The retailer

April 2012

Foreword
Dear reader, It gives us great pleasure to present to you the April 2012 edition of The retailer, our quarterly publication on the retail and consumer products sector. In this edition, we have focused on themes for operational improvement, covering the major issues faced by retail and consumer product companies in their store operations and distribution functions, respectively. We have showcased how consumer product companies can maximize their profits through customer pricing. In the last few years, the profitability of leading retailers has been under pressure. In this edition, we have focused on ways to improve the efficiency and productivity of stores with the objective of conserving precious capital. In the hot Indian summer, ice-cream is popular among consumers. We have focused on opportunities, trends and success factors in the Indian ice-cream and frozen dessert market. In our interview feature, Mr. Krishna Shete, Vice President, Business Development of Radhakrishna Foodland Pvt. Ltd., shares his views on evolving supply chains in the Indian retail and consumer products sector. We also feature our Retail innovation board section, in which we present to you snapshots of recent innovations that have emerged in the Indian and global retail industries. We hope you enjoy reading this issue of The Retailer and we look forward to your comments and feedback. Pinakiranjan Mishra

Partner and National Leader, Retail and Consumer Products Ernst & Young, India

Contents
Customer pricing for profit value leakage Performance improvement themes for Indian retailers 04 11

Ice-creams in India the inside scoop 17 Interview with Mr. Krishna Shete, Vice President, Business Development, Radhakrishna Foodland Pvt. Ltd. 25 Special feature: Innovation board 29

Involve yourself: We look forward to hearing your feedback and suggestions. To contribute to editorial content, please contact Ashish Kakwani T: +91 22 6192 0423 E: ashish.kakwani@in.ey.com

Customer pricing for profit value leakage

How consumer product companies can maximize their profits through customer pricing
While a consumer product company (CPC) can maximize its profits by implementing initiatives including the right marketing mix, segmentation, improved distribution system, optimization of costs, etc., the fastest and most effective means of maximizing profit is optimized pricing. The payoffs of improved pricing far outweigh the benefits of other levers of profit. For example, CPCs operate at an operating (EBITDA) margin of ~12-18%, and a 1% reduction in its operating expenses will at best be reflected in a 0.5%0.8% improvement in its operating margin, while a 1% increase on its overall sales through pricing can result in a ~5-8% improvement in its operating margin! However, pricing decisions are often fraught with risk, since incorrect pricing can drastically affect volumes. Therefore, a systematic approach to pricing is critical for the success of any company. In the Indian scenario, customer refers to channel intermediaries that cater to the end consumer. In this context, optimal pricing relates to customer pricing or transaction price management, i.e., the actual price realized by the company in its transactions with its channel intermediaries. This is also known as its pocket price. While a company has a target list price for each transaction, there are many on-invoice and off-invoice discounts and rebates that exist under the guise of volume discounts, consumer promotions, incentives to the sales force incentives, etc., which can drive down the list price to a net realized price the pocket price. In addition to this, a differential product mix and servicing arrangements across customers impacts this price further, leading to differential marginal contributions (MCs) across different customers.

Apart from these economic considerations, these measures enable customers to extract an enhanced price from the company due to factors such as tenure of relationship with the latter and the perceived importance of a customer. These considerations result in variations in the MC accrued to the organization from individual customers. An analysis of these variations demonstrates that the MCs are often part of a broad range that is known as the Marginal Contribution Band (depicted below).
Marginal Contribution Band 25% % of customers 20% 15% 10% 5% 2% 2% 3% 0% 0-10% 10 -12% 6% 10% 15% 18% 23% 20% 13% 8% 6%

12 -14%

14 -16%

16 -18%

18 -20%

20 -22%

22 -24%

24 -26%

26 -28%

28 -30%

Marginal contribution - as a percentage of gross sales

Individual elements (off-invoice discounts, consumer promotions, etc.) serve as input provided by the company to generate sales. In a utopian world, each input and its outcome should be evaluated at the customer level. However, while invoice or gross sales is tracked at the micro level (customerwise), companies are unable to track and put into action the individual spend elements of each customer and instead club these at a gross level. Therefore, similar input may result in differential output at the customer level this customer level granularity is lost in the overall spend profile, making it difficult to assess individual customers contribution to the organization. This lack of visibility of granular details results in value leakage across the chain.

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>30%

The sheer volume of transactions, of varying degrees of complexity, tends to create a smoke screen, which makes it difficult for companies to manage and understand opportunities for margin leakage (as illustrated below).
Most organizations do not effectively manage true customer pricing. Absence of product-level profitability Historical precedent-based pricing/spend decisions Limited visibility of true customer costs and profitability No clear strategy to optimize mix of products by customer, channel and market This leads to missed opportunities. Exploitation of price change to maximize profitability Large number of low profit or unprofitable customers Inconsistent discounting and investment across customers, markets and product types

Introducing the margin leakage waterfall

The margin leakage waterfall is the basis on which the true profitability of a customer is analyzed. It assigns key spends to customer segments (or markets or products) to identify potential areas where profit can be optimized.

Margin leakage waterfall: Provides a framework for generating hypotheses and identifying the highest value opportunities In essence, the Value Leakage Waterfall achieves two main objectives: 1. Allocates all costs to deliver a fully loaded view of current profitability by market, customer segment and product 2. Provides a common baseline to enable meaningful comparisons within and across customer segments

Margin leakage waterfall Enhance protability through price volume trade offs using elasticity analytics

Provides framework for generating hypotheses and identifying highest value opportunities Simplify discounts, align to customer value, and cease heavy period-end discounts Build cost-toserve in pricing terms Promotion spend optimizationinstitute pay for performance within customers/channels Standardise payment terms and incentivise prompt payments Drive up customer protability, eliminate unprotable tail and incentivise the sales force based on Customer Contribution Up-sell high margin products and services Improve ROI on advertising spenddeploy marketing mix analytics

Sales Inputs Excise Net Sales On -invoice discounts Invoice sales Off-invoice discounts Gross sales Non monetary promo Consumer promotions Net sales value Other BTL spends

Cost-to-serve Cost of distribution Bad debts Cost of credit Pocket price

COGS Cost of goods sold Marginal Contribution Marketing costs xed overheads Pocket margin

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Opportunity identification through Value Leakage Waterfall

The Value Leakage Waterfall can be used to leverage the following opportunities:
Customers profitability Sales input Cost to serve Improved product mix Identify profitability distinctions across customer segments and remodels negotiations to enhance profitability Deploy differentiated input across segments Develop pay for performance standards, aligning input with objective delivery across similar customers Define service delivery across segments in line with needs and delivery of profitability Align credit alignment with discounting Leverage cross-selling and up-selling opportunities to guide product improvement mix within customer segment

Ernst & Youngs point of view using Value Leakage Framework to enhance profitability
In our experience, the margin leakage approach is centered around effective segmentation and objective-linked assessment of customer-level spends.

