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Lean, outsourcing and kaizen in retail

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LEAN, OUTSOURCING AND KAIZEN IN RETAIL

Radojko Lukic

Faculty of Economics, University of Belgrade

Brief Contents

Part 1 the effects of application of lean concept in retail 5

Part 2 The Infuence of outsourcing onperformance in retail 24

Part 3 the effects of application kaizen concept in food retail 44

2
Preface

In recent years, the retail is increasingly applied the principles of

Toyota's operations in order to reduce costs and achieve the highest
possible profit with the maximu m satisfaction of the needs and desires
of consume rs. This is e specially true of lean, outsourcing and kaizen
business concept.

With that in mind, this book aims to be as complete theoretical,

methodological and empirical review the specifics of the proble ms and
effects of performance in modern retail.

Radojko Lukic, Faculty of Economics, University of Belgrade

E-mail: [email protected]

3
About the Author

Born in Doljane near Krusevac, in 1954. Finished secondary school in

Krusevac. Radojko Lukic, graduated in 1976 from University of
Belgrade, Faculty of Economics. PhD degree obtained in 1986 at the
University of Belgrade, Faculty of Economics. E mp loyed at the Faculty
of Economics, University of Belgrade since 1977. Appointed Full
Professor in 2003.

Main fields of interest and research: Cost in retail.

Courses taught on the undergraduate level: Special Accounting, Banking

accounting, and Accounting of Trade Enterprises; also teaches on Master
and PHD courses.

Department for Accounting and Business Finance, Head of the

Department – Prof. Radojko Lukic PhD

Published 100 scientific, professiona papers and publications.

Radojko Lukic, Faculty of Economics, University of Belgrade

E-mail: [email protected]

4
Part 1. The effe cts of application of lean concept in retail

Abstract

Lean principles and techniques can be successfully applied in the retail

sector. In the retail sector, lean approach improves operational flows.
Lean retail encourages manufactu rers to produce standard products in
accordance with the created (placed) orders fro m retailers pursuant to
the demand of their consumers. Characteristics of the retail market are:
strong competition, shorter product life cycle, longer product
development time and high sensitivity of demand. In order to be more
competitive and profitable today's retailers operate strategica lly
oriented to lower prices and gain exe mption from holding unnecessary
stocks. Lean retail is an example of best practices of successful
operational strate gies which mana gement need to a ccept - to maximize
the operating efficiency of the retail process.

Keywords: Toyota production system, the transformation of re tail

operations, waste, consumption, distribution, agile supply, efficient
consumer response.

JEL Classification: D40 L11 L25 L81 M30 M40 M41

Introduction

To become globally competitive modern manufacturing companies apply

Toyota Production System (TPS). A pioneer in the application of the
concept of lean is the Toyota Motor Corporation. It is designed as a set
of tools and methods to eliminate waste and inefficiency in the
production syste m and it is known as the Toyota Production System
(TPS). Elements of lean thinking are: de fining value ĺ identification of
value streams and the removal of muda (waste) ĺ organizing around
flow ĺ responding to pull through the supply chain ĺ the pursuit of
perfection (Pierc y, 1997). Toyota Production System is now applied not
only in the manu facturing industry but in other industries too, including
insurance companies, hospitals, airline maintenance organizations, state
agencies, the retail industry and many others (Behrouz, 2011).

Similar to the concept of le an manufacturing, the concept of le an retail

is known by many names and variations in the literature: lean logistics,
lean distribution and lean consumption. Attempt to apply lean concept in
retail is recent - it dates from 90s of the la st century. In this regard, a
number of retailers such as Wal-Mart, Tesco and IKEA are well-known.
5
1. What is lean retail?

Lean is a modern retail operating strategy which requires maximum

efficiency coupled with identification and elimination of waste. It
requires simple workflow, eliminating the loss of effort, time, materials
and motifs. With acceptance of lean approach managers are able to
reduce activities that add no value, directly impact and help prevent the
potential problems, and improve global operational flow.

Application of lean techniques, such as simplifying work design, using

"pull" to drive replenishment, removing bottlenecks throughout the
supply chain, eliminating wasted effort, wasted time, wasted materials
and wasted motion, contributes directly to improving the overall
performance in retail. Lean thinking is transforming the traditional way
of a retail business to new and mo re effective. This is shown in Table 1.

