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W20754

SHOPPERS STOP LIMITED: DEVELOPING SENSE-AND-RESPOND

CAPABILITIES (B)

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Pragya Arya, Sanjay Kumar, and Narain Gupta wrote this case solely to provide material for class discussion. The authors do not
intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names
and other identifying information to protect confidentiality.

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permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights

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Copyright © 2020, Ivey Business School Foundation Version: 2020-09-11

A week after the meeting with the chief executive officer (CEO) of Shoppers Stop Limited (SSL) and all
heads of business and operations departments, Ajay Kapoor was almost ready for his presentation to the
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board of directors. He had spoken to all SSL department heads except Krishna Jha, the head of distribution
and logistics (D&L). Jha had left for a week-long vacation right after the Monday morning meeting and
was returning to work on the following Monday. As soon as Kapoor heard that Jha was back in the office,
he rushed to see him. The discussion with Jha would focus on how to apply the sense-and-respond business
model at SSL. In preparation for his presentation to the board of directors, Kapoor needed some financial
information from Jha to help determine whether moving to a centralized D&L system was justified.
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REPLENISHMENT, DISTRIBUTION, AND LOGISTICS

The D&L function was spearheaded by Jha and categorized under inbound, outbound, and reverse logistics,
as well as warehousing activities. Distribution had a direct impact on SSL’s responsiveness, and Jha played
an important role in shaping the company’s current D&L and replenishment structure. Kapoor was
confident that Jha would welcome any suggestions that might improve D&L performance.
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SSL had four regional distribution centres (DCs) located in Faridabad, Bhiwandi, Bangalore, and Kolkata.
Approximate sales generated from the four DCs were 25 per cent from Faridabad, 35 per cent from Bhiwandi,
20 per cent from Bangalore, and 20 per cent from Kolkata. Together, the four DCs handled about 400,000
different stock-keeping units per year, spread over an area of 343,000 square feet (32,000 square metres).

Approximately 70 per cent of all stock arrived at the four DCs. The remaining 30 per cent of stock consisted
of non-apparel products that vendors delivered directly to various stores. These products were ordered in
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small quantities and required careful handling. An example of direct delivery by vendors to stores was
cosmetics, which required storage at lower temperatures. However, the four SSL warehouses were not
temperature-controlled.

The DCs received stock from the single-sourcing location of Mumbai and dispatched the products to all
stores across the country. Distribution from the DCs occurred daily for local stores and three times per week
for all others. SSL ran the auto-replenishment module of the company’s warehouse management system

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each morning for each store. The system was integrated with the manufacturing management system and

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the display plan of the stores. Results were aggregated and products were dispatched the same night.

Moving Ahead: From Traditional Purchasing to Just-in-Time Inventory

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In the past, vendors would send entire orders to SSL warehouses at the start or end of each season, resulting
in significant waste of various sizes and colours of inventory that had to be heavily discounted. Certain
fashion lines registered poor sales, causing SSL to incur major expenses in returns at the end of the season.

Approximately seven years earlier, SSL had implemented a “delivery authorization” initiative to address
the issue. Vendors were directed to provide stock over a phased-in period, with a maximum of two weeks’
worth of stock per batch. However, SSL assured the vendor that the entire stock negotiated at the start of
the season would be bought. This practice helped SSL make better use of its warehouse space, manage

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inventory more efficiently, reduce lead time from factory to store shelves, and enhance customer service
levels through better availability of products. The company’s accounts payable position also improved. The
“delivery authorization” initiative became an international best practice model for the retail industry and a
policy that SSL followed ever since.

Entering the D&L area, Kapoor asked Jha for a quick brief meeting, explaining that he wanted Jha’s input
on new initiatives for the D&L area. He also asked Jha for the specific recommendations from the
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consultant’s report and the back-end logistics for the online initiative. Jha explained that the consultant
suggested moving to a single central warehouse near Mumbai because most sourcing was done from
Mumbai. Pooling resources would reduce inventory costs and warehouse rentals, and lead to projected
savings of approximately ₹650 million1 per year. However, the response time for order replenishment for
more than half of the products would increase from the current four or five days to 15 days.
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Kapoor asked Jha to help him determine the total cost structure and response time if a completely
centralized system was adopted with a single DC at Bhiwandi. The two men began by gathering some data
about packaged apparel. Winter apparel weighed about 3 kilograms per item on average, whereas summer
apparel weighed approximately 1 kilogram per item with packaging. Average prices were approximately
₹3,000 for winter wear and ₹1,000 for summer wear. The cost per unit per kilogram came to ₹1,000. By
using SSL’s annual sales of ₹ 19 trillion, and deducting direct sales to subsidiaries (which were generally
about 10 per cent of turnover), they arrived at an estimate of 19000 tonnes as the total annual loadthat SSL
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would need to handle. Kapoor wondered whether pooling resources would reduce inventory and wanted to
see a comparison of the SSL current system with a single central warehouse.

