was occupied by Nazi Germany, and upon liberation by the Red Army, became
part of the Soviet sphere and fell behind the Iron Curtain. Communism completely changed or
eliminated much of the economic infrastructure that was developed between the world wars.

Czechoslovakia first attempted to change the nature of communism in 1968 when the
Prague Spring and the movement “to put a human face on communism” was born. This

Professors William Coyle and Jay Rao prepared this case as a basis for class discussion rather than to illustrate either
effective or ineffective handling of a management situation. Some of the names and data have been disguised. The
authors would like to acknowledge the help of the following graduate students: Michel Bruehwiler, Christopher
Dunham, Jan Ledbetter, and Sarah Webber.

Copyright © by Jay Rao and William Coyle, 1996.and licensed for publication to Harvard Business School Publishing. To
order copies or request permission to reproduce materials, call (800) 545-7685 or write Harvard Business School Publishing,
Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or
transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the
permission of copyright holders.
Velky Potraviny - Prague BAB013

movement to allow for more individual freedoms and entrepreneurship was crushed by the Soviet
invasion of Czechoslovakia in the late 1968. Although dissidents, including Vaclav Havel
continued to fight for more freedoms, it was not until November 1989 when communism was
overthrown by “The Velvet Revolution.” In mid-1990, a freely elected government was formed,
led by Vaclav Havel, and capitalistic structures began to be created. With political stability
established, its centralized location in Europe, and its well-educated and relatively low wage
work force, western companies found Czechoslovakia to be an attractive location for investment.
With the subsequent peaceful split of the Czech and Slovak Republics in 1993, the Czech
Republic had done well economically (Exhibit 1).

The Company
Velky Potraviny was positioned as a one-stop, low cost grocery store. Velky Potraviny
was established in the Czech Republic in 1991, and opened its first store in Prague in 1992. As of
Aug. 1996, the company had 37 stores operating in Prague and in the northwest region of the
Czech Republic. Each Velky store was a full service supermarket, offering an extensive variety
of products, although Velky limited the number of brands available in an effort to keep its costs
down (Velky carried 1,300 SKUs with a goal of 1,000 SKUs).

Velky had to face numerous challenges caused by the complete transformation of an

economy from communism to capitalism. Some of these included extremely high inflation due to
price liberalization (Exhibit 1), a non-convertible currency (the Czech crown), a poor to non-
existent distribution system illustrated by a lack of roads, let alone highways, an overburdened
rail system, a lack of warehouse space, and an evolving business, regulatory, legal and taxation
system. If these challenges were not enough, there was the cultural hurdle faced by convincing
potential customers to do one-stop shopping two or three times a week. The Czechs had not been
in the habit of buying groceries in large quantities, but rather had been accustomed to shopping
daily at neighborhood specialty stores, such as a bakery, a butcher, and a fruit merchant. Such
specialization lent itself to a perception of quality and knowledge about the product. Thus many
consumers perceived Velky Potraviny’s lack of specialization to be a detriment. Furthermore,
Velky faced stiff competition in the Prague area (Exhibit 2).

All of Velky Potraviny’s retail stores were approximately 6400-7500 ft2 and had similar
layouts (Exhibit 3). At the retail stores, storage facilities were kept as small as possible; nearly
all goods flowed directly from the loading dock to the retail shelves. Customers could select
individual units out of cartons (e.g., a single pencil or pen from a large carton of pencils, or two
or three bottles of beer). Each store employed six cashiers whose responsibilities included
memorizing prices, checking out customers, collecting money, and counting inventory with a
small hand-held device. While the retail stores were not computerized, Velky’s long-term plans
included implementation of bar code scanning technology. Depending on the retail store, some
sent their orders via modem to the warehouse every day; some ordered 2-3 times a week. Each
store usually received shipments every other day from the warehouse.

The Warehouse
Soon after establishing its first retail operations, and to support the planned growth
anticipated by the company, Velky acquired a defunct, communist era, military tank building

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facility, located in a Prague suburb north of the city. The layout of the warehouse can be found in
Exhibit 4.

The warehouse was responsible for holding non-perishable goods, which represented
approximately 70% of Velky’s product mix. Perishable goods, such as fruits, vegetables, bread
and cheese, were sent to the retail stores directly from the supplier. The warehouse was originally
arranged in such a way to facilitate the unloading of goods from suppliers and the loading of
goods to stores. However, Juraj was concerned about whether the warehouse could handle the
additional demand with the increased need to service more stores, given the planned expansion to
67 stores within the next two years. See Exhibit 5 for a description of the capacity and activity
level of the warehouse.

