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Service Performance Improvement of A Mega Shop by Considering The Supply Chain Network
Service Performance Improvement of A Mega Shop by Considering The Supply Chain Network
MIE10-091
Service Performance Improvement of a Mega Shop by Considering the Supply Chain
Network
Kazi Badrul Ahsan*, Md. Atikul Islam and Md. Sunny Ul Islam
Department of Industrial Engineering and Management
Khulna University of Engineering & Technology, Khulna-9203, BANGLADESH
ABSTRACT
Now-a-days, retailing has become one of the most active and attractive sectors. A “Mega Shop” is a kind of retailing store,
which helps customers by providing almost all kinds of daily requirements in a single shop. The main objective of this
paper is to improve this retailing service by considering the overall supply chain network so that the customers will be
satisfied more and at the same time the retailer can keep more profit. For solving various problems of the mega shop
several techniques has been employed, which includes making proper ordering technique to manage inventory for ensuring
product availability, rearranging the layout, workforce planning, arranging in-store training programs, etc. Applying
service performance improvement strategies and several modern techniques, customer satisfaction will be improved and at
the same time the sales and profitability of the store will be increased significantly.
Key Words: Supply chain management, service quality, supply chain profitability, business strategy
1. Introduction
Over the last ten years, retail industry has experienced major transitions. The growth of E-commerce has created both
new competition and a new selling channel for retailers1. Large sized retailers have changed their product varieties,
sales strategies, and distribution structures for earning more profit. And power has shifted to retailers who increasingly
drive prices, dictate products, and wield negotiating clout 2. During the same period of time, supply chain management
(SCM) has experienced its own renaissance. SCM has emerged from its cost focused, operational roots to become a
more integrative discipline that involves strategy and processes, influences over functions, and facilities cross-
organization collaboration3. Since resources available in a firm are limited, full engagement of some activities will
inevitably be at the cost of others. Therefore, the decision makers will need to understand issues such as what activities
customer value, how satisfied customers are, and how customers respond to the different levels of service. Ideally, an
explicit relationship, either a mathematical formulation or a descriptive model, between the level of service provided
and the profits generated is of great help in decision making. To determine an appropriate level of customer service, a
systematic procedure has to be developed for measuring performance. The benefit of carrying out such a procedure is to
improve the quality of service by establishing control procedures to ensure the performance level does not fall below
the desired level.
Retail store execution strategies have attracted the attention of researchers in operations management recently. The
theories closest linked to this dissertation and potential e-grocery supply chains has been discussed as separate sections,
2.1 What is a Supply Chain and Supply Chain Management?
There are numerous definitions for a Supply Chain and Supply Chain Management. The recent definitions have
placed more emphasis on the information flow, for example the definition by Hanfield and Nichols, 1999: “It
encompasses all activities associated with the flow and transformation of goods from raw materials stage,
through the end user, as well as associated information flow, Material flow up and down the supply chain”4. The
definitions of Supply Chain Management often overlap with those of modern definitions of logistics (Lambert,
2001)5.The key difference is perhaps that definitions of Supply Chain Management that do not come from a
logistics background take a more holistic approach and the emphasis is on a network rather than on a single
company. This single company approach can be seen, for example, in the definition of Logistics by Christopher, 19986.
2.2 The development of supply chain theories
This section will explain the most important concepts in supply chain management on general level with the focus
on grocery retailing supply chain.
2.2.1 JIT and ICT
The most important enabler of supply chain development has been the development of Information and
Communication Technology (ICT). Another way to describe this is to say that the most important contributor to
supply chain thinking has been increased systems thinking (Metz, 1998)7.
Just-In-Time (JIT) management philosophy introduced the concept of fast response to end customer demand.
Today it is the main driver for the development of supply chain management, with the help of information
systems. JIT was originally a manufacturing technique first implemented by Toyota and it has often been seen as a
major reason for Japan’s industrial success. The most potential benefits of JIT are Elimination of production and
International Conference on Mechanical, Industrial and Energy Engineering 2010
23-24 December, 2010, Khulna, BANGLADESH
material waste, improved communication both internally as well as externally, Lower purchasing costs, Reduced lead
time, Decreased throughput time, Increased productivity, Improved production quality, and enhanced customer
responsiveness.
2.2.2 Lean and agile logistics
Lean logistics was followed by the concepts of “lean supply” and “lean production”. Lean supply describes the
improvement in the supply chain and lean production covers the activities from product development to
manufacturing, and from procurement to distribution. Lean production includes some principles including,
Elimination of waste, Continuous improvement, Zero defects, JIT, from push to pull, Decentralized responsibilities,
Vertical information systems. The “Agile” instead of “Lean” concept was introduced by Youssef, 1992 and it has been
further developed for example by Christopher, 1998. In the “Agile”supply chain, production and logistics have been
considered to be just the fine-tuning of “Lean” by some. Others consider it to be a completely new concept.