Our experience indicates that addressing these opportunities typically enable improved margin opportunities worth around 2%5% of net revenue.

Customer segmentation and spend mapping How can the customer base be segmented to identify respresentative and manageable number of customer segments? What is the true protability delivered by customer segments?

Implementation frameworks to transition spends How should the spend s be transitioned to overcome legacy effects ans ensure customer segments? 3

Margin Leakage Reduction

Objective linked assessment of spends for target segments How should spend elements be redeployed to the needs of segments? Are spends for similar customers aligned to objective delivery? Are cross-sell and up-sell opportunities adequately utilized to drive margin improvements?

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Effective segmentation and mapping of spend the starting point of margin-improvement initiatives Segment customer base Creation of representative and manageable segments Key questions What are the key criteria according to which the customer base can be segregated? What is the best methodology that can be used to create actionable segments? Can the segmentation be easily revamped as new customers are added and market dynamics change? Identification of true segment profitability Assignment of customer level spends Key questions Which spends are variable for a customer? How should individual spends be apportioned to the customer base? What is the true profitability delivered by segments? Which segments should be selected for margin improvement initiatives?

1:

Segmentation involves using one or both the behavioral and attitudinal dimensions as variables: Behavioral attributes: Segment characteristics such as size and geography Buying behavior such as frequency of purchase, average ticket size and recentness of purchase Business economics including contribution of turnover, number of deliveries and customers ROI Attitudinal attributes: Needs and preferences including service needs, reputation and responsiveness Attitude to product or service including attitude to new technology Internal and external sources can be both used to collect data on selected variables. If statistical techniques such as factor and cluster analysis are required, multiple iterations may be needed to generate the final segment. These final segments must then be profiled for analysis. Pilot segmenatation solutions are developed accordingly.

Profiling Definition of segments that are identifiable, attributable, responsive and actionable Process of assigning a character to the segment to make it easily identifiable, based on similar customer characteristics Attribution Segmentation is usually carried out using a sample of customers; attribution required to ensure that all customers can be attributed to one of the segments Identification of manageable number of characteristics that define the membership of a customer in a segment Marginal contributions across segments are identified to assess inter-segmental variability, which can then be addressed.
Marginal contribution delivered 35% Target groups to improve protability 30% 25% 20% 15% 10% 5% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Large volume Medium volume Low volume

Marginal contribution delivered as % of MRP across Customer Groups/Accounts

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to determine margin-improvement opportunities to feed into pilot and implementation plans. Redeploy over-lapped inputs Map spends to objective delivery for identified segments and redeployment of low value adding spends Key questions What are the main objectives to be delivered by spend heads? How important are these spends across the segments in delivering the central objectives?

2: Objective-linked assessment of spend heads is carried out

This exercise helps to prioritize spends that can be redeployed or reduced for the identified segments (identified in the previous step), based on the relative importance of spends for the segment. For example, an analysis of marginal contribution revealed the need for improvement in the high-volume customer function of an Indian semi-durables player. On analyzing input overlaps, its blanket goodwill scheme, which aimed to share the companys incremental profits with all its channel partners, was found to have low import with its high-volume customers while it was important for its low-volume ones. Redeployment of the input as a loyalty program component was identified as a priority intervention to help the company grow its top line, and thereby, improve the marginal contribution of similar spend levels.

In light of multiple spends serving similar objectives, what are the opportunities for redeploying spends?

(Level of importance (H,M,L or NA) for each objective-dealer type combination) Central objective Overall retailer share (increase) Overall retailer share (increase) Overall retailer share (increase) Overall retailer share (increase) Overall retailer share (maintain) Overall retailer share (maintain) Overall retailer share (maintain) Overall retailer share (maintain) Overall retailer share (maintain) Overall retailer share (maintain) Objective Block competition asset entry to drive future growth Encourage retailers to upgrade to higher / more prestigious segment Input type Loyalty input Top-tier portfolio program

HMS M H H L H L H L H M

LMS H NA L H M H M L NA L

Segment A Segment F

Increase retailer share by limiting competition Visual Merchandising visibility Reward retailer growth Block competition entry Block competition entry (only top companies) Customer meets to generate goodwill Maintain retailer goodwill Maintain retailer goodwill Subsidize institutional orders from retail Goodwill schemes Visual Merchandising Loyalty input Field team tactical spends Goodwill schemes Top-tier portfolio program Product-level ToT deals

Re-deploy into top-tier loyalty for Segment A HMS - High Margin Segment LMS - Low Margin Segment

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Identification of input-level overspend Comparision of value delivered by segments of similar customers (same segment) This exercise helps to identify intra-segment variations that can be addressed to plug value leakage within a segment. Since customers within a segment are similar, their spend levels as a percent of sale should also be similar. However, large variations are typically observed on their deep-diving in the case of similar customers. While some of these can be explained as tactical interventions, the majority are typically the result of legacy effects. The difference in spend levels across similar customers need not be a cause for concern as long as the difference delivers proportionate returns from the customers. The figure below depicts this as an example of an Indian CPG company. Large variations were found in the case of customers belonging to the same segment for critical spend heads linked to their productlevel growth. Furthermore, a customer-level growth analysis revealed that 40% of overall spends were not delivering growth that was commensurate with the overspend level. A transition plan to address these overspends was devised and implemented to improve the effectiveness of the spends of identified customers.
Input spend effectiveness within a customer group 8 7 6 No. of dealers 5 4 3 2 1 0 0.3% 0.8% 1.3% 1.8% Segment Avg

Input spends higher than segment average Higher spends acceptable if commensurate growth is achieved

Instances of overspend identied if extra spend as % of sales does not generate higher growth redeploy spends with higher linkage to growth

The retailer

In a scenario with a limited number of customers, pricing should be driven by the cost-to-serve across the customers. This includes credit arrangements and delivery terms. For example, two similar customers, one demanding 90 days of credit and the other working on the basis of a 30-day credit window, should work on different discounting levels. Marginal contribution should also factor in the product mix so that companies can derive benefits through a basket mix analysis across their customer segments with the aim of up-selling high gross margin products to targeted customer segments.

