SUPPLY CHAIN MANAGEMENT BENCHING STUDY

MINI PROJECT 2

GROUP 7

OUTSOURCING TRENDS IN INDIAN RETAIL INDUSTRY

Pantaloons vs. Spencer’s

Period of Study: 2006-2010

ABSTRACT
This Project is done by the team as a part of Supply Chain Management Course. The present study aims at finding different outsourcing practices and trends that is either being used in the Indian Retail industry. Two retail giants Big Bazaar (Pantaloons) and Spencer & Company Ltd are used for this study. This report is based on data that have been gathered from Capitaline and also direct and telephonic interactions with company executives’ from Spencer and Big Bazaar.

SUPPLY CHAIN MANAGEMENT COURSE MINI PROJECT II PROJECT ON OUTSOURCING TRENDS IN INDIAN RETAIL TEAM MEMBERS: VIVEK PAREKH 2010281 DEBASHISH BAGG 2010298 SAKSHI AGARWAL 2010206 SANKHA DIP DATTA 2010207 SHANTANU PANDEY 2010212 SHASHANK SHEKHAR TRIPATHI 2010213 BENJAMIN WEBER 2010FE01

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OUTSOURCING TRENDS IN INDIAN RETAIL

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GROUP 7

INTRODUCTION TO OUTSOURCING
Outsourcing is any task, operation, job or process that could be performed by employees within an organization, but is instead contracted to a third party for a significant period of time. The term outsourcing is used inconsistently but usually involves the contracting out of a business function commonly one previously performed in-house to an external provider. In this sense, two organizations may enter into a contractual agreement involving an exchange of services and payments. The concept of outsourcing thereby helps the firms to perform well in their core competencies and thus mitigating rise of skill or expertise shortage in the areas where they want to outsource. Of recent concern is the ability of businesses to outsource to suppliers outside the nation, sometimes referred to as off shoring or offshore outsourcing. In addition, several related terms have emerged to grasp various aspects of the complex relationship between economic organizations or networks, such as near shoring, multi-sourcing and strategic outsourcing. One of the biggest changes of recent years has come from the growth of groups of people using online technologies to use outsourcing as a way to build a viable service delivery business that can be run from virtually anywhere in the world. The preferential contract rates that can be obtained by temporarily employing experts in specific areas to deliver elements of a project purely online means that there is a growing number of small businesses that operate entirely online using offshore outsourced contractors to deliver the work before repackaging it to deliver to the client.

INDIAN RETAIL SECTOR
Indian retail market has been ranked 4th most attractive emerging market. India's retail sector accounts for 12% of GDP with about 25 million people being employed and second largest employer after agriculture in the country. Moreover, India's overall retail sector is expected to rise to around USD 600 billion by 2013. The organized retail currently accounting for around 5% is pegged at around USD 20 billion. It is expected to touch USD 107 billion by 2013. The key challenges Indian organized retail industry faces are cost, availability and delivery of quality products, cost efficient real estate, skilled service employees, and employee attrition in the industry. The rentals continue to be the highest expense of modern retailers and are almost 4 to 5 times that of their western counterparts continue to pose a challenge to their growth. Indian retailers have difficulty in finding trained personnel and incur significant costs for training them.

PANTALOON RETAIL LTD.
Pantaloon Retail India Limited (PRIL), is a retailer which was incorporated on 12th October, 1987 and is headquartered in Mumbai. The company operates primarily through the Lifestyle and Value formats with multiple delivery mechanisms and selling channels in their business, some of them are fashion, food, general merchandise, home, leisure and entertainment, financial services, communications and wellness. The Company has stores in 51 cities across the country, constituting over 6 million square feet of retail space. In Value retail it is present through 78 Big Bazaar hypermarkets, 113 Food Bazaars and other delivery formats.

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OUTSOURCING TRENDS IN INDIAN RETAIL

MINI PROJECT II

GROUP 7

SPENCER’S RETAIL LTD.
Spencer’s Retail Limited is a multi-format food-first retailer providing a wide range of quality products to discerning young customers - well-travelled citizens of the world, looking out for authentic flavors and experiences in a fun-filled shopping environment. Part of the Rs 15,500 crore RPG Group, Spencer run about 200 stores (including about 30 large format stores) across 35 cities in India. As one of the earliest entrants in the retail space in India, Spencer’s also has a wide variety of electronics and electrical equipment, home and office essentials, garments and fashion accessories, toys, and personal care.