6
Table 1.The influence of lean thinking on the transformation of the
retail business.

Myths about retail operations Lean retailing perspectives

"We can improve customer service and

It is impossible to provide better frontline employee satisfaction without
customer service without increasing increasing labor costs"
labor costs

We cannot predict customer demand, "Overall demand may be highly variable,

so we must be ready for anything but many parts of it are quite predictable"

"We can simultaneously reduce inventory

Product avalability can only be leveles and out-of-stocks"
improved through increased amounts
of inventory on hand

"We can develop an integrated

We would need a lot of capital to invest performance improvement program that
because this program may not pay back delivers results in the same year and is self
for years funding"

"We can increase consistency and

By giving stores more control. I lose standardization while empowering local
network-wide consistency and management"
standardization

Source: Lean Retailing: Achieving Breakthroughs in store profitability,

McKinsey & Company.

In general, the application of lean approach allows the company to

reduce costs, increase e fficiency, reduce execution time, reduce waste of
all kinds, increase profitability and keep low inventories. It also
contributes to customers' satisfaction, improving product quality and
increase staff morale. According to research carried out in practice,
quantitatively speaking, the effects of lean thinking in retail are:
increased comparable sales by up to 10 percent, reduced labor costs by
10 to 20 percent, reduced inventory by 10 to 30 percent, and stock outs
by 20 to 75 percent (Lean Retailing: Achieving Breakthroughs in-store
profitability, McKinsey & Company). It signific antly contributes to
improved customer satisfaction. All this, in return, reflects the increased
store profitability. For exa mple, the return on equity, as a mea sure of
7
profitability, increased by 5 to 10 percent (by: Competing in a Value-
Driven World, North American Retail Practice, McKinsey & Compa ny).
Because of the significant economic impact lean approach is applied in
many retail formats (stores), such as groce ry stores, specialty, apparel,
convenience stores, discount, entertainment, and quick-service
restaurants. Figure 1 presents the general benefits of lean retail.

8
 The benefits of lean retailing

Production changes Inventory replenishment Operating efficiency

- Changes/alternations to - Optimization of order - Optimization of prices
product dates - Reduced labour costs
- Adjustment of quantities - Order quantity - Better allocation of costs to
produced determination tasks
- Ideas for new products - Fewer billing errors

The uses and benefits for the manufacturer

Information flow - retailer to manufacturer

- Quantity of inventory demanded
- Requiered shipment date
- Pricing information
- Payment information

Manufacturer Integrated Retailer End

channel consumer

Information flow - manufacturer to retailer

- Quantity of inventory available
- Pricing information
- Order information
- Shipment date
- Date of expiration
- Due date
- Payment information

The uses and benefits for the retailer

Merchandising Inventory management Operating efficiency

- Product assortment - Data delivery - Assign costs to
adjustments optimization activities more precisely
- Improvements of shopping - Reduce freight costs - - Eliminate billing errors
experience bulk shipment at the right
time

Figure 1.The benefits of lean retail

Source: McGuckin, (2005)

9
This figure illustrates that retailers and producers themselves gain
benefits from the lean retail. Application of lean fundamentally changes
the relationship between retailer and supplier. By using the concept of
lean retail, global retailer Wal-Mart has established a "new relationship"
with suppliers, which allows him to realize significant bene fits arising
from econo mies of scale and size. This gives him the basis fo r the
unique retail business model na med "daily price reductions".

2. How does lean retail function?

The core of lean retail is prima rily a commitment to eliminating waste.

Similar to the manufacturing se ctor and following the model of lean
approach, the main types of waste in retail are : excess inventory,
product defects, unnecessary motion, redundant employees and a waste
of time. Managers in retail c an use similar tools and principles for
identifying all types of waste to improve their operational efficiency.
Lean techniques include: (1) simplifying the design of work
(organization of individual work process should be such as to provide a
high degree of feasibility and possible control, so that it has cle ar start
and finish), (2) the use of withdrawal (pull) to create a replenishment
(provided that the supply of goods is fuelled with actual de mand of
customers, as opposed to foreca sts or anticipated demand, so to keep
inventory levels low and free space), (3) removing the bottlenecks
through the supply chain (by eliminating inefficiency with shorter
delivery time, lower transport costs and defects, and improving the flow
of goods and operational performa nce) and (4) elimination of wa ste of
effort, time, materials and movement (by identifying the core business
values, with the elimination of excess movement, time, materials and
labor used in the process).

The effective imple mentation of lean approach in retail makes grea ter
cost efficiency, increased worker productivity and less waste of time
and effort. This in return significantly affects the improvement of
customer satisfaction and store profitability.

Generally speaking, the reduction of unnecessary processes and waste

and improving customers' experience is in the heart of modern business
today. Lean retail is in line with best practice that contributes to
improving productivity and economic perfor mance in the shop. The
quality of managing the retail company, store or product category may
be, therefore, considered with the help of lean approach.