Juraj was proud to be the manager of Velky’s lone warehouse facility. It was only seven
short years ago that such an operation as Velky’s would have been illegal. The change from
communism to capitalism in some ways seemed incredibly fast, and in other ways painstakingly
slow. Fast in the sense that Juraj and many of his contemporaries had to learn capitalism quickly
in order to survive. For Juraj, issues such as cost control, performance evaluation, bonuses,
inventory turnover, productivity and efficiency, all of which were vital to running a western-style
company, had to be quickly learned on-the-job. On the other hand, being a low-cost grocer in an
economy whose per capita GDP was still only 20% that of the United States, and operating in a
country whose lack of roads and telecommunications caused costs and inefficiencies to skyrocket,
made his job more difficult. Juraj thought he was doing the best he could in these circumstances,
yet knew he could still do better. Before having the meeting with his employees, Juraj thought it
would be wise to go back to the basics and re-think the purpose of the warehouse.

Juraj realized that corporate viewed his 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.
On the surface, this appeared simple enough, even more so since the warehouse only dealt with
non-perishable goods. Therefore, spoilage was not as significant an issue, yet even non-
perishable goods had spoilage dates, so it was important to follow a first-in, first-out (FIFO)
inventory flow. Another cost issue was breakage. The inventory had to be stored and moved
with care. Any inventory loss due to breakage went directly to Juraj’s total cost line. The total
error rate for the warehouse was around 3%.

Velky’s buyers were located near the warehouse, and they were responsible for
purchasing inventories from suppliers. The buyers’ bonus was determined solely by the lack of
inventory stock-outs in the warehouse. Therefore, the buyers were clearly motivated always to
buy more than what they thought was needed. After all, the buyers saw no cost associated with
having too much inventory. As far as what the buyers thought they needed, this was based on
very incomplete information. From the retail store perspective, since the stores lacked bar code
scanning technology, the buyers did not have up-to-date information on what items were selling
well or poorly. From the warehouse perspective, since the buyers were not located in the
warehouse, and since the warehouse did not operate on a perpetual inventory system, the buyers
did not know how much inventory was on hand at any given time. Furthermore, Juraj was
frustrated that the buyers never consulted him about their buying decisions. As a result, it was
often the case that excessive inventory was being held at the warehouse.

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After the buyers placed an order, the suppliers delivered goods to the warehouse. The
warehouse knew what the buyers had ordered, but it was nearly impossible for the warehouse to
plan ahead for the receipt of the inventory. First, the suppliers did not always deliver the
quantities that were ordered. Although shortages were primarily a thing of the past, the supply
chain in the Czech Republic was still far from efficient and reliable. As a result, buyers often
ordered more than was really necessary, in the event the supplier could not deliver all that was
needed. Second, even if the correct amount was delivered, there was no telling when the goods
would arrive. The rail system was overburdened and inefficient, and the roads, although far
superior to what they were in Communist days, were still significantly below the distribution
needs of the country. As a result, the receiving function occurred whenever a supplier’s truck
happened to pull up to the receiving dock.

As seen in Exhibit 4, the warehouse had a number of functional problems. The long
ramp on the north side and a good portion of the ramp on the west side were not being used, as
the height of the ramps did not match with the height of the vans that Velky owned. Even though
the south side ramp accommodates up to six vans for loading at any given time, there are only
two doors. Receiving docks #1 and #2 accommodated two vans each at any given time. The
work-in-progress often blocked the existing doors in the receiving and shipping areas. Velky had
a problem with empty water, juice and beer bottles that were returned by customers to the retail
outlets. Velky had at least 1,000 pallets of these assorted empty bottles, which had completely
occupied the unused ramps and had started flowing into the receiving and shipping ramps as well.
Velky had a tough time negotiating with the suppliers to take these bottles back. At the retail
stores they were palletized when they were brought back by the customers, all mixed up, in terms
of shapes, sizes and color, and shipped back to the warehouse. The suppliers would not accept
the assorted bottles. Suppliers would only take back their own standardized glass bottles.

