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AGRAWAL KITCHENWARE DISTRIBUTORS: A MISCELLANY OF INVENTORY PROBLEMS Samriddhi Dhasmana and Sandeep Goel from Management Development Institute, Gurgaon, India, wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveypublishing.ca. Our goal is to publish materials of the highest quality; submit any errata to [email protected].
Copyright © 2022, Management Development Institute Gurgaon and Ivey Business School Foundation Version: 2022-06-07
Sitting in the warehouse office, staring at the financial statements in her hands, Shefali Agrawal was confused. She had spent the day observing the business and then the whole evening brooding over the position of her family business. The appearance of the warehouse was incompatible with the business financials she held in her hands.
The family business, Agrawal Kitchenware Distributors (Agrawal), was a wholesaler and distributor of kitchenware items. The company carried more than 100 inventory items but had no inventory management system. Instead, the warehouse was a picture of confusion, characterized by go-with-the-flow inventory management, which was reflected in the inventory’s physical condition. However, there was delightful business growth; the balance sheet had increased from ?12 million¹ to ?16 million during 2020. Also, the net profits had doubled to ?2 million.
How was it that a company with poorly managed inventory was thriving? Was the financial result the ultimate true picture of the company’s success or was there something else to consider? A wholesale business seemed simple: buy the goods in bulk from the manufacturer or another wholesaler and sell the goods in smaller quantities to retail businesses. A wholesale business primarily involved inventory and its movement without much need to worry about production or consumption, especially when dealing with necessities such as kitchenware, which had year-round demand. Given Agrawal’s financial performance in the business, did it need inventory management? Shefali knew that she needed to analyze the situation more carefully to identify the bridge between the inventory and the financial position of her family business.
THE BUSINESS: AGRAWAL KITCHENWARE DISTRIBUTORS
Agrawal was a wholesaler and distributor of a range of kitchenware items, including steel utensils; kitchen utility items; and small kitchen appliances such as domestic flour mills, water purifiers, water coolers, juicers, mixers, and grinders. Initially, Agrawal sold all varieties of kitchen utensils and electronics, which was rather unfocused, and it was still continuously expanding its product portfolio. For example, the
1 ? = INR = Indian rupee; US$1 = an average of ?74.102 in 2020. business had over the previous few years increased the variety of electronic items it offered. It also offered stove-related equipment and kitchen storage solutions. But at the same time, it had shifted the business focus in the utensil category to metal utensils, gradually phasing out utensils made of other materials, such as aluminum and plastic. As of the end of 2020, Agrawal was still offering some plastic utensils and stove-related items, albeit a limited variety.
The business was located in Jaipur’s industrial area with a warehouse spread over a 2,500 square foot (230 square metre) double-storey building. Agrawal sold more than 100 items to about eighty retailers and sellers in Jaipur and nearby cities. It sourced these items from various local and branded manufacturers in the states of Rajasthan, Gujarat, and Delhi. The business did not suffer from cyclicity, and customer relationships were key. Some retailers had higher bargaining capacity; therefore, the product margins and credit periods were thoughtfully decided based on competition as well as the relationship with the specific customer. Approximately 75 per cent of the sales were on credit. The choice of which products to offer was based on demand; hence, product offerings were always fluctuating. The company’s decision to focus on metal utensils in the utensil category was intended to control only the effect of that fluctuation.
In addition to selling utensils and small appliances, Agrawal took care of after-sales service. For that, the business carried an inventory of spare parts to service the products it offered. These service parts were as important as the product itself and were one of the primary reasons Agrawal retained its retail clients. Failing to provide spare parts for any of the offerings risked losing the retailer. Agrawal also provided before- and after-sale services in collaboration with some of the appliance manufacturers. Therefore, the need for before- and after-sale service executives had also increased as sales increased.
The family business was jointly managed by both Agrawal brothers. Both brothers, as well as their children, had been born and raised in the same house and household. The joint family was closely-knit, characterized by values, love, and trust, which was reflected in the brothers’ business-related decisions. As a result, there was no clear division of responsibilities. Decisions were made jointly and were seldom discussed or questioned.
The business had ten permanent employees, of which five were dedicated to before- and after-sale service. An accountant and four other employees managed the rest of the business operations. In 2018, the business expanded to online sales by partnering with various e-commerce websites.
STEPPING INTO THE MAELSTROM
On a lazy Sunday morning in June 2020, Shefali was scrolling through her Netflix home page, searching for a web series to occupy her day. It had been three months since the pandemic lockdown in March 2020, which had led to a permanent work-from-home situation for everyone, including herself. It felt like house arrest. Weekdays were fast and gruelling, as she, her employer, and her colleagues were adapting to the recent indefinite shift to working from home. But weekends were the opposite and were becoming more and more monotonous. There was not much to do around the house and there was not much left to watch on Netflix.
Living in a joint family set-up, Shefali was accustomed to listening to or sometimes avoiding the conversations going on around the house. That morning, she heard her father and uncle conversing in a nearby room, discussing a purchase order that was coming in an hour. They were leaving for the warehouse to sign for the order and Shefali thought, why not ditch her laptop and visit the warehouse today?