10
For example, the study found that there is a similar corporate
philosophy of business between T oyota and Seven-Eleven Japan (SEJ).
Both companie s achieve very good business pe rformance, create a
unique corporate philosophy and operate globally around the world.
Table 2 gives diffe rent viewpoints of manu fa cturing and retailing
towards the concept of lean management.

Table 2. Production and retail overview to lean man agement

Lean management
Manufa cturing Retailing
TPS (Toyota General mode l Seven-Eleven key concept
production and concept
syste m)
1 JT (Ju st in Time) SCM (Supply CDC (Combination distribution
chain center), NDF (Non-deliverable
manage ment) forward)
2 Kanban syste m DCM (Demand Store initiative ordering
chain
manage ment)
3 Production SCM (Supply Team merchandising
smoothing chain
manage ment)
4 Shortened setup SCM (Supply Customer focus
time chain
manage ment)
5 Shortened lead Order-delivery Dominant strategy
time
6 Standardization of Franchise syste m Store initiative ordering
operations
7 Autonomy In store Individual store management
me rchandising
8 Kaizen In store team Tanpinkanri (ite m by ite m
(Improvement me eting control)
activities)

Source:Naruo,(2007)

11
Application of lean system is particularly pronounced in clothing
retailers. Figure 2 illustrates the concept of lean in clothing retail and
relationship with the supplier.

Frequent special
store delivery

Apparel manufacturer Retailer

Continuous replenishment of orders

Apparel plant 1 Retail store 1

Manufacturer's Retailers's
distribution distribution
Apparel plant 2 Retail store 2
centar/warehouse center: cross
docking
Apparel plant n Retail store 3

Direct store delivery

Retail store n
...... Information flow
___ Product flow

Figure 2. Lean retailing-apparel supplier relations

Source: Abernathy, (2000)

This figure shows that, according to the concept of lean, retail store
needs more spec ial supplies - continuous replenish ment of retailer's
placed orders which are based on information relating the sale collected
in real-time by bar code scanning on the retailer' s cash register. Data on
sale s of individual items are aggregated centrally and used for placing
orders to suppliers, usually on a weekly basis. Based on lean approach
and supported by information and communication technology effects of
inventory manage ment re sult in in-store inventory reduction and
increased profita bility. By applying the concept of lean, retail develops
special relations with suppliers which allow the flow of goods and
information to be optimized.

12
3. Efficient consumer re sponse

The main objective of the concept of lean retail is the optimization of

not only intra-, but also interorganizational (i.e. inter and external)
processe s. In efficient consumer re sponse (ECR) strategy manufacturers
and retailers are trying to optimize product and information flows
throughout the value chain, with a starting point - point of sale, and by
collecting detailed data on the customer de mand. Effective
organizational integration of production and retail greatly facilitates the
implementation of ICT (information and communication technologies).
The development of information on merchandising and logistics (80s and
90s of the last century) has significantly contributed to rationalization
and centralization of positive effects.

Optimizing the supply chain means faster re sponse of supply in relation

to the actual sale. Introduction of electronic scanner cash registers (mid
80's of the la st century) co mbined with electronic data interchange
(EDI) or Internet, provides informa tion on the sale which supply chains
forward to manufacturers and their suppliers, altogether contributing to
fa ster reaction related to changes in de mand. Bar-coding and electronic
tracking, in addition to large investments in rationalization, leads to
increased turnover speed in distribution centers and warehouse s. Ba sed
on the package and bonding product range for one output, we can
observe a trend towards the distribution center with no storage space,
where the goods are directly re-sorted and packaged in a process known
as cross docking.

The concept of efficient consu mer response (ECR) introduces not only
the optimization of logistics. Data collection via scanners and cash
registers provide information about the buyer' s behavior (who are the
buyers, what, when and where they buy?), which can be used as a base
to create marketing strategy for n ew product develop ment for the ta rget
group of customers. Retailers and manufacturers are able therefore to
effectively adapt to customers' de mand range. Retailers can also
successfully use collected data fo r the systematic development of new
products with manufacture rs or, in the case of private labels, with their
own particular group of retailers.

All in all, electronic data interchange (EDI) and quick response (QR)
improve relations between retailers and suppliers, a llowing retail prices
to be reduced by 10% (Berman, 2010).

13
4. Managing product categories

Managing product categories adequately links retail and production thus

contributing to the improvement of efficiency throughout the value
chain and, therefore, overall performance in retail. Managers of product
categories in retail companies are responsible for only one product
category across the entire value chain, starting with suppliers, or even
product design, through logistics a nd cost planning to final sale. Table 3
shows the effects of inventory ma nage ment based on lean approach, on
the level of individual items.