2.2.3 Cross-Docking and VMI
On the physical distribution side one of the most important innovations has been cross-docking. The success of
Wal-Mart, a United States based retailer, is often said to be the cost structure benefit created by the efficient
implementation of cross-docking in distribution. In cross-docking the products delivered to a warehouse are
sorted and reloaded and transported to the stores without ever staying in the inventory. In addition to an efficient
distribution strategy, Wal-Mart implemented a new approach to inventory control together with Procter & Gamble. It
gave the control of inventories to the supplier. This new approach is called Vendor Managed Inventory (VMI). In a
working VMI-arrangement the supplier is able to see the real demand with the help of Point Of Sale (POS)
data, which is often called EPOS if transmitted electronically. The benefits of VMI are a better utilization of
resources in production and transportation, and a reduction of inventory levels.
2.3 Mega-shop and supply chain management
Perhaps the first reference on retail store execution is Salmon (1989) who argued that execution in retailing has become
more important than other aspects of retail business (e.g., merchandising)8. DeHoratius and Raman (2006) analyze the
relationship between incentives provided to store managers and monthly sales and shrinkage across a chain of stores.
They control for store fixed effects, inventory, and advertizing expenditures 9. Ton and Huckman (2005) study the
employee turnover on process conformance within retail stores and find that the negative effect of turnover is most
pronounced in stores with low process conformance10. Van Donselaar et al. (2006) find that store managers
systematically made corrections on automated order advices either by shifting orders from peak days to non-peak days
or by changing the order size. Literature on customer satisfaction is voluminous and spans several areas such as
marketing, management and accounting11. Anderson et al. (2004) find a positive association between customer
satisfaction at the company level and Tobin’s for department stores and supermarkets. Perhaps the closest to retailing
are the streams of literature studying customer satisfaction, operational failures and performance in the airline and
healthcare industry12. Anderson et al. (2006) find that drivers of customer satisfaction are affected by customer
attributions of blame for service failures: namely, customer-employee interactions are less important when the customer
attributes blame to the service provider13.
The purpose of this literature review is to show how this research and its results are linked to the body of knowledge.
Even if the new technologies is a completely new way of conducting business, the basic theories of logistics
and supply chain management will still be valid in the modern environment.
2. Methodology
For conducting this paper we considered a well reputed mega shop as case study. The primary contribution of this paper
is a methodology which could help a mega shop in identifying and conducting action steps that can increase sales,
customer satisfaction and store execution. To develop such a methodology, a clear concept about service performance
and cost minimization scopes for mega-shop has been gained from the previous literatures relating to service
performance improvement and supply chain network for cost minimization. To measure and analyze service
performance the data collection method has been used. Using the data collection method customer responses has been
closely monitored and tried to solve it according to the customers view. To do so, we have considered the
“representativeness” which means that the set of elements chosen which will capture the dimensions of the
performance. Since the service performance alone is the best indicator of satisfaction, several factors which contribute
most to customer satisfaction with the level of service received has been analyzed with more importance. In this study,
we have tried to establish an index that sufficiently captures the essence of measuring customer satisfaction based on
mathematics because research on satisfaction has normally been very cognitive in nature.
3. Theory
The economics of scale in a supply chain is the quantity that a stage of a supply chain needs to order which reduces the
overall cost for ordering, transportation and inventory. The cycle inventory exists because purchasing in large lots
allows a supply chain to exploit economies of scale and thus lower cost 14. A lot size is the quantity that a stage of a
supply chain purchases at a time15. Basically the cycle inventory is the average inventory in a supply chain that is larger
than those demanded by the customer. Since the number of customers and their demands of goods of a mega-shop vary
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in very few amounts within a short period, we consider the demand is constant for a small period of time. When demand
is steady, cycle inventory and lot size are related as follows:
lotsize Q
Cycle inventory = =
2 2
Lot sizes and cycle inventory also influences the flow time of material within the supply chain. From Little’s law,
Average inventory
Average flow time =
Average flow rate
For any supply chain, average flow rate equals demand. Thus we have
The primary role of cycle inventory is to allow different stages in a supply chain to purchase product in lot sizes that
minimize the sum of the material, ordering and holding costs. If a manager considers the holding cost alone, he or she
will reduce the lot size and cycle inventory. A manager must make the trade-off that minimizes total cost when making
lot sizing decisions.