In conclusion
Customer management is a critical function in any organization. Complete visibility into customer transactions, although challenging, given their sheer number and complexity, can enable an organization to maximize profit through customer pricing. Analysis of value leakage can also be a powerful tool for managing this complexity, delivering margin-improvement opportunities amounting to 2%5% of net revenues. Value leakage principles require consistent and rigorous implementation by organizations to capture consumer-level transactional spends. Moreover, getting the segmentation process right is an important element in managing complexity by enabling segment-level decisions, instead of dealing with a large number of customers. Implementation of the opportunities identified through value leakage brings with it challenges relating to alignment of customers with the acceptable level of return for sales input. Transition planning for important customers is therefore a key element for realizing the benefits derived through this approach.

3: Implementation frameworks for transitioning spends

The greatest challenge is to effectively draw up a transition plan that overcomes the legacy effect and ensures a customers alignment with the redefined business model. In most cases, this is a gradual process that ensures customer stickiness and helps to address their resistance effectively. In the overspend example discussed in the previous section, this problem was addressed by a segmentation solution, which grouped large customers together to deploy a segmentspecific transition methodology. A three-year conversion plan, which involved transition to the base + high incentive methodology, was adopted in annual negotiations. At the end of the transition plan, the spend head could be optimized due to customers willingness to accept a pure pay for performance methodology,.

Karan Bhatia Manager Ernst & Young Private Limited Karan is a Manager in Ernst & Youngs Performance Improvement practice, which is focused on the consumer products sector. He is has PGDM qualification from IIM, Kozhikode and has six years experience with consumer product companies in the fields of strategy, process consulting, sales and distribution, marketing operations, research and development, and execution of entry and market expansion strategies. E: karan.bhatia@in.ey.com T: +91 22 6192 0937 Inputs by Richa Tiwari

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Performance improvement themes for Indian retailers

Introduction
In India, leading retailers are struggling to enhance or maintain their margins, given the astronomical increase in rental, manpower and supply chain costs. Retailers are increasingly focusing on improving efficiency and productivity in their stores to conserve capital and fund their next phase of expansion. Historically, there have been only a few retailers in India who have managed and implemented initiatives on improving their store operations successfully. Approach adopted for stores by such retailers is one of the key reasons for low success rate. There approach was transactional in nature rather than aimed at building an organizational culture that was tuned to continuous improvement. Moreover, most retailers only utilized a few improvement levers rather than opting for a comprehensive and rigorous improvement initiative. For comprehensive operational improvement, retailers need to look at levers that have linkages with the external (catchment) and internal (retailing space, supply chain, manpower, etc.) environment of retail stores.
Figure 1: Framework for improving the performance of stores Top- line drivers Identify levers that could increase the sales at store level Cost reduction levers Develop operational capabilities to optimize costs in various operating areas and improve margins

Improvement levers for operation of stores

Retailers can use the following framework to ensure that they have explored all the relevant improvement levers to improve their retail stores:

Top- line focus

Catchment activation Improving operating parameters related to footfalls, conversion, bill size, repeat purchase Customer relationship management and loyalty Range rationalization Category management

Cost reduction in the area of manpower, power, supply chain, rentals, administrative, sales and marketing spends, promotion spends Shrinkage reduction Supply chain cost reduction

Bottom- line focus

Network EBITDA Improvement

Right MIS and performance boards for decision making Visual merchandise improvement Customer service improvement Convenient and attractive store layout

Improve support elements Usually ignored support elements can prove to be a game changer if used effectively and efciently

Efciency and asset utilization Improvement levers Improve the utilization and productivity of assets used for store operations

Space productivity improvement Fixture efciency improvement Manpower productivity improvement Marketing and sales spend effectiveness Effective markdowns Closure of nancially non-viable stores

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However, at the same time, it is imperative for retailers to prioritize these improvement levers so that maximum value can be extracted in the shortest possible time. Prioritization is primarily driven by the nature of the gaps that exist in the current retail operations of retailers and an effort made to plug these. Nevertheless, retailers could focus on the following key levers as their primary initiatives, and the rest of the levers can be taken up during the next phase of improvement.

Figure 2: Illustrative customer activation funnel Awareness 80% Interest 40% Visit 30% Buy 20% Loyal 15% 50% conversion 75% conversion 66% conversion 75% conversion

Top line focus

Catchment activation and improvement in operating parameters Almost every retailer measures and monitors operating parameters including footfalls, conversion, average ticket size and repeat purchase percentage. But most of them either fail to understand or are not able to take corrective action in the event of a plunge in the values of these parameters. These parameters could help retailers determine the extent of catchment awareness and activation in their businesses, as well as the success of their brand-building activities and the selling skills of their sales staff. A simplistic customer funnel using these operating parameters can track the progress of potential customers moving from the awareness to the loyal customer stage, and in turn, help the retailer determine the stage at which most potential customers are being dropped. To evaluate the possible reasons for this, the retailer can establish one-to-one mapping at various stages of the customer funnel. For example, awareness of a catchment store is directly linked to the effectiveness of marketing initiatives, whereas the number of customers who buy from the store can be linked to product pricing and assortment as well as to customer service and loyalty. Similarly, the number of repeat purchases can be mapped to the loyalty card scheme, product quality or assortment.

Detailed customer data captured at the time of sales can help retailers to further analyze operating parameters. For example, based on loyalty cards or delivery address data, retailers can determine the catchment penetration of each of their stores. This may help them to design catchment-specific marketing and sales activities, which will result in effective and efficient marketing initiatives.

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Figure 3: Illustrative catchment penetration

Khed

Residential Industrial belt

Addressed Catchment Households: 76,438 Player 2: 1% Player 3: 3% Player 5: 10%

High density catchment Households: 106,438 Player 1: 5% Player 2: 3% Player 3: 7%

Bopodi

Wholesale markets and malls Retailers Player 1 Player 2 Player 3 Player 4 Player 5 Key areas Untapped Catchment
Camp

Category management and range rationalization Category management and range rationalization are other areas that can drive the top line for retailers. It has been observed that effective and efficient category management can result in incremental top line growth and better space utilization (to the extent of 10%15%). This would require selection of the right assortment and merchandize, assignment and activation of the right category roles (e.g., profit enhancers, traffic builders, image creators, impulse drivers, etc.), pruning or rationalizing the range, appropriate pricing and in-season mark-down management. Retailers can use pareto analysis in conjunction with cluster analysis to determine their store-specific assortment plans. Parameters like category characteristics and their fitment with customer needs, consumer behavior and catchment analysis in terms of demographics and socio-economic understanding can be used for custering the stores.