Jha also noted that the response time was expected to be two days within a DC’s region. A truck travelled
effectively 350 kilometres per day on average. Therefore, the maximum travel time to Kolkata would be
six or seven days. However, with waiting time for a full truckload, about 50 per cent of goods could
experience a response time of about 15 days, although inventory and warehousing costs would drop. The
concern, however, was the international benchmark, which was certainly less than 15 days.
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The two men noted that SSL paid ₹3 per tonne per kilometre for the use of a truck. Warehouse rental was
another major contributor to expenses. Different DCs paid different rental fees. The cost per square foot
(approximately 0.09 square metres) was ₹19 for Kolkata, ₹12 for Bhiwandi, ₹20 for Faridabad, and ₹15 for
Bangalore. The standard warehouse size was 200 feet × 200 feet (60 × 60 metres) spread over three floors.
According to the consultant’s report, explained Jha, approximately ₹10 million could be saved from pooling

1
₹ = INR = Indian rupee; ₹1 = US$0.0182 on January 1, 2013; all currency amounts are in ₹ unless otherwise specified.

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resources, ₹28 million from inventory carrying costs, and the same from warehouse rentals. However, Jha

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was unsure about the response times for order replenishment. Some of these figures could change, with 50
per cent of inventory being stored at a single warehouse for up to 15 days.

Kapoor asked Jha to evaluate the options and come up with a comparison that could be presented to the
board of directors. Kapoor also wondered about support for back-end logistics infrastructure if SSL decided

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to go online. Competitors such as Myntra and Flipkart were promising online order delivery within two to
four days and SSL would need to match those delivery times. Kapoor asked Jha to consider how SSL could
achieve that goal, before meeting with Harish Verma and Shikhar Damle for additional details.

After they parted, Jha gathered his thoughts. He considered that the central warehouse in the proposed
system would use full truckloads to supply all stores in Delhi and National Capital Region, Kolkata,
Mumbai and Bangalore. There were enough large stores in these cities to require one full truckload per day.

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ONLINE INITIATIVE

In 2007, SSL adopted a catalogue and Internet retail format, hoping to convert information seekers into
customers. However, the contribution of online sales total revenue remained very low, at only 1 per cent.
SSL’s closest competitor, Lifestyle, did not have an online presence, but online competition was strong
from purely online retailers such as Myntra and FashionAndYou. One industry estimate projected the online
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retail market in India to grow to US$84 billion by 2021, from US$14 billion in 2012.2

During an informal conversation in the cafeteria, Kapoor happened to ask Damle why SSL’s online sales
had not grown over the years. Damle had pointed to the lack of a supported back-end D&L infrastructure,
as well as the country’s poor e-commerce support systems. India had a low availability of secure payment
systems, high-speed Internet connections, and high-quality brands with high-definition product catalogues.
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Damle also felt that companies were not using the technology that was available to provide higher value to
the customer, in comparison to traditional retailers.

Kapoor considered Damle’s words and reflected on how consumer conversion and customer retention strategies
at the store level could be replicated online. However, after spending many years perfecting a store format to
cater to traditional customers, Kapoor was not eager to encourage customers to stay at home and shop online.
He hoped to use technology to enhance the customer’s experience within the store by providing wider access to
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products, making SSL inventory more widely available, and offering superior customer service.

Better use of technology could empower customers by giving them access to a greater variety of apparel and
non-apparel options without the need of a salesperson but instead through large in-store touch-screen kiosks.
Catalogues available in the kiosks could include applications to allow customers to choose from a variety of
colours, sizes, and styles. Technology could lower costs related to human resources skills enhancement, career
planning, and retention. Touch-screen kiosks could also empower customers by making available SSL’s full
inventory, from any SSL store across the country, at the touch of a finger. The items could then be delivered
to the customer’s doorstep within a short time. Efficient customer returns, which SSL normally handled with
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discretion and respect, could be extended to purchases made on kiosks across all stores.
On Tuesday, Verma, Damle, and Kapoor met to discuss these initiatives and called Jha to join them. Kapoor
noted that online sales contribution was as high as 5 per cent for global giant retailers such as Nordstrom and
Macy’s, and growing rapidly. At Kapoor’s request, Damle checked the status of SSL online orders and found

2
“What E-commerce in India Looks Like [Recap 2012],” NextBigWhat, December 20, 2012, accessed January 30, 2020,
https://nextbigwhat.com/e-commerce-in-india-2012.