Table 3.The effec ts of inventory control in the light of lean retail

Sales Production Inventory Average Total Profit

costs costs order- inventory
fulfillment (week
ratio demand)
1. $ $ 1,198 $ 79 97% 18 $ 485
Minimize 1,761
stock
outs
(Single
inventory
policy)
2. $ $ 1,062 $ 55 89% 13 $ 494
Minimize 1,612
inventory
costs
(Single
inventory
policy)
3. $ $ 1,158 $ 70 95% 16 $ 512
Balance 1,739
stock out
and
inventory
costs
(Single
inventory
policy)
4. $ $ 1,148 $ 66 95% 15 $ 515
14
Maximize 1,728
profits
and
reduce
inventory
risk
(SKU-
level
inventory
policy)

Note: Dollar a mounts are weekly, in thousands

Source: Abernathy, (2000)

Application of inventory policy for individual items is more efficient

compared to the co mpound in the realization of profits. Compa nies
Home Depot, Wal-Mart and many others manage inventory for
individual items, thus increasing their profits.

The concept of category manage ment may, however, be in conflict with

other management requirements. Problem, in fact, occurs in connection
with the purchase of large quantities of the individual product categories
in cases when negotiating with manufacturers on terms and pric e. It,
too, occurs in the ca se of application of policies and strategies of
differentiated prices (such as, for example, promotion of special offe rs)
which applies to all not just certain categories of products.

Managing product categories is also incompatible with the management

of key custome rs. Managing key customers is a mode rn concept of
business producers which have been traditionally organized by product
and now employ special managers for large custo mers, who operate in
all products for all customers.

In principle, the application of lean in retail contributes to increased

profitability. The concept of lean retail is considered to be relevant to
the basic products because of its forecasting capabilities and whe re the
application of the "just-in-time" supply chain concept is appropriate. It
may, however, adversely a ffect the industry supply chain because of its
15
dependence on customers, what can result in a lower or reduced level of
profitability.

In addition to these fundamental problems, producers and retailers o ften

have different intere sts what causes the problem of efficient control of
the value chain. This can best be seen in the example of the brand or
private label controlled by the retailer. In many areas the value chain
integration organization is developed. It can be greatly contributed with
the imple mentation of the concept of lean retail, as well as with the
concept of e fficient consumer re sponse. In the buyer-driven model (pull
not push) retail plays a central role.

5. Information and communication technology

Using new information and communication technologies do not

automatically lead to increased integration of network between retailers
and manufacturers. Internet market (business to business, B2B) may also
increase the nu mber of available sources of supply.

Research in practice identified multiple benefits from the use of RFID

technology for retailers. Illustration in Table 4 shows the bene fits of
applying RFID technology in apparel retailers.

Table 4. Reported RFID benefits to apparel retailers

RFID business benefit Reported benefit

Reduce inventory manage ment Reduce costs by 50-95%
labor
Improve inventory accuracy Reduce total inventory by 7-15%
Reduce sales floor staff Reduce sales floor sta ff by 15-
restocking effo rts (not assigned to 50%
serving customers)
Increased sales Increase sales by 4-15%
Improve service level from Reduice service time from
distribution center to store distribution center to store by 10-
25%
Reduce shrink (due to theft) Reduce shrink by 10-50%

Source: IDC Retail Insights, 2009

16
6. Lean consumption

The concept of lean manufacturing transformed production in terms of

its maximum efficiency. Now it is the time to apply lean thinking to the
consumption process, which is known as lean consumption.

Minimizing customers’ time and e ffort and arranging deliveries exactly

when and where they are wanted, allow companies signific ant benefits.
For these rea sons, in all companies, including retail, special attention is
paid to the efficient customers / consumers relationships manageme nt.
They are a special "capital” category for them.

7. Lean distribution: supply chain manage ment

Generally, the application of lean principles enables the company to

service the customer fa ster, using less spac e and inventory, lower
transaction costs and with greater accuracy. It, in fact, contributes to
improving the company' s key measures of efficiency, such as: the
percentage of execution of orders, shipping costs, transaction costs of
storage and inventory levels.

So, for example, by applying the lean thinking company IKEA has less
human e ffort, less capital investment, shorter time, several factorie s and
stocks are at an a cceptable (target) level. All this has positive e ffect on
its business performance.

It is estimated that by applying lean thinking business performance can

be improved by 30-50%. This is done by eliminating or minimizing
activities that add no value through the entire value stream. It is
believed that over 60% of the activities do not add value. Their
elimination is a signific ant resource for improving distribution
performance. Productivity collecting inventory increa se s by 45-50%.
The accuracy of inventories, with the elimination of unnecessary
movements is increased by 90% and deliveries to customers by 98%
(Coleman, 2006).