INTERPRETATIONS FROM THE RESULTS
Table 1 shows the calculation of Outsourcing Ratio that is basis of comparison of Pantaloons and Spencer’s Retail format. Source of data for calculation in table 1 is Capital line database though annual reports of individual companies were studied for further detailed data. A comparison of industrial wise average is also included to compare what the firms have been doing differently. The Interpretation on the data here is broadly classified to heads i. e. outsourcing ratio over the year and change in outsourcing ratio with change in sales turnover.
Year Retail Industrial Average Sales Turnover Raw Materials Outsourcing Ratio Sales Turnover Pantaloons Retail Ltd. Raw Materials Outsourcing Ratio Sales Turnover Spencer’s Retail Ltd. Raw Materials Outsourcing Ratio 2011 14905 13254 0.89 4326 3144 0.73 952 727 0.76 2010 33515 22705 0.68 6317 3279 0.52 1133 892 0.79 2009 35298 23986 0.68 6661 4783 0.72 854 771 0.90 2008 27598 21686 0.79 5296 4127 0.78 540 444 0.82 2007 29983 23800 0.79 3393 2611 0.77 291 259 0.89 2006 39860 22053 0.55 1962 1478 0.75 2005 32497 20383 0.63 1085 828 0.76 2004 33211 21820 0.66 658 467 0.71 2003 33662 20925 0.62 445 328 0.74 2002 22294 17587 0.79 285 214 0.75

Table 1: Outsourcing Ratio across Indian Retail industry Figure 1: Outsourcing ratio Outsourcing Ratio 0.90 0.70 0.50 2011 2010 Pantaloons Retail Ltd. 2009 2008 2007 Year 2006 2005 2004 2003 2002 Spencer Retail Ltd.

Retail Industrial Average

1. OUTSOURCING RATIO As can be seen from figure 1, outsourcing ration has been highly variable over the last decade. On an overall outsourcing has gone up from .8 to .9 with the mean of .7 and standard deviation of 0.103. Both
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OUTSOURCING TRENDS IN INDIAN RETAIL

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the firms under study have higher outsourcing with mean of Big bazaar lying at.72 just above industrial average and variance 0f 0.07 where as Spencer have a mean of .83 and standard deviation of 0.06. a. Raw Material In case of Spencer’s and Pantaloon’s there is a stark difference between they manage their raw material as Spencer’s does not purchase any basic raw material which can be processed further into finished goods or intermediate goods. As can be seen from the Balance sheet and income statement attached, it buys only trading goods which are in itself finished goods or intermediate goods that can be processed further into finished goods. Hence it reduces considerable amount of cost in terms of raw material management and the overall supply chain cost. From this it can be realized that Spencer’s does significant amount of outsourcing as compared to other players in the markets be it Big Bazaar or others. As in case of Big Bazaar they have got a number of in house brands which may be requiring adequate amount of raw material to manufacture hence the Big Bazaar procures raw material which is the basic requirement for further being processed into finished or intermediate good. Hence from this it can be realized that Big Bazaar is a big in-sourcing player and outsources proportionately less than its peers and competitors.
Pantaloons Retail Ltd.
0.80 Outsourcing Ratio 0.75 0.70 0.65 0.60 100 2100 4100 6100 8100 Sales turnover Linear (Pantaloons Retail Ltd.) y = -1E-05x + 0.7625 R² = 0.1892 Outsourcing Ratio 0.95 0.90 0.85 0.80 0.75 100 600 1100 Sales turnover 1600 y = -0.0001x + 0.9136 R² = 0.3386

Spencer Retail Ltd.

Pantaloons Retail Ltd.

Spencer Retail Ltd.

Linear (Spencer Retail Ltd.)

Retail Industrial Average
1.00 0.90 0.80 0.70 0.60 0.50 14000 Outsourcing Ratio y = -1E-05x + 1.1032 R² = 0.8267

24000 34000 Sales turnover

44000

Retail Industrial…

Linear (Retail Industrial…

Figure 2: Sales Turnover vs. Outsourcing Ratio in Indian Retail Industry

2. CHANGES ON THE OUTSOURCING RATIO WITH RESPECT TO SALES From the below figures we can see that there is a general trend in the Indian Retail Industry that as the sales increase they seems to have been pulling out of outsourcing.
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OUTSOURCING TRENDS IN INDIAN RETAIL