Visual merchandize Visual merchandize is an effective tool to entice customers, results in higher footfalls, and eventually, top line growth. In general, retailers can focus on the following areas to improve visual merchandize: Enhancing ease of shopping Easily available store maps in stores and on shopping carts Appropriate and consistent fixtures to improve ease of selection and their right placement within stores so that customer movement is not obstructed and there are minimal dead spots Right ambience and appropriate visual elements (fixtures, displays and signages) Standardized, clear and specific visual merchandizing elements, but at the same time, maintaining the distinctiveness of each department Interactive visual merchandizing to incorporate entertainment in shopping

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Bottom-line focus
Cost optimization across cost elements In a low-margin and volume driven retail business, managing operating costs is the most essential and vital lever to improve EBITDA. In addition to the cost of merchandize, the key operating cost elements for a retailer include rentals, utilities, manpower, selling and marketing, and the interest cost. Rental is one of the key cost elements that can make or break a retail business. It has been frequently observed that renegotiation of issues relating to the actual area and the area mentioned in historic or old lease agreements with a developer may reduce rentals. Such discrepancies have been observed frequently. If this can be renegotiated with the developer, rental outgo can be reduced. In some cases, retailers have re-negotiated the percentage of super built-up area and CAM charges with developers to reduce the overall rental, based on a benchmarking exercise. Retailers are increasingly looking at changing the rental model from a fixed to variable rental mode, so that the risk of a high fixed cost can be mitigated. In the case of power, the benchmarking exercise within a store network can spur a large number of surprises. The cost of electricity is crucial for some retailers or formats because of their high usage of power due to high lux requirements. The following figure presents some levers that could be considered by retailers to reduce their power consumption:
Figure 4: Illustrative power consumption across a chain of stores Units/Sqft/Month Store 1 Store 2 Store 3 Store 4 0 0.5 1 1.5 2 1.2 1.5 1.8 2.2 2.5

Apart from rental and power costs, one of the major issues retailers face is to optimize staff costs. Measuring or benchmarking staff cost as a percentage of sales and store area (in sq. ft.) can throw up various challenges. One would imagine that large stores require a sizeable number of employees to maintain appropriate service levels and touch points with their customers. However, if sales are low despite a large store area, a high staff count may be counter-productive. That is why some retailers benchmark their mature and immature (opened recently) stores differently. In the case of mature stores, staff costs as a percentage of sales may work, whereas, in the case of newly opened stores, it can be benchmarked against the cost per unit of store area. The staff count can be increased or reduced, based on this benchmarking exercise. Additionally, this cost can be optimized by employing part-time employees and brand promoters. Enhancing the cross-selling and up-selling proficiency of existing employees and inculcating multi-tasking skills in selected existing employees can also enhance the staff productivity. Lastly, improving the effectiveness of sales and marketing initiatives may result in improvement of the top line as well as the bottom line. Retailers need to put in place a robust monitoring mechanism to determine the effectiveness of sales and marketing initiatives. A healthy mix of various initiatives can be determined on the basis of an available budget, diminishing returns on marketing spend and an index, which could reflect effectiveness in terms of cost, quality and reach.

Levers for reducing power usage Submeters installed for each department with department managers responsibility to control power consumption Lowering height of light xtures to increase lux levels SOPs are put in place for controlling power costs such as lighting, cooling and computers Increasing set-point for shop temperature to 24 degrees Celsius to 24 +/- 1 Norms set for weekdays and weekends power usage Installing a lighting transformer Reducing voltage for lighting in certain stores Installation of air curtains at exits Regular cleaning of AC lters Power saving investments: Capacitor funnel, energy savers etc

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Figure 5: Illustrative comparison of space allocation

Retail to carpet area 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00

Illustrative breakup of the area for a store 30% 10% 5%

0.81

0.75

100% 0.70 0.68 0.65 0.72 70%

2%

5% 48%

Store A Store B Store C Store D Store E Average

Chargeable

Carpet

Aisle

Trial room

Cash

Back/ Retail Ofce area

Space efficiency Space is a scarce resource in any retail store and its utilization needs to be optimal to derive the maximum benefit from the rental outgo. One of the means of enhancing space efficiency is to allocate optimal space to every category. This may not be as simple as it sounds, but retailers can try to allocate category-specific spaces using the following concepts: Category-specific gross margin return on investment (GMROI): GMROI analysis can be utilized in conjunction with inverted U curves, which can be drawn between category sales per unit area and areas allocated to different categories (based on historic or network data), to assign optimal space to specific categories of products within stores. Design of experiments (DOE): Retailers can plan sets of experiments in their network stores by allocating different areas to specific categories. They can monitor the performance of a category over a period of time to determine optimal space allocation. In addition, to take into account catchment characteristics, they can perform similar experiments after forming catchment-specific store clusters. Heuristics and linear programming-based models: These models would typically use the gross margin or top line as a maximization function after taking into account various constraints (e.g., the minimum and maximum space that can be allocated to a particular category, the effect of adjacencies of categories, the impact of shelf placement, etc.)

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Another alternative to enhance efficiency of space is to use appropriate fixtures. This may not be very relevant for some categories including food, vegetables or staples, but can add immense value to space utilization in the case of most other categories. For instance, a leading apparel retailer has increased its sales and display productivity by 15% by replacing its existing fixtures with more flexible ones. This has resulted in higher density product display. Inventory costs In any retail operation, optimizing inventory costs is of the utmost importance. Inventory mismanagement may result in stock-outs of some categories and an excess of others. Low inventory turns will have a negative impact on GMROI, and especially, in the case of categories for which gross margin is fairly low, e.g., fruits, vegetables, milk, staples, mobiles, etc. In addition, large inventories result in obsolete stock, leakage of margins, damages, and high returns and carrying costs (including interest, space, handling costs, etc.). Therefore, retailers need to have clear-cut category- and productspecific inventory policies, which can be either forecasting- or replenishment-based. Shrinkage Shrinkage is another key concern area that retailers need to be aware of and should be able to contain. It has a serious and negative impact on the revenues and margins of stores, as well as on their customer satisfaction and an organizations image. Shrinkage is generally caused by internal and external theft, failure of processes, fraud or vendor-related issues. Retailers should focus on the following to reduce shrinkage: Robust and reliable process for stock count and reconciliation at various stages of the supply chain Appropriate metrics for measurement of shrinkage across various stages of the supply chain Maintenance of data integrity (including stock data) Advanced IT systems to check, capture and measure shrinkage

Rigorous process for identifying root causes of shrinkage and eliminating these (Some of the causes would be failure of the information process, products being stored in the wrong locations, mis-pick or over-delivery due to rain, damage caused by material-handling equipment, faulty packaging, load movement in transit, crushing of carton corners or theft, eating, planned and opportunist shoplifting and theft by employees.)