The offices were strewn all over the warehouse. The manager and the assisting staff were
located in the offices near the shipping area. The assistant manager’s office was located between
the receiving areas. The office space in the North-West corner of the building was empty and
Juraj was thinking of ways to use this space productively. There was construction going on for
storage between this office space and the full pallet storage area.

The warehouse had the following job functions: receiver, picker, stepper, output checker,
and driver. Their job descriptions and responsibilities are noted in Exhibit 6. Exhibit 7
schematically shows the order in which activity occurs within the warehouse. Juraj realized that
although everyone worked in the same warehouse, each job function seemed to work
independently of each other. The performance evaluation system only exacerbated that way of
thinking among the employees. See Exhibit 8 and Exhibit 9 for a description of the employees’
compensation package.

The Meeting
Juraj thought that a meeting of representatives from the various employee groups was
needed to discuss the compensation issue. Juraj wanted to include the employees in the
compensation discussion, so as to give them some ownership in the results. Juraj wanted the
compensation to be fair, and yet reasonable so as to control costs. He knew this would be a
difficult balancing act. One thing was certain, and that was if nothing were done, employee
turnover would only become worse. With unemployment levels in Prague at 0.3%, there were

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simply too many other opportunities for workers at any skill level. Juraj thought that if he could
control employee turnover, it would lower his costs. The following people attended the meeting:

· Juraj, the warehouse manager · Jan, the senior warehouse picker

· Radek, the senior delivery driver · Jiri, the senior warehouse receiver

· Karel, one of the output checkers · Pavla, one of the warehouse steppers

After the preliminary greetings, the meeting quickly became a complaint forum. Juraj
decided not to control the meeting and let everyone vent their frustrations and complaints.

Jan started by saying “I’m working too hard and getting killed over errors that aren’t my
fault. Yet I see Jiri in receiving reading the newspaper half the time and it’s partly his fault that I
received a smaller bonus this year. For instance, a retail store orders a full pallet of tomato sauce,
so naturally I go to the full pallet area where the tomato sauce is supposed to be. So what do I
find, canned whole tomatoes instead. I know that’s close, but close isn’t good enough because
not only will I get penalized by your mistake, it slows me down so I can’t move as many pallets
as I want to. And as you know, the more pallets I move, the greater bonus I receive. So I have to
run around even more than I already have to, which is more than you guys do. With all the time
on his hands, you would think Jiri could get it right. Or at least Pavla, you should have noticed it
when you stacked it up or brought it down.”

Jiri angrily replied “I’m a receiver. I have no idea when those suppliers are going to be
pulling up to the receiving dock. And just like you Jan, my bonus is also based on the number of
pallets I move. So when there are two or three supplier trucks waiting, I’m going crazy. I have to
make sure that the suppliers deliver the correct inventory in the correct quantities. Those
suppliers are always trying to short us, yet I get blamed for it if I don’t count it correctly.
Moreover, the SKU # tags that are pasted on the stacks are so small that it is barely readable.
Well, as you said, Pavla could have warned me or helped me when he stacked them up.”

“Well guys, I also get paid based on the number of pallets I move. But when I get called
by one of you to stack up a pallet or bring it down, I don’t notice the SKU #s on the pallets. It is
not my job. I am not paid for that. Between moving Jiri’s newly received inventory in and
bringing Jan’s requested down, I think I’m doing a great job maintaining the FIFO flow I am
required to do and I get paid for. Yet I seem to get penalized for little mistakes that I don’t think
hurts anybody. Why can’t a customer use a product that is one day old? We are not dealing with
any meat here. And by the way, Jan, there is no indication to believe that the pickers travel more
distances within the warehouse than either the receivers or my fellow steppers.”

“I don’t see those types of errors,” Karel said. “In expedition, most of the errors I see are
the results of the pickers picking the wrong inventory. I don’t see what’s so difficult about their
job. You have a list from the store, just pick the inventory that’s on the list. And how difficult
can the driver’s job be, and yet they keep shipping the wrong pallets to the outlets.”

“Before you get to the drivers, I have to respond,” Jan said. “A picker’s job is not that
easy. Receivers and Steppers are dealing only with full pallets. I am the one that creates the

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partial pallets and you can ask anyone, it takes more concentration and care than any other job
here. However, I often see that full pallets are missing from the ground level shelves and I have
to go hunting for the steppers. The receivers are always monopolizing the steppers. It is such a
waste of time for me and I can’t finish the number of pallets I want to in the day. Since you
mentioned drivers, guess who gets blamed if a driver delivers the wrong inventory to the wrong
store. Of course, I do. Is it fair to blame me for a driver’s mistake?”