We start by considering the lot sizing decisions. For this decision, we assume the following inputs
D = Annual demand of the product
S = Fixed cost incurred per order
C = Cost per unit
h = Holding cost per year as a fraction of product cost
The holding cost is thus given by H = hC
Since the purchase price is independent of lot size, we have
Annual material cost = CD
D
Number of orders per year =
Q
D
Annual order cost = S
Q
Q Q
Annual holding cost = H = hC
2 2
D Q
Hence, the total annual cost, TC = CD + S + hC
Q 2
2 DS
Optimal lot size, Q* =
hC
D DhC
The optimal ordering frequency, n = =
*
Q* 2S
International Conference on Mechanical, Industrial and Energy Engineering 2010
23-24 December, 2010, Khulna, BANGLADESH
Departmental
Foods
Foods
Cosmetics
Cosmetics
Cosmetics
Counter
Counter
Ornaments
Entry
Ground Floor
women &
Children
oes
Entry
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Ground Floor
23-24 December, 2010, Khulna, BANGLADESH
Shoes
Restaurant
Entry
First Floor
In figure-2 a layout has been proposed for the various problems of the two shop floors. In the ground floor the most
Fig.2 Existing layout of the shop floor
moving goods such as fruits, vegetables, fish, meat, and some other daily requirements (e.g. rice, sugar, salt, tea, coffee
etc. shown as * Food in the layout) are located just beginning of the shop floor. Other departmental products have been
located at the corner because these goods are slow moving goods and customer consider enough time for buying. A sign
board shown as smiling face in the layout has been inserted for showing the information about new products, discounts
on various goods and direction of the different types of goods. A wash room also has been inserted for better service to
the customers. A staff room and a separate room for store manager have been inserted because some new employees
have been proposed for providing better customer service. The function of each employee have been described below
a) Store manager: The function of the store manager is to make sure that the store is working at its best and
provides a good shopping experience for customers. A store manager needs to spend most of his time on the
shop floor. Motivating the team is one of the important aspects of a store manager. The store manager also
needs to oversee the administrative side, dealing with paperwork’s, deliveries, staff rotas and so forth. The
main objective of a store manager is to ensure that they meet and exceed the sales target set by top
management of head office.
b) Supermarket manager: As store manager the supermarket manager is responsible for sales performance of the
store. A supermarket manager gets involved in all of the business aspects, ranging from sales drive to
managing wages and the stores waste budget. This means trying to reduce the amount of non-saleable goods
that have in the store. A supermarket manager also responsible for staff welfare and oversee their training and
development.
c) Assistant manager: An assistant manager needs to appear unruffled, helpful and friendly to all types of people.
It also requires willing to talk to anyone and be able to cope with challenging conversations. The main function
of a assistant manager to constantly deal with people in the job and people that are very unpredictable. An
assistant manager also works to get the best out of the staff by inspiring them.
d) Security guard: A security guard is mainly responsible for the general security of the store, which includes the
premises and products. It is the duty of a security guard to ensure that items do not get damaged or removed
from the store. He needs to check that everything is locked up at the right time, all the security devices are
armed and the alarms are switched on.
e) Customer service assistant: A customer service assistant serves both behind the counter and in the shop. He
helps centre visitors with enquiries face to face. He also provides direction to the visitors for places both inside
and outside the shop and dealing with customer complaints. He also helps customers in bringing children
safely to the parents when children get lost.
f) Sales assistant: The main function of a sales assistant is to give advice and information to the customers about
the products the shop stocks and then help them to decide what they want to buy. He also help to keep the shop
floor attractive and presentable.
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23-24 December, 2010, Khulna, BANGLADESH
Departmental Departmental Fish & Meat
Departmental Departmental Fish & Meat
Fruits &Vegetables
Ornaments
Cosmetics
Cosmetics
*Foods
Foods
Foods
Fruits &Vegetables
Ornaments
Cosmetics
Cosmetics
*Foods
Foods
Foods
Counter Counter
Wash
room Counter Counter
Wash
room
Staff room Store Manager
Entry
Ground Floor
Staff room Store Manager
Entry
Ground
Ground Floor
Floor
Ground Floor
Restaurant
Counter
Counter
Wash Toys & Others
Room First Floor
Wash Toys & Others
Entry
First Floor
First Floor
Fig.3 ProposedLayout
Fig.3 Proposed Layoutof of
thethe
twotwo
shopshop floors
floors
5.3 5.3
TheThe
Product
Productavailability
availabilityproblem
problem
Fig.3 Proposed Layout of the two shop floors
For For
product availability
product availabilityproblem,
problem, we
we have consideredtwo
have considered two different
different criteria.
criteria. TheyThey
are are
(i)Daily basis
(i)Daily product
basis productand
and(ii)
(ii)Weekly or Monthly
Weekly or Monthlybasis
basisproduct
product
(i) Daily
(i) Daily basis
basis product:
product:
TheThe daily
daily basis
basis productmeans
product meansthose
those products
products which
whichareare
needed to order
needed dailydaily
to order suchsuch
as vegetable, fruit, fish
as vegetable, andfish
fruit, meat etc.meat etc.
and
For collecting the daily basis products, a milk run process can be used by going door to door market or supplier. We
For collecting the daily basis products, a milk run process can be used by going door to door market or supplier. We
represent the propose process of collecting the daily basis goods or product by showing a figure.
represent the propose process of collecting the daily basis goods or product by showing a figure.