Conclusion
Retailers can explore multiple levers at their stores to improve their EBITDA, but prioritization of these levers is the key. Secondly, benchmarking a stores performance within a retailers network and comparing this with that of its competitors might throw up numerous opportunities for improvement and can be a good starting point. Deepesh Jain Senior Manager Ernst & Young Private Limited Deepesh is a Senior Manager in Ernst & Youngs Performance Improvement practice and has over nine years work experience, largely in the areas of strategy development, operations and performance improvement, business process re-engineering, benchmarking, gap analysis and sales force effectiveness. Deepesh has an MBA from IIMA and has worked in sectors including retail and consumer products and oil and gas. E: deepesh.jain@in.ey.com T: +91 22 6192 1835

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Ice-creams in India the inside scoop

Introduction
The ice-cream industry in India has traditionally been heavily fragmented and dominated by local players selling unbranded ice-creams. Over the years, organized players have tried to counter them by focusing on promotional campaigns and aggressive brand-building exercises. However, for an organized player to capture a significant market share in this extremely fragmented and competitive industry, the other three Ps product, price and place of its strategy are perhaps equally or even more important than promotion alone. While aggressive promotion can help to create a mind share, especially in the urban market, it is the availability of the right mix of products at the right price that can help players secure a significant share of customer spend, particularly impulse spend on products such as ice-creams. On the flip side, as competition intensifies in the ice-cream industry, players that do not focus on these three Ps risk losing even their well-established mind share with their customers. The key elements that need to be addressed while evaluating and defining a companys strategy include the following: Product portfolio Distribution structure Cost control Identify the focus SKU types/flavors, aligned with target customer segments and markets Deploy the correct network structure to tap the target customer segments and markets Estimate and control the key cost heads in order to manage competitive pricing of products while ensuring overall profitability of the firm

Market overview
The ice-cream industry in India is currently estimated at around INR2530 billion, growing at 15%20%, with only 45%50% comprising of organized players, i.e., the branded segment.
Organized players - Market share (Total market ~1200-1500 cr.)

Regional players

25-35%

35-40%

Amul

15-18% Vadilal

15-20% Kwality Walls

*Note: This includes manufacturers of ice-creams and frozen desserts. Regional players differ by region, but on an average constitute between a fourth and third of the overall market.

In spite of largely favorable climatic conditions, per capita consumption of ice-cream in India is significantly lower than the world average as well as that of smaller neighboring countries such as Pakistan.
Ice-cream per capita consumption 23 L 18 L 14 L

Organizations currently tend to address these elements separately, since they come under the purview of separate functional structures (e.g., marketing, sales and finance). However, these inter-related elements need to be addressed comprehensively for a company to compete effectively and achieve profitable growth.

2.3 L US

2L

750 ml Pakistan

350 ml India

Australia Sweden World Avg. China

However, per capita consumption of ice-cream is expected to grow at least two-fold in the next decade due to improving hygiene and rising disposable income levels in the country.

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India Disposable income vs. Ice-cream consumption 300 Disposable income per capita (in Rs. 000) 250 200 150 100 50 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 Urban -Disposable income Rural -Disposable income 1800 Ice-cream consumption per capita (in ml) 1500 1200 900 600 300 0

All India -Disposable income Per capita Ice-cream consumption

Therefore, it is evident that India presents a significant growth opportunity for organized players offering branded icecreams. However, the stiff competition between organized and unorganized players makes it difficult for the former to achieve profitable growth. We will now look at each of the three key elements in detail, in context of the complexities associated with the Indian marketplace.

SKU mix
While buying ice-creams, most customers like to choose from a range of options. Moreover, preferences and spending patterns vary significantly across age groups and locations. For instance, young people in cities are more likely to experiment with different flavors or premium Stock Keeping Units (SKUs), as compared to the youth in semi-urban or rural areas; visitors at tourist spots such as beaches and amusement parks are more likely to buy cones and sticks. Therefore, for ice-cream manufacturers, designing their product portfolios is a fairly complex task, and requires them to fit in a broad range of SKUs at competitive price points for their target customer segments and markets. Intensifying competition in the organized space further accentuates the need to have the right mix of SKUs. Hence, the first step in developing a companys strategy should be to define its product portfolio along the three dimensions of SKU types, flavors and fat content. Decisions should be taken keeping these dimensions in view as well as the companys desired pricing structure.

Growing urbanization Increasing freezer penetration Improving disposable income levels

Enablers for growing ice-cream consumption

Improving cold chain infrastructure Improving availability of power

Growth of modern trade channels

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SKU Type

All organized players are offering range of SKU variants targeted

at different customer segments

Kids Cups & Candy sticks, Youth Cones, Premium sticks

& Specialty Items (e.g. Casatta slices), Family Tubs, Family Packs, Institutions Bulk packs, Cups (small)

Cups, cones & sticks make up approx.70% of total ice-cream sales Some players are focusing on specific SKUs to capture the market
e.g. Amul is aggressively focusing on Tubs & Bulk Packs, which contribute over 35-40% of its total sales Flavors

Four standard flavors Vanilla, Strawberry, Butterscotch and

Chocolate constitute around 80% of the total market

Companies are trying to differentiate their product portfolio by

offering other variants too

Natural fruits & dry fruit flavors (e.g. Mango, Orange, Pista,
Badam, Raisins)

Local flavors (e.g. Rose milk for South India) Festive flavors (e.g. Dates, Anjeer for Ramazan period)
Fat Content

Varying the Fat content helps manage raw material costs & offer
competitive pricing

Typical Fat options available : Premium 16%, Regular 12%,

Medium 9%, Low 6%

Most organized players vary Fat content in certain SKU types or

for specific customer segments

Medium fat ice-cream is used in combination SKUs like

Chocobar

Low fat ice-creams (cups & bulk packs) offered for institutional
sales (hotels, banquets)
The retailer 19

