Introduction

Libas is an e-retailer selling men's formal shirts on Flipkart and Amazon. The proprietor is Mr. Suresh Chand, who has more than 7 years of experience in many online marketplaces. The company operates out of an office warehouse located near Chirag, Delhi.

The following image shows the supply chain of Libas online stores.

Supply Chain - Libas

The various components of the Supply Chain are as follows:

Order Generation Cycle (Forward Flow): The order is generated when the customer places an order on the Flipkart site. The website is integrated with a seller panel which instantly reflects the new order. The details reflect the customer's name, the address with the pin code, and the SKU which is being bought. The seller panel is a customised web page that is totally integrated with the Flipkart server.

Order Fulfilment Cycle: Libas does not manufacture the products on his own but gets them made from specialist tailors at Prahladpur. The order fulfilment cycle, therefore, has three steps:

Procurement cycle: The raw materials are procured from suppliers. The fabric is procured from three suppliers - Cadini, Raymond, and Morarjee. (Refer Annexure 1- Procurement). The accessories (collars, buttons) are sourced from the wholesale market at Govindpuri.

Manufacturing: The fabric and accessories are given to the Tailors to make shirts (brand name Libas) as per specifications. It takes the tailor 15 days to make a shirt as per the quality norms.

Execution Cycle: Libas keeps 15 days of inventory (equal to lead time). Once an order comes from the website the ready shirt is picked from the Warehouse. This shirt has to be packaged, labelled and handed over to the Logistics in a TAT (Turn Around Time) of 2 days. While choosing the Logistics partner Libas has the option of choosing Flipkart WS Retail (a fully owned Logistics partner of Flipkart) or any other Logistic provider of its own choice. If the pickup is scheduled with Flipkart, then the parcel is scanned by the logistics provider and the seller's panel, and the website is updated instantly. The customer also gets an SMS that the parcel is ready for dispatch. On the other hand, if Bestseller chooses a logistics provider of his own choice, then he has to manually enter the AWB number (Airway Bill number) on the seller panel. Otherwise, the order will continue as pending and the TAT will be breached. Once the parcel gets delivered at the customer's end, the seller panel gets updated to reflect the same. On the other hand, if the customer refuses to take the parcel then the panel is updated as RTO (Return to Origin). Currently, Libas has around a 20% RTO rate.

The Return Cycle (Reverse Flow) - The Return Cycle refers to the case where the parcel is not delivered at the Customer's end. This happens because of two reasons:

Customer Initiated Reasons - This can be because of reasons like Buyer's remorse or Quality issues.

Logistics Initiated Returns - This is because of reasons like wrong pin code, buyer not reachable, etc.

The seller is debited the return logistic cost where the reason for returns is customer-initiated (quality reasons).

The seller is entitled to Insurance from Flipkart if the return parcel is damaged in transit and the claim is made within 24 hours. This is made from Flipkart's Seller Protection Fund.

The Payment Cycle: Flipkart settles sellers once in every 15 days. Payment is made for all complete transactions i.e., where delivery is made to customers and the customers has also paid the amount (in case of COD orders)

E-commerce Operation of Libas for Flipkart

Libas is focused on the premium online shirt market (Rs 1100+) and markets the same under the Libas brand name.

Order Volume: Libas gets on average 25 orders per day from Flipkart. The orders are mostly for Blue, White shirts (60%). There is no trend for other SKUs. 80% of the orders are COD (Cash on Delivery) orders.

Location: Libas operates out of a leased 650 sq ft office warehouse space in Chirag Delhi. The location is advantageous and on road. Pickups from Flipkart can be scheduled easily. The office is also not very far from the suppliers (Chandni Chowk, Govindpuri) and tailors (Prahladpur). The rent for the warehouse is Rs 10,000 per month.

Lead Time: Flipkart gives Libas 2 days to execute a customer order. The tailors need a lead time of 15 days to execute a job order.

Inventory: Libas needs to keep an inventory of 15 days to cover the lead time. However, on an SKU level, Libas often runs into stock out as order flow can be erratic for individual SKUs. In terms of value, the average stock held by Libas is Rs 400,000 (app).

Procurement: Libas procures the raw material (Buttons, Collars, etc.) from the wholesale market in Govindpuri. Similarly, the fabric is procured from the distributors of Raymond and Cadini. The fabric for Morarjee is sourced wholesale. Procuring from the distributors ensures reliable quality. All the procurement has to be done in cash.

Manufacturing: The shirt is stitched by tailors in Prahladpur. These tailors are also engaged in similar operations for apparel brands like Blackberry and have a high level of expertise. The tailors charge Rs 180 per shirt for stitching. The tailors need 15 days to execute an order. Payment is done in cash once the job work gets completed.