Shefali, her parents, and her brother lived in Shefali’s grandfather’s house with her uncle’s family of five.
The joint family arrangement was common in India, and as was also common, the joint Agrawal family owned and managed joint family businesses. With a substantial presence of joint family households in the country, the Indian Income Tax Act provided a separate status to joint families with joint businesses, which were referred to as a Hindu Undivided Family (HUF). The Agrawal HUF owned two businesses: a kitchenware sales business (a shop) and a kitchenware wholesaler and distributor business (a warehouse). The two Agrawal brothers started these two firms jointly in the mid-1980s, originally as a kitchenware shop and a cloth printing business. The shop had never been a matter of concern for them, but the printing factory sustained huge losses and was closed. The building was then converted to a utensil manufacturing unit, which again proved to be a business of losses for them. In 2010, inspired by their successful kitchen shop business, the family opened a kitchen utensils wholesale business. This decision brought profits to the family, so they expanded the warehouse to also include appliances and other kitchen items.
Shefali was a management trainee at a multinational company. She had been working at that company for about a year, placed there during her master of business administration studies. Shefali was never much involved in her family business apart from sometimes helping her father when it came to technology. However, she had been thinking about getting involved in the business for quite some time. She had learned a lot in business school and was eager to apply this in her family business, but she had always been too busy with her “real” job. This weekend, the boredom-inspired warehouse field trip would mark the beginning of her intrusion into family business affairs.
THE VISIT TO THE WAREHOUSE
When she arrived at the warehouse, Shefali saw a large truck being unloaded; two pickup trucks were parked
nearby. The business rented the large truck a few times a month for inward transportation of large orders, and
the pickups, which were owned by the business, were used for small-size inward and outward transportation.
Inside the double-storeyed building, Shefali followed her father to the office. She had been there before, a well-organized accounts office with shelves containing well-labelled files. The rest of the warehouse building was divided into four sections: utensils, appliances, other kitchen items, and maintenance parts. The largest section of the building was dedicated to appliances, due to their size and fragile nature. Next was the utensils section, followed by the remaining two, significantly smaller, sections. The overall warehouse was lined with floor to ceiling shelves for arranging the inventory. Transportation trolleys and portable ladders were lying here and there. Similar items were grouped together, and the workers were trying to figure out where among the grouped items to place the items just received.
So far, Shefali did not see anything more than she already knew through her previous casual visits with her father for some chores around the warehouse. She continued her walk around the warehouse, looking for something more intriguing.
Shefali noticed a few damaged boxes and initially did not think much of it; every business had some storage loss. But glancing over the shelves, she noticed some opened boxes of appliances, damaged packaging, tarnished utensils, and some old-looking items kept along with the fresh-looking inventory. The warehouse also had a mixed inventory pile, which looked like a “when in a hurry, keep it here” inventory.
Tired, yet also optimistic and eager to learn more about the piles of inventory she was standing in the middle of, Shefali decided to investigate the paper trail to understand more. The walk-through was not going to offer much more help because the piles contained so many different items. Instead, Shefali went back to the office to look at the inventory records. However, all she found was a stock record of the quantity and prices of items purchased and sold. And nothing else. Shefali began asking the employees for information, but what she learned was questionable and only confused her more. She had already witnessed an attempt to keep similar items together in the warehouse, but item positioning was based on memory and not recorded. Similarly, all the decisions for ordering and arranging the inventory were based on need and memory. There was no structured or consistent system for the hundred-plus items in the warehouse. It also appeared that the product portfolio was shifting and expanding.
With no inventory management at all, Shefali could not understand the business’s performance: The financial statements showed that the business was doing well, but how was this possible? Figuring out the answer to that question meant that her weekends after that Sunday were never boring.
THE MISCELLANY OF INVENTORY ISSUES Warehouse Inventory
The warehouse was divided into four sections, one for each category of product (see Exhibit 1), but there were no clearly divided subsections for the more than 100 products the company offered in 2020. Slightly more than half of the items56 per centcomprised kitchen utensils, which ranged from spoons to pressure cookers. The items were a diverse mix of shapes, sizes, and costs. The variety of kitchen electronics was limited and made up about 30 per cent of the inventory. In that category, water coolers and purifiers were popular and almost always required post-sale service. The other two sections carried a small inventory, both physically and numerically. The number of uncategorized items in these sections (“other”) was low compared to the other two sections. Because spare parts and post-sale services were so important, a vast array of small parts were grouped as one item type.
Stacking racks made the arrangement look organized, but there was no system for arranging the items within a section. As a result, locating an item was always a difficult task. Moving things around to find items was also how goods got damaged. The lack of an organized system also led to confusion, item misplacement, over- or under-ordering, and losing track of slow-moving items.