This is the critical first step because decisions relating to product portfolios eventually become the starting point that define companies marketing, sales and distribution strategies. Distribution structure Climatic conditions in India lead to extreme seasonal swings in ice-cream sales in most regions. For example, the summer season (MarchJuly) accounts for over 60% of the total sales of most players. On the other hand, utilization of manufacturing capacity can fall as low as 30% during the off-peak season. This makes the option of building large-scale and/or multiple manufacturing bases inherently unviable. As a result, most organized players currently have a single manufacturing location (except for large national players such as Amul and Kwality Walls) and a limited regional footprint around it. Therefore, it is evident that ice-cream manufacturers, by the very nature of the product they sell, require a very well-designed distribution network and cold chain logistics support to ensure that their products reach their target markets and customers. The two main objectives of such networks include: Providing an adequate number of depots and distributors that can store the products and ensure that these reach dealer points in good condition Providing an adequate number of dealer points that offer easy access to customers

Decisions on the design of distribution networks need to take into consideration these two aspects (mentioned above) from the perspective of availability of options and their viability. Unavailability of a robust back-end infrastructure, including road networks, power supply, cold stores and cold chain transportation, makes the task of building a large customer and geographical footprint across the country extremely challenging. Most companies use the hub and spoke model with third party managed depots, each feeding more than 2530 exclusive distributors. Each distributor supplies dealers within a radius of around 10 kilometers. However, it is difficult to set up third-party depots or distributors in semi-urban and rural markets, and so companies often set up their own depots or appoint super distributors that supply dealers and other small distributors. In such a complex environment with multiple operating model options, companies need to effectively manage tradeoffs between the following: Setting up of optimal number of depots (company-run or third party-managed) and their running cost Optimal number of distributors vs their market coverage the number of dealers one distributor can effectively serve Stock levels at various nodes vs the cost of trips made by refrigerator-mounted vehicles to feed the entire network

Factory

Depots

Distributors

On the front end, there are multiple options now available to In-store reach consumers. In-store deep Kiosks freezers in neighborhood grocery stores or sweet shops have been Supermarkets the most used format over the years. However, with growing Ice-cream Consumers Parlors urbanization and increasing purchasing power, standalone Hotels / parlors, which were earlier only Banquets used by premium or superpremium players such as Naturals Push Carts and Baskin Robbins, are also fast gaining traction. For instance, Arun (Hatsun Agro) has been very aggressive in setting up standalone scooping parlors across south India.
Dealers

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The retailer

In-store Kiosks / Freezers

Companies place deep freezers (approx. 200-400 l) capacity in existing stores, typically in residential neighborhoods grocery
stores, supermarkets, sweet shops, juice bars

Most companies like Kwality Walls provide the freezers free of cost while some charge a nominal dealership fee (around Rs.1525000) to recover the cost of the freezers

Key suppliers of deep freezers Voltas, Bluestar, Carrier, Haier, Western

Vending Carts

Vending carts (approx. 200 l) are extensively used around places like beach, tourist spots (like India Gate), fairs, exhibitions Or
semi urban/rural areas with limited presence

Area of operation of vending carts is fixed by the manufacturers In many cases, vending carts are owned by depots / distributors and run on commission basis by the actual cart vendors
Standalone Parlors / Stores

Companies are now opening standalone scooping parlors (300-500 sq. ft.) in up-market residential areas and shopping districts
to increase their sales as well as Brand Equity

Stores are usually franchisee outlets, with manufacturers charging a one time brand royalty fee / refundable brand deposit of
Rs.50000-100000.

Equipment purchase is usually subsidized or facilitated by from preferred suppliers

Institutional Sales

Earlier a preserve of local players, most manufacturers are now aggressively focusing on tapping institutional segment hotels,
restaurants, banquets

Quick Service Restaurants (e.g. McDonalds, Dominos Pizza) / Coffee chains (e.g. Caf Coffee Day, Barista) have emerged as
other key targets for institutional sales

Most firms now have a sales team focused on this segment As mentioned earlier, there are extreme swings in ice-cream sales in India due to climatic conditions in the country. Companies need to factor in this aspect while developing their sales networks, since their sales swing will have a varying impact across dealer formats. They should also ensure the viability of these formats through focused sales support during the offpeak season. For instance, most companies launch Buy 1 Get 1 Free offers on certain SKUs to boost sales of in-store kiosks and parlors during these months, especially on special occasions such as Diwali, Christmas and Valentines Day.

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Format Vending Cart In-store Freezer / Kiosk Standalone Parlor

Investment (Approx. in Rs.) 35,000 25,000 3,50,000

Avg. Monthly Sale (in Rs.) Off-peak 10,000 25,000 80,000 Peak (Summer) 30,000 60,000 1,50,000

Typical Margin (%) 25% - 35% 20% - 25% 40% - 50%

Breakeven Period 5 7 months 3 5 months 4 - 8 months

Sales format - Seasonal variations Avg. Monthly Sale (in Rs.) 160000 140000 120000 100000 80000 60000 40000 20000 0 25000 10000 Off-peak Season Vending cart In-store freezer/Kiosk Standalone parlor 80000 60000 30000 150000

Peak (Summer)

Therefore, it is clear that given the broad range of available options, companies need to develop the right networks of various formats, which are best supported by their product mix and helps them tap their target markets and customer segments.

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Mapping of Target Segment, SKUs and Formats

> Rs.500

SKU: Bulk Packs, Cups Format: Direct sales Standard avors (Vanilla, Strawberry) most popular SKU: Scoops, Tubs, Family Packs Format: Scooping Parlors, Freezers in Supermarkets Best segment to target premium / innovative avors SKU: Cones, Premium Sticks, Specialty Items (Casatta slices, Sundaes etc.) Format: Kiosks (Malls/Ofce food courts), Scooping Parlors, Vending carts (Beach, Cinema Halls) SKUs: Candy Sticks, Cones, Cups Target format: Vending Carts, Freezers in stores near schools /colleges Kids/Pre-teens Youth Prole of customers Adults/Families Institutions

Average spend

Rs.300 -500

Rs.100 -300

< Rs.100

Cost control
Apart from taking decisions on their product portfolios and distribution structures, ice-cream manufacturers also need to focus on keeping their overall cost of manufacturing and operations under control. For instance, given the seasonal nature of sales, capacity utilization of manufacturing facilities and the overall distribution network falls dramatically (as low as 30%) during the off-peak season. On the other hand, availability becoming a major issue during the peak season, with raw materials and the prices of packing material fluctuating. A high fixed cost structure in such an operating scenario can severely impact profitability. Based on our experience, we present below the typical cost structure of a manufacturer:

Typical cost structure (as a % of sales) and key focus areas EBITDA 10-20% Sales and marketing 15-20% Distribution 8-10% Factory overheads 10-15% Sales and marketing efforts are focused on : Increasing market coverage through dealer network expansion Dealer performance monitoring ensure optimum stock levels at existing dealers and closure of non-performing ones Ensure sale of right product mix to achieve the targeted realization per unit/ litre of ice-cream sold Logistics team xes the stock norms for all key nodes in the network and minimum order quantities Focus is to ensure higher vehicle capacity utilization per trip Overall rm focus is on achieving high sales throughput to ensure better capacity utilization esp. during off-peak season Power and fuel costs can be as high 6-7%, hence rms focus on optimal utilization of cold storage facilities in factory and depots Material cost 40-45% Most rms do not have captive dairies and rely on local farmers and dairies for key raw materials like Milk, Cream, Skimmed Milk Powder High focus packing material items from both availability and cost perspective are: Cups, Cones, Tubs

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These cost heads need to be managed through a mix of strategic and tactical initiatives including the following: Strategic sourcing of raw and packing material through longterm contracts with selected suppliers (especially for critical items such as milk, cream, sugar, cups, cones and sticks) Optimal inventory management of finished goods since this also impacts the power consumption of cold storage facilities in company-managed factories and depots Stock norm definition of depots and enhanced route planning to keep logistic costs under control Limitation of fixed workforce to only management staff and skilled employees in factories for quality control, production control, plant maintenance, etc. Strong tie-ups with HR companies to provide adequate unskilled labor during the peak season (typically for three-shift operations six days a week) and only a limited labor force during the offpeak season on a need basis (for single-shift operation on only two or three days a week)

Fast facts: Ice-cream vs. frozen dessert

Ice-cream has actually become a generic term, but technically not every cup, cone or tub of frozen delicacy one indulges in is an ice-cream. Prevention of Food Adulteration (PFA) Rules provide clear guidelines on differentiating ice-creams from other frozen desserts.
Ice-cream Frozen Desserts

As per The Prevention of

Food Adulteration (PFA) Rules, ice-cream is defined as a product obtained by freezing a pasteurized mix prepared from milk and / or other products derived from milk

Products obtained by freezing

a pasteurized mix prepared with milk fat and / or edible vegetable oils and fats in combination with milk protein and / or vegetable protein products

Made from 100% Milk or

derived ingredients like cream, skimmed milk powder, they are rich in nutrients like protein, calcium & vitamins

Typically made with oils like

Palm Oil or Coconut Oil, they have low nutritional value compared to ice-creams

For a litre of ice-cream, cost

of vegetable fat based mix is around Rs.30 / litre

Conclusion
Organized players that are focusing on Indias ice-cream industry need to concentrate on their product portfolios, distribution structures and cost control measures, irrespective of the markets in which they operate. Their ability to take specific strategic and tactical decisions on these elements will eventually help them capture a market share and achieve profitable growth in this extremely competitive industry space.

For a litre of ice-cream, cost

of milk fat mix is around Rs.60/litre

Indian players : Kwality Walls,

Vadilal

Indian players : Amul, Mother

Dairy, Arun, Jamaai, Baskin Robbins

Anant Sood Senior Manager Ernst & Young Private Limited Anant is a Senior Manager in Ernst & Youngs Performance Improvement practice and has over 11 years of consulting experience in India, China, the Middle East and the US. He has an MBA in systems and marketing and worked in sectors including oil and gas, travel and leisure, fertilizers and automotives. E: anant.sood@in.ey.com T: +91 44 6632 8551 Inputs by Ramswaroop Sharma

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Interview with Mr. Krishna Shete, Vice President, Business Development, Radhakrishna Foodland Pvt. Ltd.
Krishna Shete Krishna is the promoter of Radhakrishna Foodland and leads the Sales & Marketing function in the companys Executive Management team. Radhakrishna Foodlands business development strategy, a key aspect of its client activation function, is driven by Krishna. With his fresh approach and dynamism, he manages and addresses business challenges in keeping with the long-term goals of the organization. 1. Could you take us through the evolution of Radhakrishna Foodland, highlighting the key milestones achieved? Radhakrishna Foodland Pvt. Ltd. (RFPL) started as a shipchandling company. It gradually evolved to become an integrated provider of supply chain solutions to the Food and Near Food industries. We thrived and grew our fooddistribution business in an era when knowledge of food safety was limited and cold chain infrastructure inadequate. Presently, our business is aligned to five sectors that we service. These include Processed Agri, Retail, quick service restaurants (QSRs), Food Service and Retail. We have developed a category-led approach for 32 categories of our services across these five sectors. Our customers patronage, as well as our ideology and commitment to their businesses has helped to create a differentiated position for us in the marketplace. 2. How do you differentiate yourself from other logistics and supply chain solution providers? Logistics and supply chain solutions are perceived as generic and differentiation is a challenge. We believe in differentiating our offerings and operations through our suit of end-to-end services and our team of domain experts. RFPL is geared to offer end-to-end supply chain solutions from the factory stage to our customers, and in certain cases, even consumers. Our suit of services, along with our proven track record, singles us out as a differentiated provider of the services mentioned above. We have aligned our people and organization with the five sectors we serve. This is reflected in the professional backgrounds and ground experience of our key executives. This enables us to understand our clients needs better and deliver solutions that focus on areas that are critical for them. 3. What are the major challenges in the supply chain of the Indian retail and consumer products sector? How does Radhakrishna Foodland assist its clients in overcoming these challenges? Leading Indian consumer brands are witnessing unprecedented growth in terms of geographic reach and volume. Given this rapid growth, it is critical for them to focus on each players core capabilities. However, during their evolutionary phase, players such as RFPL are required to their build capacities around people, processes and infrastructure for the future, since servicing this pace of growth is challenging. Consumer markets are dynamic and require the industry to focus on compliance, product integrity and business continuity to ensure smooth operations. Apart from capability-building, there is also an increasing need to focus on soft aspects such as hidden costs. We at RFPL are doing all of this and have developed an in-house model Service Quality Value Management (SQVM) function to ensure minimum wastage, error and theft (WET). Furthermore, a major challenge facing the industry is seamless sharing of information. The information shared between clients and supply partners is not optimal and transparent, which gives rise to inefficiencies in the supply chain. Therefore, it is critical to define specifications, scope, SLAs and metrics to track performance, and accordingly decide on information-sharing plans and tools.