In general, lean thinking can be seen as maximizing the relative value of

the delivered (in accordance with the customer' s perception), with
reducing waste (and there fore operating costs). Similarly, the lean
distribution can be de fined as minimization of waste in the down stream
supply chain, so that the right product is available to the custome r at the
right time and right place (Reichhart, 2007). Figure 3 shows the lean
logistics in retailing.
17
 Information technologies
Suppliers Customers
and - Supply chain management and
shippers - Electronic data interface shippers
- Satellite monitoring and transport
management systems
- Warehouse management systems

Distribution technologies
- Conveyors/sortation systems
- Automated storage & retrival
- Cross-docking
- 3PL
- Pick and pack
- Voice-directed picking

Labour management practices

- Computerised performance
monitoring
- Wage incentive systems
- Multi-skilling and broad banding
- Teamwork
- Employee involvement

Figure 3. Lean logistics in retailing

Note: 3PL (Third Party Logistic); third parties.

Source: Wright (2006)

Lean supply means mapping (determining) the flow and eliminating all
types of losses in the supply chain. Research in practice determined that
the application of lean / just-in-time (JIT) practices significa ntly
contributes to reducing the execution time of received orders.

18
There are some differences betwe en lean and agile approaches. In some
cases the lean approach does not allow for e fficient management of
internal processe s or external relations. It is better in conditions of high
and predictable demand, with some supplies, so tha t functional products
can be created. In the case of low volume, high sensitivity of the supply
chain, unpredictable customer's requirements and difficult control of
suppliers' capacity and innovation, quick response or agile approach
based on product innovation is preferable (Cox, 2005). Table 5 shows
the profiles of lean and agile product (i.e. supply chain).

Table 5. Lean and agile product profiles

Distinguishing Lean supply Agile supply

attributes
Typical products Functional products Innovative products
Marketplace demand Predictable Volatile
Product variety Low High
Product life cycle Long Short
Customers drivers Cost Availability
Profit margin Low High
Dominant costs Physical costs Marketability costs
Stockout penalties Long-term Immediate and
contractual volatile
Purchasing policy Buy materials Assign capacity
Informa tion Highly desirable Obligatory
enrichment
Forecasting Algorithmic Consultative
mechanism

Source: Cox (2005)

Application of lean thinking impacts the achieve ment of cost savings

across the entire value chain. For example, research in the UK found
that all participants in the value chain of red meat industry generate 2-
3% cost reduction (Zokaei, 2006).

19
Conclusion

In the literature the term lean is defined as long-term philosophy of

growth with the generation of value for the customer, society and
econo my, which is achieved by reducing costs, improving delivery time
and quality through total elimination of waste. In recent times, lean
thinking is applied in all areas of business, including retail.

In the retail customers' demand is elastic. Retailers need to adapt

inventory move ments to customer demand. What may help is successful
implementation of the concept of lean retail. The concept of lean is a
combination of lower retail inventories and mo re frequent filling in the
shop. With lower inventories at the store, retailers will not have a large
a mount of unsold goods under the terms of a colla pse in demand. With
frequent filling, store manager does not have to periodically control the
"popular" items. Lean retail requires (1) bar codes, which allow retailers
to control the sale of each o f the ten thousand products in stock, (2)
electronic data interchange, a computer syste m network that allows
retailers to quickly and inexpensively communicate with suppliers, and
(3) modern distribution center which is a fa st channel of goods from
suppliers to sale s locations.

Basically, the concept of lean retailing is to give quick re sponse to

fluctuations in demand rather than holding large stocks. Lean retail
enables faster movement of goods from suppliers to sales locations. The
application of lean principles, RFID technology and inventory
management at the level of individual ite ms signific antly contributes to
creating value for custome rs and retailers. The esse nce o f applying five
principles of lea n retail are the following: 1) if customers expect that
products to be supplied are in trend, it is necessary to eliminate
obstacles such as extra grip and improve proce sses that result from poor
design diagrams. 2) the pursuit of value system, which consists of
identifying and mapping all the steps regarding the move ment of g oods
through the system all the way to the custome r; activities that do not
add value should be eliminated, 3) execution of the process flow, in
terms of process redesign that will ensure the free flo w of products to
customers, 4) the withdrawal from cu stomers means that lean
performance requires clea r understanding of de mand and current
inventory levels, and that the withdrawal of goods to the store and
shelves is ba sed on customers wants, and 5) p erfection, which is
reflected in the fact that the remaining waste need to be rooted out, and
20
then the sa me thing again. Ultimately, all this has a positive impact on
business performance of the shops and retailers in general.