MINI PROJECT II

GROUP 7

3. SURVEY RESULTS A survey on outsourcing trends in the industry have been circulated to Saurabh Biswas [4], Sumit Dutta [5], Subhranil Dutta [6] a few prominent managers each firm under study. Results of the same can be summarized as follows: 1. Indian retailers procure from multiple retailers than from a specific source. 2. Spencer aggregates at levels of capacity, inventory and transportation to get surplus from the supply chain, while Big bazaar low cost and high quality as factors to select vendors with transport aggregation being the common factor on which both depend. 3. One-on one negotiation is preferred by Spencer to enter into an outsourcing deal while Big bazaar prefers reverse auction. 4. Big bazaar being a bigger and more established player don’t look for responsiveness when Spencer weighs it equally to supply efficiency. 5. Both players enter into buy back contacts, when Spencer prefers quantity flexibility as additional parameter to be responsive to market, Big bazaar prefers revenue sharing. 6. Logistics are basically handled by 3PL bodies. According to experts in both the organization 30% to 60% of inbound logistics is handled by 3PL along with complete outbound logistics. 7. Spencer’s also enter into downstream outsourcing al the outlet end. Survey results show that these firms don’t take franchise outlet and leased outlet different from their own outlet. Big bazaar on the other hand prefers its own outlets, which also justifies as its outlets are much bigger and caters to demand across many industry segments. 8. Spencer’s have an equal distribution of contractual and permanent staff. Survey results show that Big bazaar’s staffs are all permanent but observation of one of the author (Debashish Bagg) of the report is that Big Bazaar hires contractual staff from lower grade business schools and other institutions in the name of internship to cater to seasonal fluctuation of its demand. 9. Both Biz Bazaar and Spencer’s takes details of Tier-2 suppliers also while entering into business contracts 10. Spencer’s say that the outsourcing have increased on an overall basis when their own financial statements don’t support the same statement. Big Bazaar agrees that its outsourcing have increased over the last decade.

OUTSOURCING TRENDS AT SPENCER
Benjamin and Sankha Dip did interview a manager from Spencer’s Retail Ltd. to drill into more details of outsourcing at their place. According to the manager outsourcing is preferably done for all kinds of perishables due to high variety and good quality as well as seasonality at Spencer’s. The transport is organized via third parties called ‘handy boys'. The last year has seen an increase in inventory cost, at Spencer so there was a need to optimize stocking. Spencer's adapted Japanese 5S’ management technique to achieve better efficiency in inventory management. Spencer's has warehouses in which FMCG1 and personal care products are stored, no perishables. Spencer being new or inexperienced in Indian retail business has to rely heavily on suppliers. Retailer gains a higher margin on in-house brands that are procured from contract manufacturers and have
1

Fast moving consumer goods.
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OUTSOURCING TRENDS IN INDIAN RETAIL

MINI PROJECT II

GROUP 7

to follow Spencer's corporate image because it's the retailer's own brand. Thus the quality standards for the suppliers are higher; standardization allows easier streamlining of the overall business processes and integration of the suppliers. Along with establishment of in- house brands, the processes of procurement also will undergo changes. In the past retailer relied on experience of its supplier for forecasting, procurement hence being driven by the supplier and was a push cycle. Nowadays Spencer's forecasts the replenishment of most processed goods on its own. Spencer's has changed for instance the process from push to pull for Cadbury’s products. This plays an important role in the inventory management with regard to efficiency and responsiveness. The deployment of functional Supplier Management Software under the aegis of automation and digitization of processes further support this trend.

CONCLUSIONS
It can be concluded from the above that Big Bazaar have been moving to reduce its outsourcing and all the outsourcing i.e. vendor management strategies have been kept aligned to its size of big player in the Indian retail market. It has been keen on increasing the overall efficiency rather than being responsive to seasonal demand fluctuations. Spencer on the other hand a very young player in the Indian retail has being trying persistently to move out of its supplier dependencies. In either case fluctuations in the outsourcing ratio seems to have a tendency to damp down in the near future.

LIMITATIONS OF THE STUDY
Due to most of the Indian retail sector being under control of local and unorganized player solid conclusions on the outsourcing trends cannot be concluded. Even survey results may be depended on the market that each player is focusing on.

CHANGES EXPECTED DUE TO FDI NORMS
FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity. Allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that allowing healthy FDI in the retail sector might help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retail shops) have undoubtedly failed to provide to the masses employed in them. The real results of this FDI norms are difficult to conclude and hence one need to lookout for the real results.