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25

4. How different are the logistics and supply chain operations of food and non-food categories? In the supply chain, the critical activities of movement, handling and storage are directly dependent on the category of goods being handled. For example, we service categories with a shelf life of 3 days to 18 months with each having the following: Specific requirements relating to temperature, food safety, etc. Challenges pertaining to cross-contamination, hazards, etc. As a provider of supply chain solutions, we have to handle the variety of foods products coming from the same company in a different manner. For example, confectionery and beverages need to be moved, stored and handled in different ways. In a nutshell, the supply chain is category specific and the challenge is to group categories that are similar in such a way that it does not impact the other categories.

5. How will the changes in the Food Safety and Security Act of India (FSSAI) impact the logistics and supply chain operations of FMCG categories? Historically, adherence to and enforcement of food safety and security norms has been low. However, with recent developments in the area, the industry is gradually moving toward a healthy and FSSAI-compliant supply chain. We at RFPL comply with global best practices relating to food safety and security. Furthermore, leading food companies and supply chain providers (including us) have been investing in building the required infrastructure to comply with and even exceed FSSAI requirements. However, the bigger challenge facing us is that our ecosystem (supporting infrastructure) is not ready for FSSAI. For example, leading commercial complexes and malls do not have the required back-end infrastructure (for loading and unloading), resulting in manual intervention, which may not be compliant with FSSAI requirements.

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The retailer

6. What will be the impact on the supply chain of Indian retail and consumer products companies after implementation of GST? Implementation of GST is expected to result in consolidation or reduction in the number of distribution centers. In this event, the emergence of larger distribution centers is inevitable. In view of this scenario, players will be required to gear up to manage the complexities of these large distribution centers. Furthermore, they will also have to redesign processes and train people to manage this change. In addition, leading players may have to focus on investing in shared infrastructure at strategic locations to drive time and cost efficiencies. However, in the overall scheme, implementation of GST will give a further impetus to the growth of the organized sector and drive consolidation among industry players.

7. How do you foresee the supply chain models of retail and consumer product companies evolving over the next 5 to10 years? Supply chain models are continuously evolving in India. In the next three to five years, the three key changes I foresee in common practices include: Increased focus on category-specific requirements Enhanced focus of supply chain providers on their core capabilities FMCG companies and supply chain solution providers co-investing in and building their capability to service their customers effectively In a nutshell, supply chain models are expected to lay increased emphasis on the depth of their offering rather than its width.

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27

Special feature: Innovation board

Marks & Spencer stores go digital

Marks & Spencer (M&S) is working with NCR Corporation to pilot new multimedia zones in its stores. These will combine digital discovery touch screens, video walls and displays of actual outfits. The retailers Style Online touch screens help shoppers keep up-to-date with the latest fashions and provide a digital stylist tool that enables them to combine different garments and accessories to create their own personalized look. This enables shoppers to achieve the tailored look they want without retailers having to hold excessive stock on-site. It unlocks the pressure on margins and enhances the value proposition to the customer. Consumers like being able to touch, feel and see products in-store, but also want the benefit of endless choices, and onetouch ordering enables them to shop in the easiest and quickest possible manner. These screens complement mobile commerce by offering fast, highdefinition and widescreen digital access to information, and thereby, offers consumers a novel experience. M&S has set up multimedia touch screens in several stores in the UK as well as in its flagship store in Paris. These converged retailing solutions enable retailers to differentiate themselves, reduce their operating costs and attract todays empowered and frequently elusive consumers.

Walmart trying to bridge gap between brick and mortar and online stores
Furthermore, this technology could enable customers to check (from anywhere in the store) the availability of a product in a store. For example, customers could read product codes in the window to check whether a dress is available in specific sizes. The biggest advantage of this is that it can also be done when the stores are closed. It will also help customers create a route through the shopping area, based on their shopping lists. This helps to make shopping an enhanced experience for customers by cutting down on their time and effort.

Growing competition from online retailers is driving brick- and- mortar retailers to innovate continuously. Walmart, the worlds largest retailer, is developing applications and offerings that will impact shopping behavior widely. This includes development of applications to provide customers with the exact location of products in stores as well as detailed product comparisons a feature that typically only found on online shopping websites.

(http://www.ncr.com/newsroom/resources/marksand-spencer, accessed 2nd April, 2012)

(http://www.innovationmanagement.se/2011/11/11/walmart-setting-up-rd-centre-in-india-for-e-commerceinnovations/, accessed 2nd April, 2012)

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The retailer

Tescos online trial option

Online shoppers face the problem of products not matching expectations in terms of size, look and feel. Tescos Augmented Reality platform is set to solve this issue by enabling consumers to visualize products at home. Updated reality technology enables customers to visualize televisions, toys and other products at home and helps them make better purchase decisions. This is a significant step forward in the online shopping experience. Customers are able to see the actual sizes and proportions of products from the comfort of their homes before ordering, and as a result, reducing the number of returned products. In addition, Tesco is currently piloting augmented reality in its stores and online, which enables shoppers to view 3D images of products on computer screens. Customers can access a virtual 3D view of items in their homes by using their webcams and markers. The pilot, which is being conducted with Total Immersions partner and UK software company Kishino, is aimed at saving shelf space in Tesco retail stores. Augmented reality will enable customers to get a close view of products and interact in ways that has never been possible before.

The progression of technology is a boon for the retail industry. Kiva uses mobile robots for automation and order fulfillment in warehouses. Its materialhandling systems are currently being used by some of the worlds leading retail companies. Products are kept on portable storage units. When an order for an item arrives, battery-powered robots are guided by a computerized control system to fetch the order. These follow a grid system of 2D bar codes on the floor to navigate their way to mobile shelves containing the desired inventory. The robots navigate around the warehouse using an onboard

Kivas new and improved warehouse management systems

camera to read barcode stickers on the warehouse floor. They communicate wirelessly to computer servers that run order-processing software and deliver directions. The system is much more efficient and accurate than the traditional method of having human workers traveling around a warehouse, and locating and collecting items. Kivas relatively new automated materialhandling systems for order fulfillment are gaining traction in e-commerce, retail restocking, distribution of parts and other major distribution operations in warehouses.

(http://econsultancy.com/us/awards/winners, accessed 2nd April, 2012)

(http://www.fastcompany.com/most-innovative-companies/2012/kiva-systems- accessed 2nd April 2012)

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