“So you think all I do is drive around all day listening to the radio,” Radek said. “The
expedition area is such a mess, it’s a wonder I get as much correct as I do. I should be able to
pull up, have my store’s shipment separately stacked, forklift the inventory on the truck and get
out of here. I get paid based on the deliveries I make and yet most of the time, I am waiting in the
parking lot because Jan and Karel are so slow and disorganized. It takes forever to get a truck
loaded around here and you know I that I have to make at least two deliveries every day and I
have to make a third delivery every other day.”

“Well it would help if we knew when you were planning to pick up the inventory,” Jan
said. “You just expect to show up unannounced and we should be ready to serve you? How can
we arrange the expedition area when the order in which you and the other drivers show up is a
mystery. The only time loading inventory worked well was that special set of Sunday deliveries
we made last fall for the Bohemian Festival.”

“I remember,” said Karel. “There was so little activity that day, we were not only able to
clearly separate the different store’s deliveries, we were able to load the trucks in an order that
facilitated direct stocking from truck to shelves at the retail store. The stores said they were able
to unload the truck and stock the floor in about one-third the time.”

“The only problem with that” Radek said, “is that we did all the work, but the retail store
took all the credit and received all the benefit. Another thing I think we can all agree on is that
ridiculous attitudinal component to the bonus. Although by me just saying that, it probably
means that my bonus will be reduced this month. Right Juraj?”

“Don’t worry Pavel. Nothing in this meeting will be held against you. But do you all
feel as Pavel does, that the subjective component of the compensation package needs to be
changed?”

“The problem with these subjective measures is that from period to period there is no
consistency,” Jiri said. “For instance, one month I’ll make a suggestion to change a procedure
and it will be viewed favorably, and the next month I’ll be accused of being dissatisfied with how
we do things around here.”

“How does management know what my attitude is, let alone all my fellow pickers and
everyone else on the warehouse floor. Don’t misunderstand me Juraj. I appreciate the
opportunity to discuss these issues with you today, but we live with these problems everyday.
You and the rest of management determine what our attitudinal performance is, but just having
this meeting is an indication that you don’t understand what we do. On the other hand, I think I
speak for everyone when I say that I see you in your office everyday, and I know you work hard,
but I have no idea what you do. I have no idea what determines whether you’ve done a good job
or not.”

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Everyone agreed with Jan’s comments. Juraj tried to explain to his assembled workers
and even to himself what he was trying and being asked to accomplish. At this point, Juraj
thanked them for their input, and he stated that he learned a great deal from their comments. Juraj
promised that more meetings like this would occur in the future.

Juraj left the meeting convinced that something had to be done, and done quickly. But
what needed to be done? His job was based on delivering the correct merchandise in the correct
quantity to the correct store on a timely basis and in a cost-effective manner. Cost-effectiveness
would be even more important, given that with the same warehouse space, there would be twice
as many stores to serve within the next two years. The compensation structure certainly needed
to be restructured, but how? Would restructuring the compensation help retain employees and
improve his costs? Would it make his operations more efficient?

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Exhibit 1
Czech Republic: Key Macro-economic Data
Date: 14 Aug. 1996
1992 1993 1994 1995 1996* 1997**
Population (Mil.) 10.318 10.328 10.338 10.331 10.331 10.3331
GDP, CZK (Bil.) 791 908.5 1037.5 1212 1409 1611
GDP, US$ (Bil.) 28 31.2 36 45.6 52 57
GDP, real growth rate -6.4 -0.9 2.6 4.8 5.5 5.5
GDP per capita, US$ 2712.7 3017.6 3486.5 4418.5 5060 5512
Unemployment (% of 2.6 3.5 3.2 2.9 3.5 4
labor)
Inflation (%) 12.7 20.8 10 9.1 8.5 N/A
CZK per US$ 28.3 29.2 28.8 26.6 26.9 28.3
Source: Czech Statistical Office, Czech National Bank

• *Till June 1996

• **Forecast

• In 1995 Average monthly wage was 8,181 CZK.