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Stratton, R. and Warburton, R.D.H. (2003), "The strategic integration of
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23
Part 2. The influence of outsourcing of perfor mance in retail

Abstract

Modern strategic techniques are being increasingly applied in recent

years, both in production and retail, individually or concurrently. The
main goal of their application in the retail business is continuous
improvement, in particular, by reducing costs of competitiveness and
(business and financial) performanc e, while increasing customer
satisfaction and meeting the needs of customers / consume rs. One of the
most important strategic techniques being increasingly used not only in
manufacturing but also in modern retail is outsourcing, which, basically,
involves purchasing goods and / or services from independent external
suppliers. The research in contemporary practice of the retail business
has revealed that the application of outsourcing technique contributes to
stronger commitment of management towards the activities that a re the
core of competitiveness, reducing costs, improving competitiveness and
creating added value. All this has a long-term impact on improving
performance in the retail sector. Starting from the developed theory and
conducted practical research, this paper emphasiz es the importance and
specific problems o f application of outsourcing strategic technique in
the modern retail. Their knowledge is very importa nt for the effective
implementation of outsourcing as a function of imp roving overall
performance in retail. This is especially true for retailers in developing
and transition countries, as it is the case, for example, with Serb ia,
where the use o f outsourcing is at very low level compared to developed
countries. In the future, because of its economic importance,
outsourcing will be certainly more applied in the retail sector of
respective countries, with the e xpectation of the growing trend at
approximately the same level as it is in developed countries in Europe
and America.

Keywords:, cost reduction, information outsourcing, business process

outsourcing, logistics outsourcing.

JEL Classification: D40 L81 M41

24
Introduction

In the retail sec tor, under the c onditions of stro ng competition and
limited purchasing power of buyers / consumers opportunities to
increase profits through price control (i.e. increase) are limited.
Opportunities to increase profits by reducing the total costs (as the su m
of costs of goods sold and operating expenses), particularly operating
costs are significantly greater. In order to reduce costs in retail, modern
strategic cost management techniques are being simultaneously applied.
As part of that, the importance of outsourcing is increasing, and it is
reflected in more profitable choice o f purcha sing instead of own
production - procure ment of goods and services from independent
external suppliers. Outsourcing is, in its essence, a contractual
relationship between external supplier and company (as purchaser), by
which he takes responsibility for the efficient execution of one or more
of its business functions. It is considered, both in theory and in practice,
that outsourcing is a significant potential source of revenue for retailers
who apply this strategic technique in different busin ess areas, in fina nce
and administration, human resources management, in procurement and
information tech nology. The effects result in significant reduction of
total costs (according to resea rch in practice up to 30%) and,
consequently, increased profits in retail (according to Retail: Outsource
' til You Drop, Outsourcing Yearbook 2011).

Online retail market is becoming significant lately. Retailers receive

outsourcing services to a great extent, such as infrastructure support,
location area and data center. The growth rate of the re spective services
in 2010 was 20%. In the past financial year, online sale s of food retailer
Tesco was 49%, and in order to improve sale s, supply chain and
efficiency throughout the company, it invested significantly in
improving the information technology of large supermarkets operating in
the UK. On the grounds of it, and the others, profits increased by 11% to
the amount of ǧ 2.8 billion (according to Retail: Outsource 'til You
Drop, Outsourcing Yearbook 2011).

There are differe nt types of outsourcing services such as information

outsourcing, business process outsourcing, logistics outsourcing, human
resource management outsourcing, marketing outsourcing, accounting
and financial outsourcing. All of them, and in combination with e ach
other, are used in the modern retail sector to reduce operational costs
and increase profits.

25
Two typical types o f outsourcing services are: technology and business
process. Technology outsourcing service includes electronic commerce
(e-comme rce), infrastructure (network), software (applications),
telecommunications, Web site development and their maintenance.
Business process outsourcing service s include buyer's contact
information (customer relationship manage ment), equipment, fina nce
and accounting, human resources, logistics, supply chain manageme nt,
procurement and security.

In this paper we will in particular re fe r to those types of outsourcing

which are mostly used in modern retail. We will envisage that trend, the
specific s and problems of application, as well as their impact on
performance in retail.

The research is carried out on primary and secondary empirical data

regarding the trend of application of outsourcing in the modern retail
sector, particularly in countries with developed market economy.
Considering the economic importance, knowledge of the e ffects of
application of outsourcing in countries with developed retail economy
should serve primarily a s a theoretical and practical basis for
encouraging the increase of the e ffective implementation of this
strategic technique in retail of developing and countries in transition, as
it is the case with Serbia and other neighboring countries, on the way to
market economy.

