Mr Merchant is a Merchandiser working with one of the fastest growing organized retail

companies in India. A post graduate with five years of retail merchandising experience in
various categories, he has managed to establish himself as a high performer. But things are
not going right in his new assignment in the best performing region of the company –one of
the old regions with stable business. In one of his categories sales is dropping and he knew
that it is due to the drop in sales of his major vendor –“Youngistan Cola” company.
There has been a continuous decline in the sales for last three months. Though he has tried
promoting the SKUs by discounting there was hardly any impact on the sales. Confused and
frustrated with the current situation Mr Merchant decided to call for a meeting the next
week with the Operations manager, Replenishment officer and the Sales manager of the
vendor. He knew from competitor bench marking that the sale of other retailers for the
products of Youngistan Cola is growing. Based on the feed back from various stores he
decided that focus of the discussion should be the replenishments as all stores complained
of stock outs or excess stocks.
Meeting started and soon Mr Merchant realized that the problems are multifaceted and there
is no single cause for the decline in sales. After a four hour long meeting when he came out
of the meeting room he had a bunch of papers with probable reasons scribbled on it. On the
way home in the evening he tried to organize the various points discussed. At the end of an
hour’s work at home arranging the major issues discussed, he was exhausted and all the
more confused, but was happy that he has a list of issues to address. If he can tackle all
these problems there should be an improvement in the business.
The list looked like:
Replenishment officer:
 Vendor supply is erratic
 Fill rates are low
 Stores indenting is not synchronized
Area Sales Manager of the vendor:
 Payment delays
 Excessive returns
 Stock outs in the distributor warehouse
Operations manager:
 Stock out of fast moving SKUs
 Low DC fill rates

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An hour long analysis of previous month sales and purchase orders and done with a few
phone calls to the Store floor managers, DC supervisors and the distributor he had more
information in front of him. Upon analysis of the information he collected, Merchant
noticed a pattern emerging. The stores indent their requirements on different days and the
replenishment officer consolidates the requirement and makes an order every third working
day. But the vendor delivers the product only when he has two or three orders outstanding.
Another concern he identified was that the stores indent for equal quantities of slow moving
SKUs as the fast moving ones which is increasing the inventory. The day before he had a
meeting with the Commercial manager and she has already expressed his inability to release
further payments as the cash flow situation in the company is alarming. Commercial team is
of the opinion that high working capital is the root cause of payment issues and until the
merchandisers reduces the inventory holding working capital situation is not going to
improve.
Next day morning Merchant reached office and sat down in front of the system all
determined to find a solution for the issues. Phone rang forcing him to break the chain of
thought. It was the DC Manager calling up to inform him that he found two cases of Cola
cola regular 330 ml which is already expired in the distribution centre. This product is one
of the fastest moving SKUs in the category but still the product is expired? Mr Merchant
realized another problem- Unnecessary stocking of fast moving SKUs in the DC leading to
excess inventory, more damages and low DC efficiency.
The more he thought about the issues the more convinced he was that a proper
replenishment process is the only way out. But based on his experience it is very difficult to
ensure coordination between all the stores, buyers, distributor and vendor especially when
the number of stores is as high as in his region. He was convinced that an Automatic
Replenishment System (ARS) is the only solution for his problem. He decided to test out
ARS for this vendor.

Masters for Automatic Replenishment

From the training material he received in the two day work shop he attended he listed out
the major aspects to be focused on while preparing the master for ARS.
1. Right Vendor schedule

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 2. Right distribution mix - Put away / Flow through / Direct supply
3. Right Shelf fit

Vendor scheduling:
Recalling the discussion he had with the distributor representative, Merchant noted down
that it does not make economical sense for the distributor to supply the stock to the
distribution centre which is 50 km away from his warehouse unless the order is above Rs
60000. From the previous month sale figures the monthly business volume for the vendor
was nearly Rs 2.5 lacs. Now how will he decide the vendor schedule? Should he maintain
the current frequency of once in 3 days or should he change the frequency. Applying the
learning from the training he calculated the order frequency as shown below:
Minimum order value for the vendor = Rs 60000
Total monthly business with the vendor = Rs 250000
Feasible supply frequency = 250000/60000 = 4.17 times a month
Rounded off supply frequency – Once a week
But on which day of the week should be the order raised? The vendor is ready to supply the
material available in his warehouse in two days from the date of PO issue. Distributor was
ready to supply any day of the week except Sunday, but Merchant decided to consider the
availability of stock in the vendor’s premises and the feasibility of receiving in the
Distribution centre also into his analysis. A phone call to the vendor representative helped
him understand that the stock from the manufacturer depot reaches the distributor
warehouse on Wednesdays. So Thursday would be the day with maximum availability with
the vendor. Is it feasible to raise orders on Thursday?
Merchant collected the vendor schedules from the DC which gave him the number of
vendors delivering to the DC on various days as shown below.
No of
Day
Vendors
Monday 29
Tuesday 32
Wednesday 27
Thursday 34
Friday 36
Saturday 16

