Pursuing A Sustainable Supply Chain

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BALANCING YOUR NEEDS WITH YOUR RESPONSIBILITY

Case studies can act as one of the most effective methods of learning how to deal with real life management problems, these are mostly descriptive enactments of the challenges that have been faced by an organization in the past. In Bangladesh students have to depend on case studies based on foreign companies.
Kaizen CRS, a full service market research firm has taken an initiative to develop business cases on local organizations. The initiative is being called “Kaizen Case Study” (KCS). This case on Aarong is an excerpt from one of the cases of KCS. For those interested in the full case, please email: debojit@kaizencrs.com.

THE CASE OF AARONG
Aarong is a leading lifestyle brand in Bangladesh, an organization which has achieved massive success due to the cooperation from the 65,000 artisans who are the backbone of its supply chain. However, the Chief Operating Officer (COO) of the company was faced with a majore dilemma in 2013. This came about from the political unrest which was prevalent in the country at the time. The announcements regarding the verdicts in the war crime trials had triggered a new phase of angry street protests in the first three months from February to April of 2013 which saw more strikes than in the previous three years – 23 in total. Till the beginning of February 2013, the situation was a bit relaxed, but ever since they began, they caused severe problems for traders, damaged vital infrastructure and even led to the loss of human life.
During this period, Aarong too suffered from incessant strikes. The wide spread violence during that time had lead customers to stop visiting the outlets leading to overstocking in stores.
Aarong sources its product from its artisans at least three months ahead, and now on top of the unsold stock, new inventory was piling up clogging the supply chain. Aarong needed to keep its business afloat, and the easiest way perhaps was to cut orders from artisans however the core mission of Aarong is to support the artisans through thick and thin. Amidst the uncertainty of when the strikes would end, Aarong faced a critical dilemma of balancing its business goals along with its social mission.

AARONG BUSINESS MODEL
Aarong (meaning village-fair), has become one of the most popular lifestyle retail chains of Bangladesh. Currently, Aarong has 16 stores across the country, 9 of which are in the capital city, Dhaka. The first outlet of Aarong was launched in 1978 in Shukrabad, Dhaka. In 2011, Aarong launched its flagship retail outlet in Uttara which Aarong claims to be the largest retail store of a single brand in Bangladesh.
Currently, Aarong has over a 100 different fashion and lifestyle products starting from clay pots to diamond jewellery, silk and cotton fabrics to brass and leather merchandise, from Nakshi Kantha to home décor products, Aarong has something for everyone. Aarong has also entered the unique market segment for handicrafts in an attempt to revive Bangladesh’s rich heritage. They aim to connect the urban consumers with their roots by providing them with products made in collaboration with over 65,000 artisans spread across Bangladesh. Aarong has revolutionized the retail industry with high standards for quality and artistry.

MARKETING
Aarong understands the importance of properly building a brand by being consistent in their marketing communications. They aim to gain long-term customers by positioning themselves as the fashion trendsetter and the nation’s leading lifestyle brand in the minds of the consumers. Aarong’s dedicated marketing team seeks to do that through the use of both traditional print and billboard advertising along with a robust digital marketing strategy to showcase their innovative product lines. Promotions for these products are then planned according to upcoming major shopping holidays like Eid-ul-Fitr. It is a bit unconventional to think of handicraft retailers and supermodels in the same space. However, Aarong’s men’s and women’s wear are featured by the top models of the country. The fabrics of each of the pieces are weaved on handlooms and value addition is done by hand embroidery, block/screen prints, natural dyes which are all handcrafted by rural artisans. Aarong promotes artisanal products without promoting the artisan, but rather using mainstream methods. Aarong does not want to capitalize its use of artisans in their marketing campaigns only because it goes against the very purpose of Aarong’s existence, i.e., to help the rural artisans and ensure a constant stream of income.

THE CHALLENGE
In the first three months of 2013, the situation was looking incredibly bleak because of the strikes and political unrest in the country. Roads were blocked, vehicles set on fire, stores vandalized, tear gas canisters thrown all across the country to break up congregations of violent protestors. All this resulted in a sense of panic instilled within the general populace. Businesses suffered greatly as customers refused to leave the security of their homes. Only the absolute necessities were purchased during this time. Furthermore, companies started incurring greater costs because of the ten times increase in the cost to transport a product in the country.
During a time like this, Aarong saw a significant decrease in its overall sales February 2013 and the pressing issue of overstock was becoming more apparent. With no signs of the political situation improving, Aarong had to make a decision on how to deal with their major overstock issue. A few alternatives were available for Aarong executives.