• 1996 Consumer goods ownership per 1,000 people - 309 TVs, 245 cars and 314
telephones. The Czech Republic has one of the highest VCR, PC and Cellular Telephone
ownership in Eastern Europe.

• The cumulative Foreign Direct Investment from 1990 - 1996 (March) was US $5.95
billion.

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Exhibit 2
1996 Rankings of the Largest Prague Area Retail / Food Companies

Rank Company Sales* % Sales Discount Price Super- Drug Dept. Household
from Retail Index Store
Food Market Store Items

1 Konti 9.5 65 115 X X X

2 Emart 4.7 20 X 103 X X X
3 Enova 4.2 30 116 X X X
4 Tonpro 3.8 80 X 105 X X
5 Veldita 3.4 40 112 X X X
6 Velky 2.1 90 X 100 X
7 Verceny 1.8 55 112 X X X
8 Tiv 1.8 90 X 106 X
* in Billions of Crowns, 1 US$ = 26.9 CZKs

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Exhibit 3
Typical Velky Retail Outlet

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Exhibit 4
Current Warehouse Layout
Receiving #1

Office Space
Receiving #2
Office
WIP
Space

Legend
WIP = Door
Under construction

= Ramp Area

= Work In Progress

= Rack Storage

N
Full Pallet Storage Area Backtracking

W E
Assorted Pallet Pick Area

Not This Space Not Currently Available

rawing Not To Scale

Expedition
Office Space

Shipping
Expedition

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Exhibit 5
Velky Potraviny Warehouse Data
Store Expansion Plans Aug-96 37
Dec-96 40
Dec-97 52
Dec-98 67
Warehouse area 9000 sq. m
Area for containers, cases 250 sq. m
Capacity 7500 palettes (shelving + floor space)
Shelve Dimensions Depth 140 cm, Height 150-200 cm,
Total Ht. 6 m
Number of Items Average = 750, Max. = 1000
Average value of stock 75 mil. CZK
Highest Turnover Items Beverages, Flour, Sugar, Stiff fat, Oil
Warehouse inventory turnover 18-24 days
Delivery to Warehouse Data (collected from 1/15/96 - 3/22/96 = 50 days)
Total # of palettes delivered 30012
Total number of deliveries (vans) 2728
Total number of palettes delivered per day 600 {(max., min) = (876,412)}
Total number of vans per day 54.5 {(max., min) = (55,19)}
Total number of palettes per van 11
Average unloading time / van 45 minutes
Delivery to Store Data (collected from 1/15/96 - 3/22/96 = 50 days)
Total # of palettes delivered 26204
Total number of deliveries (vans) 1746
Total number of palettes dispatched per day 524 {(max., min) = (612,393)}
Total number of vans per day 35 {max. = 42}
Total number of palettes per van 15
# of shipments (van) 2.5 deliveries/truck/day
Frequency of shipments to stores Every other day
Working Hours 10 hours / day
Paid breaks 1 hour / day
Loading time at warehouse 1 hour/truck
Average weight of palette 575 kgs.
Single vs. Assorted palettes 40% / 60%
# items sent as single-item palettes 70 SKUs
Average delivery to store 475 SKUs, valued at 475,000 CZK

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Exhibit 6
Task Flow & Responsibilities by Job Title
Receiver (Warehouse Delivery; 14 employees)
1. Average of 55 truckloads per day are unloaded by the suppliers’ drivers (80%) and/or the
receivers (20%)
2. Receivers check orders as they are unloaded from trucks
3. Full pallets get moved to full pallet area by the receivers
4. Full pallets get moved to and stored in assorted pallet area by the steppers
Picker (Order Picking; 38-44 employees)
1. Picker gets pick order from the assistant/deputy warehouse manager
2. Pickers decide among themselves who picks which assorted items (e.g. beverage vs. dry goods,
etc.)
3. Picker gets on his forklift
4. Picker begins to pick order in assorted pallet area, shrink-wrapping pallet as he goes
5. Picker picks orders which contain full pallets and delivers to expediting area
6. Picker compares goods vs. item listed on pick for accuracy
7. Picker checks item off list once it’s picked
8. If no goods in lower racks, picker tells stepper that item needs to be replenished
9. Picker puts a circle around item on pick list which lets the buyer know that item needs to be
reordered
10. Picker completes pick order and finishes shrink-wrapping pallet
11. Picker delivers pallet to the expediting area. Assorted pallets are arranged as closely together as
possible, by store, in expediting area
12. Picker puts 4 stickers on each side of assorted pallet order. Stickers identify store and order
number. Identical sticker is placed on completed pick order paperwork; last sticker is left on the
sticker sheet.
13. Completed pick order paperwork and sticker sheet are returned to warehouse manager
14. Completed pick order is checked by the output/quality checker. Approximately 15% of a whole
store order is checked. Errors (over/under) are brought to the attention of the warehouse manager
who writes up the mistake and puts in the picker’s file. The picker then corrects the error.