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Saturday is a day on which DC is relatively free and the vendor would be making a delivery
on Saturday if the order is given on Thursday. Looks like a win – win situation merchant
thought. The below mentioned lines were added to the analysis sheet which he was
preparing.
Day of order generation – Thursday
Lead time – 2 days
Day of delivery – Saturday
Order frequency – Once a week
VENDOR LEAD
VENDOR NAME ORDER SCHEDULE DELIVERY SCHEDULE
CODE TIME
100005 Youngistan Cola Every Thursday 2 Every Saturday

Distribution Mix:
Merchant analyzed the sale, stock, order and supply status for the previous month for SKUs
supplied by Youngistan Cola Company. A sample list is shown below
Monthly Sales
Article Code Article Description (Pcs) Fill rate
1000001 Cola cola Diet 500 ml 300 85%
1000002 Cola cola Vanilla 600 ml 15 24%
1000003 Cola cola Regular 330 ml 1500 97%
One close look at the sales and fill rates he understood that the fill rates are consistent for
fast moving SKUs while for the slow moving SKUs supply is erratic. He estimated that
with the change in vendor schedule situation should improve, but fill rates would be a
concern for the range builder SKUs. Referring back to the handout of ARS training he
realized that a right put away flow through mix can solve this issue for him. Following the
training guidelines he completed the put away / Flow through classification as well which
looked like:
Flow Through / Put
Article Code Article Description Away
1000001 Cola cola Diet 500 ml Flow Through
1000002 Cola cola Vanilla 600 ml Put Away
1000003 Cola cola Regular 330 ml Flow Through

As a note he added the classification guideline for future reference

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Note:-
Flow Through - SKUs with high sales and high fill rates
Put Away – SKUs with low sales & low fill rates, range builders
Minimum Shelf Fit:
Minimum shelf fit is the minimum quantity to be displayed on the shelf and can be
calculated as number of pieces that can be accommodated in one facing of a product. (This
was what Mr Merchant had learned during ARS training). He would need the shelf
dimensions and the product dimensions to calculate MSF. Local projects person provided
shelf dimensions which were length – 3 ft, Depth – 1.5 ft, Height – 1ft. A colleague from
planogramming team provided the product dimensions as given below.
Article Code Article Description Length Depth Height
1000001 Cola cola Diet 500 ml 3" 3" 9"
1000002 Cola cola Vanilla 600 ml 2.5" 2.5" 9"
1000003 Cola cola Regular 330 ml 3" 3" 6"

Calculations for MSF were added to the list which was shown as:
Depth of the shelf = 18 inches
Depth of the product = 3 inches
MSF = Depth of the shelf / Depth of the product = 18/3 = 6
Article Depth of Depth of MSF-
Code Article Description SKU Shelf calculated MSF Final
1000001 Cola cola Diet 500 ml 3" 18" 6 6
1000002 Cola cola Vanilla 600 ml 2.5" 18" 7.2 7
1000003 Cola cola Regular 330 ml 3" 18" 6 6

ARS Master :
With the details which are already listed out Merchant summarized the ARS master for the
SKUs supplied by Youngistan Cola. The master looked like:

With the Minimum order a quantity (named PUF in ARS terminology and is defined as one
case lot qty or an inner carton qty) collected from the distributor and added to the PUF

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column the master looked complete. But still there are some missing fields, which are store
indent and delivery days. Merchant was confident that he can crack this one on his own. He
had the guidelines ready with him which read:
Flowthrough – Indent should be generated on the day of PO generation, delivery day can
be calculated as vendor delivery day + lead time from DC to store(1 day in normal
circumstances)
Put Away – Indent should be generated based on the category scheduling and the store
delivery would happen in DC to store lead time no of days (1 day in normal circumstances)
Beverages are to be indented on every Tuesday as per the existing schedule followed by the
stores; Operations manager confirmed over phone. This bit of information helped Merchant
to finish his store side schedule as well.

A comment was added for reference – Store 1 DC to store lead time is 1 day

Automatic Replenishment Implementation

With the masters ready and approved by the ARS champion in head office, Merchant was
sure that he has done the base work for ARS implementation. But is it enough? Years of
retail experience reminded him that without the buy in of all the people involved any kind
of implementation would be a tall task. Merchant requested the Business Manager for a one
hour session on ARS to be made a part of the weekly review meeting scheduled on the
coming Monday. He received a tentative approval from the BM with a comment that ARS
implementation will be approved only if the team has proper understanding of the system.
Merchant knew that he needs to prepare for the meeting. He prepared a write up which was
to be circulated ahead of the meeting for understanding of the audience. Other than the
explanation of a 91 data point forecasting system (The one used in the company for ARS),
advantages and benefits of adopting ARS, and some examples of companies working on
ARS, the write up also contained:
1. Sample Forecasting calculations
2. Example of how indent quantities are calculated