The effects and problems of implementation of outsourcing strategic

technique in modern retail are being more explored lately in theory and
practice (Berke, 2010; Niranjan, 2011). In light of this, the literature is
particularly focused on information outsourcing (Gwebu et al., 2010;
Ohne mus, 2010), business process outsourcing and logistics outsourcing
(Depen, 2008; Rajesh, 2011; Bourlakis, 2011). Because of its
considerable importance, dissertations are being produced and research
based on the retail of specific c ountries (e.g. China), certain product
categories (fo r example, textile) or companies (for example, Zara). Also,
there are specia l agencies that research effects of application of
outsourcing in retail, with particular reference to the special issues
(such as, for example, food).

1. Definition, types and importance of outsourcing in the retail

As it is known, the outsourcing is one of the very important strategic

techniques in modern co mpanie s, including retail. It belongs to the top
26
10 most co mmonly used techniques of strategic manage ment (Bain
survey: Rigby, D. and Bilodeau, B., Management T ools & Trends 2011,
Bain & Company).

The term outsourcing is not new - it has a long history. In 19th century
Britain imported cotton from the United States, spun cotton is weaved in
fa ctories in England, and the finished product is then exported abroad,
mainly in India as its colony (Niranjan, 2011). The concept of
outsourcing became especially popular in 1962 when Ross Perot formed
a company c alled Electronic Data System (EDS). Today EDS is multi-
billion dollar company, with over 70,000 employees and it is one of the
major global BOP (business process outsourcing) firms (Agarwal, 2007).

In all co mpanies, including retail, outsourcing is viewed as a very

important strate gic instrument to help achieve higher profits and
improved market competitiveness. By its nature, outsourcing is a
contractual relationship that depends on the implementation of the
supplier's terms of satisfying the customer' s defined goals of
performance (Bourlakis, 2011). Outsourcing is, in fact, primarily a
business pra ctice in a number of organizational functions, such as
accounting (record-keeping and processing of wages), management of
computer and information system, human resource management, plant
maintenance, logistics and supply chain manage ment, production and
marketing. Outsourcing is known by diffe rent names, such as produce or
buy, vertical integration or disintegration (contraction), in-house sales
force or sale s force a ffiliate with third parties (Varadarajan, 2009).
Outsourcing is specifically developed for oversea s subsidiaries,
suppliers, customers, competitors and strategic alliance partners
(Varadarajan, 2009). This increases the impact of outsourcing to create
added value in all companies, including retail.

There are differe nt categories of outsourcing. Typical are, based on how

the client operates or uses suppliers, the following: general outsourcing,
selective outsourcing (one are a, such as data center operations),
outsourcing of added value (includes only those activities that add
value), cooperative outsourcing (organizing information systems
activities with third parties), transition outsourcing (technology
transfer), business proce ss outsourcing (customer relationship
management, etc.) and useful business contractin g (Agarwal, 2007).
According to geographical criteria we distinguish dome stic and
international (offshore) outsourcing. In the world today, the growing
importance of international outsourcing is increasingly evident.

27
Today, outsourcing is, generally speaking, very important strategic
management tec hnique. There are clear indications based on the
available e mpirical data, especially for developed countries. The global
trend of outsourcing is a s follows: in 2009 growth rate was 4%; average
annual growth rate since 2005 is 9.7% and the market value of over $
580 billion. Market share of individual categories is the following:
information technology outsourcing (Information Technology
Outsourcing - ITO) 50%, the business proce ss outsourcing (Business
Process Outsourcing - BPO) 43% and electronic data processing
(electronic data processing - EDP) 7% (Quoted from: www.zylun.com /
outsourcing-global statistics).

Modern outsourcing industry is characterized by high growth rate of

return. For example, according to research by Datamonitor market
growth rate of outsourcing services is 5.4% in 2010, and 7.2% in 2011,
with expected revenues of $ 660 billion at end of 2011. The expected
market value in 2014 is about $ 875 billion, with 10% growth (Quoted
in: www.zylun.com / outsourcing-global statistics).

Today, the ma rke t value of information technology outsourcing services

in the U.S. is approximately $ 77 billion. In the world it is almost $ 500
billion. According to Gartner research about 65% of all observed
companies have formalized approach to the selec tion of outsourcing
supplier for nearly every business process (Tarikere , 2011).

It is well-known fa ct that IT outsourcing is very important tool of cost

efficiency control in all co mpanies, including retail. According to the
Economist Intelligence Unit, 34% of companies used full or partial IT
outsourcing in 1997, with the expectation of an increase to 58% in 2010
(Berke, 2010).

