Rationalising substantial inventory
Rationalising substantial inventory

Avenir is a result oriented, 100 per cent delivery focused management consulting company working with its clients to significantly increase cash flow and profits and sustain the same over a long time frame making the so called business cycle irrelevant. We caught up with Anuj Mittal, Principal Consultant, Avenir to understand the application of the Theory of Constraints for turning around a business.


Neha Malhotra (NM): Can you brief us about Avenir?

Anuj Mittal (AM): Avenir is a delivery focused management consulting company. Through the application of Theory of Constraints (as propounded by Dr Eli Goldratt), we are able to guarantee substantial improvement in liquidity within weeks of starting the assignment in addition to the bottom-line.

But this does not restrict Avenir from using any methodology that may help your organisation grow, whatever it takes. The ultimate goal of a company is to make money. We help companies just doing that. Our consultants have been trained by institutions led by Dr Goldratt himself and worked internationally in partnership with same institutions to deliver unprecedented results both in the bottom and top line.

NM: What is Theory of Constraints all about?

AM: The Theory of Constraints (TOC) is an overall philosophy developed by Dr Eliyahu M. Goldratt, usually applied to running and improving an organisation.  TOC adopts the common idiom ‘A chain is no stronger than its weakest link’ as a new management paradigm. By focusing on the constraint(s) and ensuring maximum productivity of the constraint, the whole organisational system can achieve a much better flow of products/services delivered to the customer, thereby creating a decisive competitive edge in the market.

The analytic approach with TOC comes from the contention that any manageable system is limited in achieving more of its goals by a very small number of constraints, and that there is always at least one constraint. Hence the TOC process seeks to identify the constraint and restructure the rest of the organisation around it.

NM: How is it applicable in Retail?

AM: To see the applicability of TOC in retail, one has to identify the weakest link. Even though on an aggregate basis one can see patterns in the demand, it has become impossible to predict consumer demand at a retail shop level for any particular SKU. On a day to day basis at the shop level, demand tends to be very erratic. This leads to high levels of unavailability and analysis has shown that 30-40 per cent SKUs are not available at in the stores at a given point of time. This often leads to a direct loss of 30-40 per cent of sales and severely limits the profitability, despite many retailers using the most technologically advanced demand forecasting systems.

The weakest link for the retailer therefore is to get the right amount of inventory. Low inventory leads to unavailability and keeping high inventory quickly uses up all cash and space available.

Retailers quiet often have surplus inventory of what's not selling and are out of stock on what sells well.

TOC eliminates this conflict by creating a demand-pull based replenishment system with a simple but effective system of managing inventory so that is just enough to ensure availability while making optimal use of the cash available.

NM: What benefits can it bring to a retail business?

AM: The retailers who implement TOC see shelf availability jump to 99 per cent levels and an average jump of 30-40 per cent in sales. As this comes without any significant addition to costs, the profits can easily see more than a 100 per cent jump in a short span of time. Simultaneously, there is a 25-30 per cent reduction in inventory.

NM: How does its application affect the customer? 

AM: The consumers are absolutely delighted. Unavailability is one of the biggest pain areas for consumers but they have little choice as most stores have the same problem. When they do not find what they are looking for, they are forced to shuffle between stores for the same or settle for a substitute. Implementing the TOC solution ensures that their convenience is taken care off, the products are fresher and gives them all the reasons to be more and more loyal to the store.

NM: What are the challenges that are faced in its application in retail?

AM: There are two primary challenges in implementing the retail solution. Firstly, getting the internal team to align to the whole new paradigm of replenishment to demand and shifting away from the methods they have been accustomed to for years requires a structured cause-effect based dialogue and the patience to overcome obstacles.  Secondly, the challenge is to create win-win agreements with the vast number of suppliers to modify their processes to allow for consistent and effective replenishment.

NM: What future do you foresee for this business application in the times to come?

AM: The retail industry has been booming, but competitive intensity has lead to profitability levels being very low or non-existent. With FDI in single brand retail already approved and FDI in multi-brand retail in the horizon, competition is going to become more and more intense. The TOC applications allow retailers to develop a competitive edge of availability, significantly increase profits and reduce inventory levels. There is no other alternative which delivers a result even close to this. It’s an inevitability that more and more businesses have to shift to this new paradigm and the first movers will reap a tremendous advantage. Given it is an emerging paradigm, the growth has been tremendous. 

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