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Exhibit 6 (Continued)
Task Flow & Responsibilities by Job Title
Driver (Store Forwarding; 14 employees)
1. Driver receives paperwork which tells him which stores he will deliver to and what orders/pallets
he needs to load on his truck. Drivers’ routes vary each day.
2. Driver gets his forklift
3. Driver starts loading order from expediting area
4. Once truck is fully loaded, driver leaves, drives to first store and unloads that store’s order
5. Driver picks up empty bottles which have been returned by customers to the store and loads onto
truck
6. The driver returns to the warehouse to pick up his next load, 90% of the time, and starts the
process (steps 1-5) again.
7. Driver proceeds to a second store to deliver another order, 10% of the time
8. Driver moves or off-loads bottles in order to get to pallet order to be unloaded
9. Driver picks up 2nd store’s empty bottles and loads onto truck (and so on, if delivering to more
than one store)
10. Driver returns to Velky distribution center throughout the day and repeats process. 2 or 3
deliveries are made per day
11. Driver washes/cleans inside of truck upon return to distribution center
12. Driver may fill truck with store orders and leave the fully loaded truck at the distribution center
overnight; returning at 6:00 in the morning to make delivery at the first store
Stepper (Replenishment of Picking Area; 2 employees)
1. Steppers receives verbal indication from pickers that an item needs to be replenished in a
particular aisle
2. Stepper continuously visually evaluates the inventory in each aisle and replenishes products as
required
Output Checker (Error Checking; 2-3 employees)
1. Output checkers review 15% of store orders throughout the day to check for accuracy
2. When errors are discovered, output checker advises the warehouse manager who writes the error
up and places in the picker’s file
Deputy Warehouse Manager (Assistant Management; 5 employees)
1. Deputy Warehouse Manager acts as an assistant to the Warehouse Manager
2. Reviews orders that come in from each store
3. Compiles picking order sheets based on his experience and knowledge of how many items can fit
on an assorted pallet
Warehouse Manager (Management; 1 employee)
1. Oversees all warehouse operations and manages staff of Deputy Warehouse Managers

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Exhibit 7
Current Process Flow

Corporate Warehouse Retail Outlet

Offices

Checking
Delivery
(15% of
from
assorted
suppliers
pallets)

Buying Work In Receiver Inventory Picker picks Work In Truck driver Truck driver
department Progress checks assorted and Progress loads truck unloads
orders from delivery and full pallets and leaves truck and
suppliers move to for store loads bottles
storage
Delivered Full pallet and Expedition
Goods assorted pallet rack
storage
If pick area is Stepper moves
empty, pallets from full
picker pallet storage
tells stepper to area to pick area
replenish

Assistant Store
Picker gets
warehouse manager
pick list from orders goods
manager
office compiles
pick list

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Exhibit 8
Velky-Potraviny’s Current Bonus Program for Warehouse Employees

An employee who has a permanent contract with the company and concurrently his trial period
has expired, may be given a bonus in addition to his base pay.

The amount of bonus depends on the quality of the work he delivers. It serves to compensate the
employee for aspects of work which are difficult to express in quantitative measures. Among the
evaluation criteria are aspects like willingness, pro-activity, commitment, speed but keeping with quality
standards, proper handling of merchandise and technology, obeying safety rules and regulations and
highway code regulations. The employee should have no absence without permission for the month in
question and has not breached work discipline in any other way. Otherwise he is not entitled to any
bonus. For any breach of work discipline he must be reproached in writing. The employee must have
worked at least 75% of the monthly working hours in the position during the month in question. If he has
worked less working hours than specified, the employee will receive a bonus amounting to the
proportionate bonus of the last month. The bonus is due as of the regular payday together with the
normal pay for the period and is subjected to tax and other deductions.