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 3. Impact of MSF

Forecasting calculations:
Mr Merchant elaborated on the basic concepts of ARS and started off with the explanation
of how forecasting is done in ARS. He used the sales history for Cola cola Diet 500 ml for
the last 3 months to demonstrate the forecasting (The daily sale figures are given in Table 1)
Table 1 :-

Mr Merchant explained the various calculations involved in arriving the final forecast. He
selected 4th November which was a Thursday as the day for which the forecasting is to be
demonstrated. The slide in front of him read like this:

Daily Forecast = Avg*a*b*c*d

Where: Avg - average sales for the 91 days

a – Day of the week index
b – Period of the month index
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c – Month of the year (seasonality) index
d – Promotion index
Merchant used the example for details of the calculations and demonstrated it on the flip
chart which looked like:
1. Average Sale = Total sale /91
 Total sale for 91 days = 857
 Average Sale= 857/91 = 9.42 pc per day
2. Day of the week index – (For Thursday)
 Day of the week index = (Average sales for the day) / (Average
Sales for 91 days)
 Average sale of Thursday = Total sale of Thursday /13 =89/13 =
6.85
 Day of the week index for Thursday = (Average sales for Thursday)
/ (Average Sales for 91 days) = 6.85/9.42 = 0.73
3. Period of the month index – (For the period 30-4)
 Period of the month index = (Average sale for corresponding
period) / (Average Sales for 91 days)
 Average sale for 30th to 4th = 197/16 = 12.31
 Period of the month index for 30-4 = 12.31/ 9.42 = 1.31
4. Month of the year index (Seasonality index – For November)
 Seasonality index = 3 *(Total sales of corresponding month in the
previous year) / (Total sales for x-1, x-2 and x-3 in the previous
year)
• From the previous year sales :
i. November – 1200 Pc
ii. October – 902 pc
iii. September – 726
iv. August – 1000

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  Total sale for August, September, October = 902+726+1000 =
2628
 Seasonality index for November = 3*1200/2628 = 1.37
5. d, Promotion index
 The product is on a promotion which is expected to give a 25%
boost in the sales
 Promotion index for the period = 1.25
Hence the forecast value for 4th November, Thursday would be:
Forecast = Avg * a * b * c * d = 9.42*0.73*1.31*1.37*1.25 = 15.43 Pc
The output of forecasting for Cola cola diet 330 ml for the next order cycle was shown as:

As soon as the Merchant finished explaining the forecasting calculations one of the other
merchandisers raised a query. She wanted to know how the system will calculate the indent
quantity for a store from the forecast values. Merchant had another slide ready to answer
this question.
Determining Indent / Order Quantity:
There are two parts to the indent quantity calculation, merchant explained to Colleagues
and went ahead explaining the slide where it was shown:
1. Forecasted demand
a. Number of days for which order quantity is to be calculated

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 b. Calculating total demand for the ordering period
2. Safety Stock- Safety stock = No of safety days * Average Sale
3. MBQ calculation – MBQ = Forecasted demand + Safety Stock
Merchant further explained the process in detail with the example which clarified the
doubts of the team.
Forecasted demand:
Ordering period – Order is raised on every Thursday and supply would be made on the
corresponding Saturday. So the order quantity should be sufficient enough from one
Thursday till the second Saturday. In the example the order period should be from 4 th
(Thursday) to 12th (Friday) as on 13th the order raised on 11th would be delivered.
Total Forecasted demand for the ordering period = Sum of forecasts from 4th to 12th =
111.20

Safety Stock calculation:

Number of days for which Safety stock is to be kept is 5 days for a once a week supply
scenario.
So Safety stock = 5 * 9.42 = 47.1 Pc
MBQ calculation:
Minimum Base quantity for the SKU is the minimum stock that should be ensured in the
store in order to satisfy the customer demand. Which is calculated as: MBQ = Forecasted
demand + Safety Stock
So MBQ = 111.2 + 47.1 = 158.3
Indent / Order quantity:
Indent / Order Quantity = Max (MBQ or MSF) – Current Stock
MBQ = 158.3
MSF = 6 Pc
Current Stock in the store = 15 Pc
Indent Quantity = 158.3-15 = 144 Pc

With the approval of the Business Head and the buy in of the regional team Merchant
implemented ARS for Youngistan cola. It was not a smooth transition, but with the help of

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the IT team he resolved the issues which he faced during implementation. Once the process
was streamlined he analyzed the trend. The results were encouraging – Increase in
availability leading to increased sales, reduced inventory and working capital held up and
more visibility on the indents and orders to mention a few. Now the next task is to
implement ARS for all the vendors.
You are a Managment trainee, just finished MBA from a premium B School. And you are
asked to undergo training under Mr Mercnadiser. The first task he has assigned to you is to
prepare the ARS master for the region. Over a cup of tea he has explained what he has
learned from the ARS implementation for Youngistan Cola.

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