Inward Transportation: Accessories are purchased in bulk and transported through public transport. The cost is included in the cost of purchasing. The cost of transportation of fabric to the tailors and transportation of stitched shirts to the warehouse is paid for by Libs. It is approximately Rs 7000 per cycle. This cost is not included in the purchase cost.

Reverse Logistics: Around 20% of orders are in the RTO (Returned bucket). Of the returned orders 60% are due to Logistic reasons. Libas reuses these logistic returned products against fresh orders. A certain percentage of products are also damaged in transit (app 20%). Libas raises a claim from Flipkart for the damaged products. Flipkart has a claim service of around 25%. Libas normally retails damaged products at a heavy discount in the wholesale market (offline market). Typically, Libas is able to recover 50% of the cost of the shirt in discount sales.

Quality: There is no mechanism in place for testing the quality at the current juncture. The fabric is of a stable quality as it is being procured from authorized distributors of the brands. However, there is a great deal of variability in the quality of the accessories.

Other Expenses /overhead expenses are:

Manpower Cost: Rs 20000 per month (2 people in packaging)

Electricity and other overheads: Rs 8000 per month

The cost of procured consumables/accessories on average for the shirt works out as Rs 600/piece and market placement cost per piece works out as Rs 100/ piece on an average.

Challenges Faced by Libas

Libas is facing quite a few challenges which are explained here:

High Channel Commissions: Flipkart charges a high commission of 18% from the seller. There are also other charges like a collection fee of 2%, a fixed charge of Rs 40, etc. 20% plus of the product price is typically being paid to the Marketplace. This impacts the net margin. As can be seen from the Shirt Costing details, the net margin ranges from 5.9% on a few SKUs to a maximum of 16% (on the cost price). Please note this net margin does not factor in other costs like warehousing costs, overheads, inward transportation, inventory carrying costs, Reverse Logistics costs, etc.

No Collaboration with Suppliers: Libas has a transactional relationship with its suppliers. For the accessories like buttons, collars, etc. it buys from the wholesale market. These purchases are mostly on cash. The fabric has three suppliers - Raymond, Morarjee, and Cadini Siyaram. The company has to buy in cash from these suppliers. The tailors work on a consignment job work basis and take 15 days to manufacture a shirt as per the specification of Bestseller. Due to supply chain uncertainties, Bestseller has to keep an inventory of 15 days.

Managing Product Returns: There is a return rate of 20 -25% for the products that are sold online. Products are returned mostly for logistic reasons like wrong pin codes, Buyer not reachable, Location not being serviced, etc. However, there are also many returns from consumers because of Adhoc reasons. Products also often get damaged in transit on the return leg. Flipkart accepts a claim only in the first 24 hours. Also, the claim sanctioned is often only a fraction (15-20%). The returned products are taken into fresh stock again (if there is no damage to the product in transit) or sold wholesale under a heavy discount (if the products are damaged and not worthy of being sold online).

Managing Order Fulfilment: Flipkart operates on a very strict TAT (Turn Around Time) of 2 days. This means that the completed order has to be handed over to the Logistics partner within 2 days. If the order TAT is breached, then the seller is warned. On repeated warnings, the seller's account is suspended and no fresh orders are given to the seller. Bestseller faces a lot of challenges on this account. Customer orders are very fluctuating. They average around 20 orders a day. However, during special offers and schemes, the orders can easily go twice as much. Bestseller keeps a stock of 15 days as the upstream supply chain has a lead time of 15 days. However, the customer order is erratic in terms of SKU mix. Bestseller often has a stockout of a few SKUs. This impacts customer service and the TAT often gets breached. In the last year, the account of Bestseller has already been blocked on three occasions by Flipkart.

Cash Flow Issues: Flipkart pays Libas on all completed transactions twice a month. However, the suppliers have a much lesser payment cycle. The suppliers for accessories and fabric have to be paid in cash. The tailors also have to be paid on delivery (i.e. 15 days). This often creates a cash imbalance in Bestseller.

High Logistic Costs: Since the final package is more than 1kg Libas is having to pay a forward logistic cost of Rs 95 to Flipkart.

Product Quality: Libas also has to often deal with inconsistency in product quality. There is a big challenge in ensuring reliability in the supply of accessories. These are purchased from the wholesale market and the variation in quality is seen from one batch to another. Since Libas is catering to a niche segment in Men's shirting (Premium), it wants to give its customers a superior experience.

Q. Based on your understanding of the scenario, you are required to answer the following questions:

1. How would you redesign the supply chain?