Based on poor quality, an employee’s bonus is reduced in the following way: For each
penalty/error point CZK 50 is deducted from his bonus up to the point where he has no bonus.

In addition to mistakes found by the inspection in warehouse also mistakes found during a take-
over of goods at a retail store are taken into account. In such instance, however, only item 2) i.e., extra
merchandise applies. The formula for computation of the final penalty points score is:

(Number of penalty points from the warehouse * 3 / number of inspections) + (number of errors
found in a retail store)

The result is rounded to an integer (from 0.5 up).

Each employee is checked at least 3 times per month and the result of the inspection is recorded
in a record signed by the warehouse manager or his deputy. Documents stating the amount of bonus are
submitted to the payroll office together with other payroll paperwork in due periods. The manager of the
warehouse is responsible for the contents and timely delivery of the paperwork. The bonus is paid
together with the regular pay and is subjected to normal taxing and deductions (tax, social and health
insurance). Should an attempt to influence results of the inspection be ascertained on the part of the
consignment dealer, he will not be paid any bonus for that month.

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Velky Potraviny – Prague BAB013

Exhibit 8 (Continued)
Velky-Potraviny’s Current Bonus Program for Warehouse Employees

Errors are evaluated according to the following key:

Error description Penalty Picker Receiver Stepper Drivers

points Error Error % Error % Error
% %
Missing merchandise item 3 12 33 - -
Extra merchandise item 3 7 - - -
Interchange (confusion) of items 2 5 60 96 -
Missing pallet 5 5 - - 41
Delivered an extra pallet 7 5 - - 41
Incorrect record in the consignment 2 9 - - -
sheet
Pallet not labeled 3 3 - - -
Pallet label with a different label 5 15 - - -
Improper storage of goods on a pallet 1 18 - - -
Issuance of “younger” goods 3 13 - - -
Breakage, Damage, Mishandling 2 8 7 4 18
% of all errors attributed to 63% 17% 10% 10%
Error percentages are given for data collected in 1995 (for the whole year).
Example: Suppose a picker is charged with 4 errors (1 extra pallet delivered, 1 pallet
with different label and 2 damages) in a given month, then the total penalty points = 14, i.e., 700
Kcs. will be deducted from his second bonus (see exhibit 7). The maximum second bonus he
can get is 300 Kcs.

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Velky Potraviny – Prague BAB013

Exhibit 9
Current Measures of Performance by Job/Function
Warehouse Responsibilities # of Measures of Measures of Base Pay First Bonus Second
Position Empl. Performance Performance Component (Subjective Bonus
(Quantitative (Subjective) (Paid Measures) (Quantifiabl
) Monthly) e Measures)
Receivers Unload on average 65 palettes per day, 14 # of pallets Co-operative, 9000 - 12000 Max. 2000 CZK Max. 3000 CZK
check deliveries with invoice, check unloaded per day positive attitude, CZK
for damages, stack in correct SKU takes responsibility
place and expiration order
Steppers Replenish products, move correct 2 # of pallets moved Co-operative, 8000 CZK Max. 2000 CZK Max. 1000 CZK
palettes from higher stacks to lower, in each day positive attitude,
correct expiration order takes responsibility
Pickers Pick orders, visually check for correct 38-44 # of pallets picked Co-operative, 7000 CZK Max. 2000 CZK Max. 1000 CZK
product, hand-wrap pallet, put store each day positive attitude,
i.d. on pallet, deliver pallet to expedite takes responsibility
area, advise Steppers that products
need to be replenished, clean aisles,
technical maintenance of forklifts
Output/ Check 15% of all outgoing orders; 2 Number of palettes Co-operative, 9000 CZK N/A N/A
Quality advise Warehouse Manager when checked per month positive attitude,
Checkers order is wrong, incomplete and number of takes responsibility
errors found
Drivers Pick up orders from expediting area, 14 Speed loading Willingness to 11,000 CZK 3000 N/A
load order on truck, deliver to stores, pallet orders onto travel to 2 stores
unload at stores truck and un- which are located
loading at stores, far from Prague
care of truck and
contents

Warehouse Manages overall warehouse 1 N/A N/A N/A

Manager operations, construction for expansion,
employees performance, quality
Deputy/Asst Support Warehouse Manager, 5 N/A N/A N/A
Warehouse Mgr operations, quality, process flow

Total: 77-82

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