Alternative 1: Do nothing
Aarong can choose to do nothing and let the situation fix itself. It can simply depend on its existing brand image and hope that the political situation will improve significantly. The overstock can be mitigated through aggressive marketing later.

Alternative 2: Withdraw orders from a few producers
Withdrawing orders from a few producers would allow Aarong to ease the pressure of overstock by adjusting it with next month’s inventory. This would reduce cost and help react to any further unforeseen negative impacts from external factors.
Alternative 3: Reduce small quantity orders from each producer
Rather than completely withdrawing orders from a few selected producers, Aarong can reduce order quantity for each producer by a small amount. This will ensure that all producers still have work and a source of income. However, this will increase the overall cost arising from the overstock since it is a longer process of mitigating excess inventory. Furthermore, Aarong will have to bear the cost of analysing and deciding on how much order quantity to reduce from each producer. This would be the longer procedure.
Given the alternatives available, Aarong had to decide which the best solution was. Furthermore, the solution had to be sustainable and be beneficial for Aarong and its partners.

NEXT STEP
Aarong’s management was in a tight position in 2013 and the options to wiggle more room for change had been severely limited by the catastrophic political climate. Could it continue to incur the losses and stock pile supplies in order to keep the artisans afloat? But with no end in sight to the unstable political climate, this was definitely not sustainable.
On the other hand, if they chose to withdraw orders from a few particular producers, complications could arise regarding which producers to choose and choosing the option of leaving them high and dry with no other income source available.
Similarly, if the quantity ordered were lessened by all customers, management would have to decide on answers for questions such as: how much quantity? Will each producer reduce quantity by the same amount? Will it provide relief to the transportation costs?
These were the possible questions that Aarong had to decide on in 2013 if they still wanted to remain profitable and do right by the thousands of artisans who rely on them for their livelihood.

PRODUCTION

Aarong has an efficient decentralized production system with a combination of both independent producers and the producers of Ayesha Abed Foundation (AAF). It has over 800 independent producers who have about 30,000 artisans working for them while the Ayesha Abed Foundation has 35,000 artisans working in 13 centres. The Ayesha Abed Foundation is responsible for the production of 75% of all textile of Aarong while the remaining 25% is produced by the independent producers spread throughout Bangladesh. Aarong’s entire production process is divided into the five stages shown in the following diagram.

STAGE 1:
PLANNING
Aarong analyses the sales and inventory levels of previous years to find a trend that they use to set target quantities for each of their products in their portfolio for each outlet per month for the next fiscal year. This is usually done approximately a year before. The planning stage revolves around Eid-ul-Fitr, one of the major holidays for all Muslims in Bangladesh. During Eid-ul-Fitr, it is a tradition for Muslims to buy, gift and wear new clothes. Hence, Eid ul-Fitr is a highly critical time of the year for Aarong since it accounts for nearly 25% of total sales each year.

STAGE 2:
DESIGNING
After the planning stage, a dedicated team of around sixty designers start working to create the next season’s product designs. These designers start working with producers to create samples of products which have to be approved before full-scale production can begin.

STAGE 3:
COSTING AND MERCHANDISING
After a sample has been approved, the necessary raw materials are acquired large-scale production from outside suppliers. The appropriate product costing is established during this stage. Producers are supplied with the necessary raw materials, design instructions, costing information and the required quantity. Production is carried out through, both the Ayesha Abed Foundation (AAF) and its sub-centres and through independent producers. Each producer is given a particular target quantity to meet.

STAGE 4:
QUALITY CONTROL
Quality is key to the overall success of Aarong, and hence Aarong has an extremely rigid quality control stage in its production process. Quality control is executed at every stage of production. In each stage, the product is examined thoroughly, and only if it is approved, does it move on to its next stage of production. This type of quality control ensures consistency in the product line and customer satisfaction.

STAGE 5:
AARONG OUTLETS AND INVENTORY CONTROL
At the final stage of the entire production process, the finished goods are sent to Aarong outlets. Since Aarong has over 100 different product lines, it means that the number of Stock Keeping Units (SKUs) is enormous. This further facilitates the need to track daily sales and monthly productions to maintain an efficient inventory level.

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