Annapurna Mart: Fixing Service Without Breaking the Bank
Annapurna Mart runs six grocery stores in Amravati district from a central warehouse and carries 4,100 SKUs. The 210 fastest-moving SKUs (Class A) produce 62% of sales, 890 SKUs (Class B) produce 27%, and the remaining 3,000 SKUs produce 11%. Inventory on hand is ₹1.9 crore, about 46 days of cost of goods sold. The warehouse fills 88% of store order lines. Class A items are out of stock at store level about 11% of the time, and store managers admit they compensate by loading up on whatever is available. All stores are replenished once a week, on Wednesday, by a full truck; the truck returns 42% empty. Supplier lead times vary from 2 to 7 days. Store managers order 'by feel' on a printed sheet. A stock report shows 340 Class C SKUs with no sale in 90 days, carrying ₹14 lakh of stock and occupying about a fifth of the shelf space in the two largest stores. Working capital is stretched and the bank has asked for an inventory reduction plan by the end of the month.
1. Diagnose the problem using the numbers. Which is the larger financial loss - the dead stock or the service failure?
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Size the business. ₹1.9 crore ÷ 46 days = ₹4.13 lakh of COGS per day, so annual COGS ≈ ₹15.1 crore and turnover ≈ ₹17 crore.
Size the dead stock. ₹14 lakh sitting in 340 SKUs with zero sales in 90 days. It is frozen capital and dead shelf space, and it is the number the bank is looking at. But ₹14 lakh is 0.9% of annual COGS - a one-off, recoverable amount.
Size the service failure. A fill rate of 88% means 12% of order lines are short. If only half of those shortages lose the sale, and those lost lines are weighted toward fast movers, the lost sales are in the order of 12% × 50% × ₹17 crore ≈ ₹1 crore a year, most of it in Class A items where the customer simply buys the brand elsewhere and may not return. Even a conservative fifth of that figure is several times the dead-stock value.
Root causes, not symptoms.
- One policy for all 4,100 SKUs. A single weekly order cycle for a Class A SKU selling hundreds of units a week and a Class C SKU selling four units a month guarantees that A items run dry between Wednesdays while C items sit.
- Ordering by feel. No reorder points, no safety stock, no lead-time buffer - despite lead times ranging from 2 to 7 days.
- A perverse response. Managers told to "load up on whatever is available" inflate C-item stock and worsen both working capital and shelf allocation.
- A 42% empty return trip is a free asset being wasted.
Diagnosis. This is a replenishment-policy problem, not a buying-team effort problem. The bank's request for inventory reduction should be answered with a service-improvement plan, because cutting stock across the board would deepen the ₹1 crore loss while releasing only a fraction of it.
2. Propose a differentiated replenishment policy. Be specific about cycles and targets for each class.
Read the worked answer
Segment the assortment and set a separate policy for each
| Class | SKUs | Order cycle | Method | Target |
|---|---|---|---|---|
| A (62% of sales) | 210 | Twice weekly | Reorder point from POS data; safety stock covering maximum lead time (7 days) plus variability | 97–98% in-stock at store |
| B (27% of sales) | 890 | Weekly | Min–max with fixed review day | 93–95% |
| C (11% of sales) | 3,000 | Fortnightly or monthly | Order-up-to level; some via distributor drop-ship direct to store | 85%, with deliberate zero stock on dead lines |
Operational changes
- Two deliveries a week, not one. Split the Wednesday truck into two smaller runs (Monday and Thursday) for Class A only. This alone removes most of the 7-day exposure that causes the 11% A-item stockouts.
- Replace the printed sheet with system-generated suggested orders. Managers review and adjust, but the default is the calculated reorder point. 'By feel' ordering disappears as a cause of both overstock and shortage.
- Use the empty return leg. The 42% empty return capacity can carry store-to-store transfers, returns to suppliers, and backhaul from local suppliers (flour mills, papad and dairy units within Amravati district) - cutting inbound freight cost without a new truck.
- Separate the service target from the cash target. Class A safety stock is protected; cash comes out of Class C, dead stock and order discipline, not out of the items customers actually come for.
- Publish a weekly scorecard by store: A-item in-stock, fill rate, inventory days, dead-stock value. What is measured weekly gets managed; monthly is too slow for a grocery.
3. The bank wants inventory reduced by the end of the month. How would you release cash without damaging service, and what would you refuse to do?
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Where the cash actually is
- Dead stock: ₹14 lakh. Do not run a blanket discount. First offer the 340 SKUs back to distributors for credit - many FMCG distributors accept returns within 90–180 days, and this costs nothing. What remains goes to a single clearance bay or a 3-for-2 bundle priced to move within six weeks. At 40–60% recovery this releases roughly ₹6–8 lakh in cash and a fifth of the shelf space in the two largest stores, which is then reassigned to Class A lines that are currently short.
- Class C assortment: 3,000 SKUs is more than six grocery stores need. Delist the bottom 500 on 26-week sales - but check first whether baskets containing those SKUs are large. A slow SKU that anchors a ₹2,000 monthly basket is not a slow SKU; it is a traffic item, and cutting it loses the basket.
- Order discipline. The over-ordering habit ('load up on whatever is available') is inflating Class B and C stock by an amount no one has measured. Two weeks of system-suggested orders will show it, and that release is permanent, unlike a clearance sale.
- Negotiate terms, not just quantities. Ask the top 20 suppliers for 15-day extended credit in exchange for a firmer weekly volume commitment; this reduces working capital without touching shelf availability.
What I would refuse to do
- Cut Class A safety stock to hit a month-end number. The 11% stockout is already costing an estimated crore a year; trimming safety stock converts an inventory problem into a permanent sales problem.
- Cut the whole assortment by a fixed percentage. Across-the-board cuts always remove the wrong SKUs and are the standard cause of a service collapse six weeks later.
- Report inventory days alone. Report inventory days and A-item in-stock together - a plan that improves one while worsening the other has failed.