REFERENCES
1. Annual reports of Spencer Retail. 2. Annual Reports of Pantaloon Retail Ltd. 3. Capitaline plus database. (Referred on 8th November, 2011).
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OUTSOURCING TRENDS IN INDIAN RETAIL

MINI PROJECT II

GROUP 7

4. Mr. Saurabh Biswas, Head Supply Chain & Planning at Spencer's Retail Ltd, Gurgaon India. +919871545247, email: saurabhbiswas@hotmail.com 5. Mr. Sumit Dutta, Manager Operations, Spencer's Retail Ltd, Kolkata, India. +919007138878. Email: sumit_da@yahoo.com 6. Mr. Subhranil Dutta, Store Mgr- Big Bazaar Kolkata

APPENDIX
Attached below are the balance sheets and profit and loss statements of Spencer’s retail and Pantaloon Retail ltd for the five years of study. The report also includes aggregate data of the retail industry that is extracted from Capital line website.

SPENCER’S RETAIL BALANCE SHEET
Year SOURCES OF FUNDS : Share Capital Reserves Total Equity Application Money Total Shareholders’ Funds Secured Loans Unsecured Loans Total Debt Total Liabilities APPLICATION OF FUNDS : Gross Block Less : Accumulated Depreciation Less: Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions 172.19 10.77 171.33 5.58 192.63 5.07 106.07 2.57 66.84 1.63 7|P a g e 402.02 101.32 0 300.7 0 35.48 88.25 129.49 18.7 13.54 82.55 244.28 442.83 68.82 0 374.01 0 65.17 80.3 151.95 24.88 27.8 89.19 293.82 359.41 43.97 0 315.44 0 86.91 1.01 177.59 27.71 28.29 174.86 408.45 125.18 22.68 0 102.5 0 21.36 1.01 61.65 11.73 22 59.39 154.77 61.1 13.38 0 47.72 0 10.35 0.01 36.89 6.61 7.05 30.06 80.61 26.01 -468.58 767.45 324.88 57.18 350 407.18 732.06 26.01 -210.09 618.65 434.57 76.28 300 376.28 810.85 26.01 -32.42 248 241.59 84.54 350 434.54 676.13 26.01 57.69 0 83.7 87.3 0 87.3 171 20.61 16.23 6.25 43.09 17.28 9.85 27.13 70.22 Mar 10 Mar 09 Mar 08 Mar 07 Mar 06

OUTSOURCING TRENDS IN INDIAN RETAIL

MINI PROJECT II

GROUP 7

Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Total Assets Contingent Liabilities

182.96 61.32 0 246.31 0 246.31 732.06 3.74

176.91 116.91 0 175.45 0.99 174.46 810.85 14.9

197.7 210.75 0 71.95 9.93 62.02 676.13 0.82

108.64 46.13 0 0 0 0 171 0.39

68.47 12.14 0 0 0 0 70.22 0.84

SPENCER’S RETAIL PROFIT AND LOSS STATEMENT
Year INCOME : Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income EXPENDITURE : Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses Total Expenditure Operating Profit Interest Gross Profit Depreciation Profit Before Tax Fringe Benefit tax Deferred Tax Reported Net Profit Extraordinary Items Adjusted Net Profit P & L Balance brought forward Statutory Appropriations 726.75 25.45 105.25 28.13 204.63 103.33 1,193.54 -253.7 28.08 -281.78 48.57 -330.35 0 -71.86 -258.49 -61.38 -197.11 -325.93 0 891.84 39.84 140.35 32.95 266.78 51.7 1,423.46 -222.86 24.91 -247.77 40.79 -288.56 1.55 -112.44 -177.67 70.65 -248.32 -148.26 0 771.07 28.14 82.9 19.93 172.44 4.02 1,078.50 -104.71 17.48 -122.19 27.74 -149.93 1.39 -62.02 -89.3 -0.47 -88.83 -59.01 0 444.41 11.84 43.56 11.64 83.6 5.21 600.26 -35.53 6.67 -42.2 9.4 -51.6 0.74 0 -52.34 0.45 -52.79 -6.67 0 258.54 5.06 20.9 5.24 34.97 3.28 327.99 -8.09 3.42 -11.51 3.65 -15.16 0.38 0 -15.54 0.07 -15.61 -17.5 0 8|P a g e 951.84 0 951.84 14.41 -26.41 939.84 1,133.05 0 1,133.05 79.44 -11.89 1,200.60 853.61 0 853.61 6.73 113.45 973.79 539.83 0 539.83 0.86 24.04 564.73 290.64 0 290.64 0.29 28.97 319.9 Mar 10 Mar 09 Mar 08 Mar 07 Mar 06

OUTSOURCING TRENDS IN INDIAN RETAIL

MINI PROJECT II

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Appropriations P & L Balance carried down Book Value-Unit Cur