Sales orders drove inventory, but Agrawal placed purchase orders based on customer demand or intuition or when inventory in the warehouse was exhausted or appeared low (physically or in the stock book). In addition, there was no way to recognize which item had been added to the inventory earlier and which had been recently purchased. Movement of material in and out of the warehouse was well recorded, but item selection was based on accessibility and convenience. Also, with a lack of records, Agrawal had no ability to identify any theft or pilfering. Questions about inventorywhether an excess or shortagewere common around the warehouse, but answers were rarely available.
Some inventory had been lying about in the warehouse for a long time, without a prospective buyer. In many cases, Agrawal would bring in new products to meet a retailer’s request, only to have the retailer later refuse the product, adding to unwanted excess inventory in the warehouse. Many items were purchased in smaller lots for sampling, but quality issues or customer preference would undermine sales, leaving the unsaleable product sitting on a shelf. It was also common to find stale or damaged items in a pile of good products. While Agrawal’s products were not food and the date of manufacturing was not critical, outdated products could lose their shine or become tarnished and electronic technology could become obsolete, resulting in random non-saleable items in the inventory. Shelf life varied by product, but the inventory arrangement did not consider that. Packaging
The aesthetics of a product was important in a competitive environment. Product packaging contributed to the aesthetics and, importantly, also protected the product. However, there was no way to ensure that the product inside a sealed box was in good condition before sale. Customers did not like receiving a box with a broken seal, but they were also angry if the product inside the sealed box was damaged.
Damaged packaging was also a problem. The product inside the box could be brand new and undamaged, but if the packaging was damagedusually due to rough handling or wear and tearcustomers would reject the item. However, the manufacturer would not accept an item returned for damaged packaging; according to manufacturers, damaged packaging did not equate with a damaged product.
Online Sales
Online sales had shown extreme growth for the business. Online sales as a percentage of total sales doubled within a short span of three years. In the beginning, Agrawal offered all its products online, but that proved to be a wrong decision for the business because the transportation service provided by the e-commerce companies was subpar. Delicate items were often returned damaged, causing losses. Therefore, Agrawal stopped selling fragile items through e-commerce. Recently, however, the e-commerce websites started providing a refund on damage due to transportation, so the company began increasing its online sale product portfolio again.
The Customer is King
Agrawal prioritized customerl’ needs above all else. The company had no specific predefined credit policy, but most of the retailers purchased on credit, making credit purchases in 75 per cent of sales. Credit extension and repayments were based on convenience and relationship.
Purchase orders were based on customer demand, and returns were not questioned. The service and maintenance part of the business (including maintaining an inventory of parts) had been started in order to better serve customers. As a result, a good proportion of the inventory of parts was not sold for profit but used within the business for after-sale service to retailers.
Financial Saga
The family usually withdrew the business profits for income, but in 2020, the family left a portion of the book profits within the company as an infusion of capital (see Exhibits 2 and 3). Current liabilities were primarily business creditors. Sundry debtors were sales receivables, which had increased substantially compared to the increase in sales. A major portion of the loans included the working capital loans the company took to fund bulk purchases. Agrawal has purchased a used pickup truck and expanded it metal utensils inventory. But there was still idle cash in the business, which could be used to expand inventory or?to address SheI11~~l F1QF~~Q?to establish a suitable inventory management system.
Sales had increased approximately 20 per cent in the previous five years, although sales decreased in 2020. A major portion of the expenses included salary and wages (approximately 40 per cent of expenses in 2020), commission and fees (approximately 10 per cent, which included referral fees paid to the e-commerce website), loading and forwarding charges (about another 10 per cent), depreciation (approximately 10 per cent), and sales discounts (about 7 per cent). The net profits for the fiscal year ending in 2019 were ?1,154,029.17 and in 2020, ?2,271,276.05, respectively.
The proportion of current assets as compared to total assets was extremely high. Inventory was 42 per cent of total current assets in 2019, which fell to 37 per cent in 2020. The decrease was not a result of a drop in inventory, however, but a result of more cash in the bank, which doubled between 2019 and 2020 year ends. Profitability had doubled, but sales only increased by 17 per cent, despite the introduction of twenty-six new products in 2020. The value of maintained inventoryprimarily made up of metal utensilsalso seemed extremely high.
MANAGEMENT DECISIONS
The business needed revamping, and that would require many decisions. But since a wholesale business was based on inventory, Shefali believed that if the inventory was sorted, the rest of the business would come along during the process.
Shefali had learned several inventory management techniques during her business program, at least one of which would control Agrawal’s inventory problems. She believed that in the process of implementing inventory management, Agrawal’s business structure would evolve and improve substantially. However, she was uncertain which inventory management scheme to choose and how to implement it. Also, the decisionand maintenance of the systemwould be up to the family, so the changes needed to be smooth and easy to understand and implement.
The inventory management techniques Shefali had read about included just-in-time (JIT), which minimized storage costs; material requirement planning (MRP), which helped with production units; economic order quantity (EOQ), which helped with deciding order quantities; reorder levels, which calculated stock replenishment levels; always better control (ABC) analysis, which could be used for prioritizing control over the inventory items that had higher consumption; and safety stock calculations, which ensured that demand was maintained and related costs minimized. Shefali could employ any one or a combination of these techniques to solve the inventory problems at Agrawal.