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This figure shows the basic process of a mega shop by collecting their necessary products through milk run process.A
milk run is a route on which a truck either delivers product from single supplier to multiple retailers or goes from
multiple supplier to a single buyer location. In this process a truck can be used for collecting necessary goods or
products by visiting door to door market or supplier. This new plan or process improves the performance of existing
plan which collects the daily basis products from every single supplier.Their existing process of gathering the necessary
goods or products creates some extra value over the products and ultimately the product cost increases.We solved or
improved this problem by introducing a proposed process of collecting their goods or products. In this proposed plan
they can easily collect their necessary goods or products by introducing a milk run process for collecting their necessary
products.They can easily go there and collect their necessary goods and products.It saves both time and money.
Close-Up 55
315
Pepsodent 44460 50 50
Tooth paste(1) 280 500 25%
Colgate 45
260
Lux 525 22
Soap(2) Lifebuoy 315 54600 500 25% 18 22
Sandalina 210 25
Dove 280 300
Sunsilk 196 38480 280 185
Shampoo(3) 500 25%
Clear 154 300
Pantene 110 280
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Since unit costs of the different products are similar for our easier calculation we have taken the average of each
categories of product. Now we need to determine the ordering frequency of each categories of product.
hC1 D1 0.25 * 50 * 44460
n1 = = = 22
2(S + s1 ) 2 * (500 + 100)
hC2 D2 0.25 * 22 * 54600
n2 = = = 16
2(S + s2 ) 2 * (500 + 100)
hC3 D3 0.25 *185* 38480
n3 = = = 39
2(S + s3 ) 2 * (500 + 100)
hC4 D4 0.25 *185* 29380
n4 = = = 34
2(S + s4 ) 2 * (500 + 100)
hC5 D5 0.25 *165* 24180
n5 = = = 29
2(S + s5 ) 2 * (500 + 100)
From the above calculation we find that the shampoo is the most frequently order. Thus we set, n = 39
Now, we need to evaluate the frequency with which tooth paste, soap, conditioner and face wash need to include with
shampoo in the order.
hC1 D1 0.25 * 50 * 44460
Hence, n1 = = = 53
2s1 2 *100
hC2 D2 0.25 * 22 * 54600
n2 = = = 39
2s2 2 *100
hC3 D3 0.25 * 50 * 44460
n3 = = = 53
2 s3 2 *100
hC4 D4 0.25 *185* 29380
n4 = = = 83
2s4 2 *100
hC5 D5 0.25 *165* 24180
n5 = = = 71
2 s5 2 *100
Next,
n 39
m1 = = = 1.77
n1 22
n 39
m2 = = = 2.43
n2 16
n 39
m3 = = =1
n3 39
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n 39
m4 = = = 1.15
n4 34
n 39
m5 = = = 1.34
n5 29
Then we will take the values of ‘m’ in integer form.
m1 = [1.77] = 2, m2 = [2.43] = 3, m3 = [1] = 1, m4 = [1.15] = 2, m5 = [1.34] = 2
Thus tooth paste, conditioner and face wash needs to include in every 2nd order and the soap needs to include in every
3rd order.
Now, we need to decide on the ordering frequency of each goods to recalculate the ordering frequency of the most
frequently ordered goods as follows
hC1 D1 + hC2 D2 + hC3 D3 + hC4 D4 + hC5 D5
n= = 73.7
100 100 100 100 100
2( S + + + + + )
2 3 1 2 2
Thus shampoo needs to order ’73.7’ times per year. Now the ordering frequency of every other product is as follows
73.7
n1 = = 36.85, n2 = 24.57, n3 = 73.7, n4 = 36.85, n5 = 36.85
2
The ordering policies and resulting costs for the 5 products has shown in the table-2.
Average flow time 0.71 weeks 1.06 weeks 0.35 weeks 0.71 weeks 0.71 weeks
The annual holding cost for the five products is Tk. 57755.75. The annual ordering cost is given by
nS + n1 s1 + n2 s2 + n3 s3 + n4 s4 + n5 s5 = Tk .57732
The total annual cost is thus equal to Tk. 115487.75.
6. Conclusion
Customers are satisfied in buying goods from the mega-shop. A customer, who visits the shop first time, becomes
motivated to be a permanent customer and buying all kinds of daily requirements from this shop. Safety of the products
in the shop ensures by security guard and close circuit cameras and a product no longer waits for sell. The probability of
finding all kinds of product in shop increased.
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