0 -584.42 -170.15

0 -325.93 -70.77

0 -148.26 -2.46

0 -59.01 32.18

-26.37 -6.67 17.87

PANTALOON RETAIL BALANCE SHEET
Year SOURCES OF FUNDS : Share Capital Reserves Total Equity Share Warrants Equity Application Money Total Shareholders’ Funds Secured Loans Unsecured Loans Total Debt Total Liabilities APPLICATION OF FUNDS : Gross Block Less : Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Total Assets Contingent Liabilities 1,166.48 29.92 1,196.40 1,315.73 19.03 106.08 -87.05 5,051.25 906.59 863.42 24.22 887.64 1,030.16 29.87 102.3 -72.43 4,142.47 3,547.05 916.39 20.46 936.85 2,345.89 2.77 118.87 -116.1 5,097.81 111.5 620.08 17.58 637.66 1,990.92 27.19 95.03 -67.84 4,038.41 158.42 343.89 15.71 359.6 1,389.85 2 57.84 -55.84 2,391.75 101.32 9|P a g e 1,762.20 185.24 85.77 478.92 2,512.13 1,270.67 123.57 100.54 423.02 1,917.80 1,787.84 177.25 109.34 1,208.31 3,282.74 1,429.84 113.16 121.1 964.48 2,628.58 885.96 65.17 162.97 635.35 1,749.45 1,877.67 410.64 1,467.03 100.13 2,255.41 1,417.04 294.89 1,122.15 59.68 2,002.91 1,876.45 307.69 1,568.76 345.23 954.03 1,368.76 170.59 1,198.17 330.64 586.52 767.07 92.47 674.6 131.13 252.01 106.9 2,671.23 100 0 2,878.13 1,675.89 497.23 2,173.12 5,051.25 41.23 2,527.48 122.88 64.66 2,756.25 1,236.03 150.19 1,386.22 4,142.47 38.06 2,211.48 22.88 0 2,272.42 2,525.53 299.86 2,825.39 5,097.81 31.86 1,751.51 63.26 0 1,846.63 1,991.77 200.01 2,191.78 4,038.41 29.35 1,062.82 0 0 1,092.17 951.93 347.65 1,299.58 2,391.75 Jun 11 Jun 10 Jun 09 Jun 08 Jun 07

OUTSOURCING TRENDS IN INDIAN RETAIL

MINI PROJECT II

GROUP 7

PANTALOON RETAIL PROFIT AND LOSS STATEMENT
Year INCOME : Sales Turnover Net Sales Other Income Stock Adjustments Total Income EXPENDITURE : Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses Total Expenditure Operating Profit Interest Gross Profit Depreciation Profit Before Tax Tax Fringe Benefit tax Deferred Tax Reported Net Profit Extraordinary Items Adjusted Net Profit Adjust. below Net Profit P & L Balance brought forward Appropriations P & L Balance carried down Dividend Preference Dividend Equity Dividend % Earnings Per Share-Unit Cur Book Value-Unit Cur 3,143.77 71.44 209.44 89.35 766.76 105.07 4,385.83 455.13 193.47 261.66 146.37 115.29 24 0 14.62 76.67 -3.69 80.36 0.16 495.98 66.44 506.37 20.27 0.01 45 3.38 125.04 3,278.65 83.2 270.67 136.61 1,041.88 142.64 4,953.65 676.56 301.04 375.52 161.88 213.64 32.83 0 1.25 179.56 44.42 135.14 0 380.54 64.12 495.98 17.13 0 40 8.57 124.6 4,783.06 98.97 269.94 182.44 867.12 144.56 6,346.09 680.72 324.44 356.28 140.05 216.23 25.5 1.89 48.26 140.58 -2.38 142.96 0 267.56 27.6 380.54 11.57 0 30 7.28 118.21 4,126.60 78.2 269.41 155.23 716.88 103.45 5,449.77 491.45 212.44 279.01 83.39 195.62 29.13 3.24 37.28 125.97 -0.93 126.9 -49.09 215.76 25.08 267.56 10.67 0 30 7.79 111.95 2,611.00 61.51 206.09 113.19 488.07 63.28 3,543.14 312.13 94.26 217.87 36.86 181.01 30.77 2.32 27.93 119.99 60.12 59.87 0 116.59 20.82 215.76 7.54 0 25 8.09 74.42 4,325.57 4,325.41 21.4 494.15 4,840.96 6,316.66 6,316.66 97.43 -783.88 5,630.21 6,661.42 6,661.42 12.28 353.11 7,026.81 5,295.88 5,295.88 30.93 614.41 5,941.22 3,392.79 3,392.79 96.53 365.95 3,855.27 Jun 11 Jun 10 Jun 09 Jun 08 Jun 07

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