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that customers had placed almost 10,000 online orders to date. The SSL website and back-end systems were

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structured to place each online order on the store nearest to the customer’s shipping location, based on where
the ordered item was available. Kapoor raised a concern regarding the current category of capitalized expense
or promotional cost for these types of expenses, which would require a more sophisticated back-end
distribution system to cater to a higher level of online business, such as 5 per cent of total sales.

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Damle emphasized that the data from SSL’s enterprise resource planning (ERP) system, “JDA,” could be
better used for business analytics and trends to guide the strategic decision-making process. The data would
be an important factor in sensing what the customer wanted. Verma agreed to extend his proposal to cover a
comprehensive project that made use of SSL’s ERP data for analysis. Damle hoped to prove that the savings
generated would exceed the costs incurred by using business analytics in the decision-making process. He
requested Sushil Kothari and Sunita Thadani assist in this exercise to discuss implementation issues.

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Jha, who had just joined the meeting, suggested that SSL could grow the online business by either using its
current D&L structure for delivering the items ordered online or by creating a parallel distribution system. He
had evaluated the two options considering the fact that 50 per cent of stores were within the city limits, and
50 per cent stores were outside the city limits. He also estimated that all online orders could be equally put in
1-kilogram and 5-kilogram packages.

Distribution and Logistics for the Online Initiative

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Using the Current D&L Structure

With online orders fulfilled from existing inventory (i.e., assuming no extra inventory for the online
business), the sourcing lead time would be zero. With the current D&L set-up, the orders would be first
placed at the nearest regional DC, which would pack and ship the orders to the store nearest the customer’s
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shipping address. The items would be shipped in a truck that was already making a delivery to various
stores, and the accumulation time for orders would be the same as the frequency of truck dispatches to
stores. The store would then ship the items to the customer using a local courier service, which would take
one to three days, depending on distance. Inventory carrying costs and warehouse rental expenses would
remain the same. No transportation costs from the warehouse to the stores would be incurred because the
ordered items would fit in the current truck deliveries. However, the cost to ship from each store to the
customer would be approximately ₹200 for an average package weighing 1 kilogram, ₹ 750 for an average
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package weighing 5 kilograms. and ₹1200 for an average package weighing 10 kilograms.

Using the Parallel Distribution System

The second option was to aggregate all online orders at the central warehouse in Bhiwandi and then dispatch
items to a regional store using 10- or 5-kilogram boxes, and from the regional store to the customer using
a local courier. The assumption was that the item would be available at the central warehouse; otherwise,
it could be sourced very quickly. Order accumulation would be immediate if the stock was available at the
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store, or up to five days if the stock was unavailable and was therefore aggregated at the central warehouse.
The transportation time from the central warehouse to the regional store was a maximum of two days, and
from there to the customers within one to three days. Average delivery costs were ₹750 for 5-kilogram
boxes and ₹1,200 for 10-kilogram boxes across the country, regardless of distance. SSL could use standard
10-kilogram boxes or a combination of boxes (which did not require any order accumulation time) for the
west region and a truckload for the remaining stores in the north, south, and east. Delivery costs for

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individual packages were approximately ₹300 for a 1-kilogram item to be shipped across India as compared

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to the cost with current D&L system. This was because in the parallel system all deliveries across India
would be done from the central warehouse in Bhiwandi, resulting in an increase in the distance travelled.
The average costs for 5-kilogram and 10-kilogram packages was same.

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THE FUTURE COURSE OF ACTION

Kapoor’s work on collecting information from all heads of business and operations departments was complete.
He had a preliminary plan for SSL to become a sense-and-respond organization. He was aware that any
suggestion he made to the CEO and board of directors would need to be strongly supported by numbers. The
next step was to assemble all calculations for both scenarios, using the current D&L structure and using a
parallel distribution system. He planned to have all relevant calculations ready for his meeting with the CEO
the next day at 11 a.m. Kapoor wondered how he should open the meeting’s discussion to convince the CEO

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to adopt a sense-and-respond business model at SSL, and what the most suitable D&L structure might be.
Was a major restructuring of D&L needed to improve the company’s sense-and-respond capability?

Pragya Arya and Narain Gupta are affiliated with Management Development Institute Gurgaon.
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copyright. Permissions@hbsp.harvard.edu or 617.783.7860