In reference to IT outsourcing the key question is: Does IT outsourcing

contributes to cre ating added economic value of companies? Benefits of
IT outsourcing are greater on the higher than on the lower (enterprise)
level. By using the performance me asures of Po rter's value chain model
research in practice found that the companies predominantly realized the
econo mic cost saving benefits when using IT outsourcing, but
significantly sma ller compa red to the efficiency itself. For examp le,
research has found that savings in labor costs (based on wages of young
engineers) in o ff shoring locations - compa red to developed countries
(expressed as U. S. = 100) - a mount in individual countries: Germany
158, Japan 116, UK 111, U.S. 100, Russia 46, Czech Republic 41,
28
Hungary 37, Poland 36, Brazil 28, Malaysia 20, China 19 and India 12
(The Financial Director Poland Guide To: Outsourcing in Poland, Spring
2006). Cost efficiency improving is evident in input logistics and
supporting activities. With the exception of input logistics, significant
improvements in efficiency of op erations and output logistics are not
observed, what leads us to the conclusion that a positive impact of IT
outsourcing performance of companies, including retail, is limited
(Gwebu et al., 2010).

The use of IT outsourcing services in the trade in Serbia is at a

relatively low level compared to other developed countries, including
countries in the region. We will illustrate this on the example of
enterprise resource planning (ERP) syste m u se and, especially, customer
relationship management (CRM), which is one of the main indicators of
use of ICT in enterprises in the European Union, as shown in Table 1.

Table 1. Use of IT outsourcing services in trade in Serbia, 2010

Company Enterprise Customer relationship

recourse management - CRM
planning
(ERP) (In percent)
syste m Entering, Analyzing
storing and information
(In making about clients for
percent) information marketing
about clients purposes
available to (pricing, sales
other business pro motion,
service s selection of
distribution
channels, etc.).
Banks an d 27.3 58.4 43.7
insurance
companies
Manufacturing 15.4 12.3 12.9
Transport, storage 14.7 9.7 8.3
and
communication
Activities relate d 13.4 8.3 7.7
to real estate,
29
renting and
business activities
Cinematographic 7.7 5.5 7.2
and video
activities, radio
and TV activities
Wholesale an d 7.3 3.4 5.9
retail
Hotels, camp sites 5.9 3.3 5.2
and other
accommodation
for short stay
Construction 2.5 0.8 1.8
In total 11.5 7.1 6.9

Source: The use of ICT in Serbia 2010, Statistical Office of Serbia.

Based on the data presented in the Table 1 it can be generally concluded

that the use o f IT outsourcing services in trade in Serbia (customer
relationship management - the first column of 3.4%) is low compared to
the average of the whole country (7.1%), banks and insurance companies
(58.4%), manufa cturing (12.3%) and, in particular, countries with
developed economies, the European Union and others (for co mparison,
in Poland it is 16%). However, because of its profound importa nce
outsourcing services in the trade in Serbia will be increasingly used in
the future. This will have a positive impact on its overall business
performance.

In the long term, IT outsourcing has positive e ffect on the overall

performance of companies, including retail. For these rea sons, today
they appropriate a significant part of revenues for the development and
application of modern information and communica tion technology. For
example, the top 25 companies in the world invest 0.8% of their
revenues in IT compared to the global average of 3.7% (Malhotra,
2005).

Throughout the world, in all businesse s, including retail, logistics

outsourcing is being increasingly used and it's very strong upward trend
since 1990. According to one study, the total logistics expenditure in
We stern Europe and the U.S., 64% and 48%, respectively, is related to
logistics outsourcing service. It is estimated that the growth rate of this
30
service in the near future (2009-2011) will amount to 17%, in Western
Europe as well as in the U.S. Growth rate of the logistics outsourcing
service s in the United States increa sed approximately, as seen on the
example of a Fortune 500 company, with 40% (1990) to 80% in 2004.
According to e stimate s, the global logistics outsourcing service is 40%,
with the expectation of growth tendencies in the future. It contributes to
increased cost e fficiency more than to overall performance of the
company (De epen et al., 2008).

By its nature, the logistics business is re sponsible for the efficient and
effective handling of firm' s goods in accordance with the defined
objective of minimizing costs, improving custo mer service and creating
competitive advantage (Bourlakis, 2011). Logistics outsourcing process,
in the literature also known as contract logistics and third party logistics
(3PL), has considerable relevance. Third party logistics are defined as
external companies that perform logistics functions, instead of
traditional within the organization. Functions that are performed by
third party logistics may include the entire logistics process or selection
of activities within it.

Logistics outsourcing (3PL) has, however, its advantages and

disadvantages. They are detailed in Table 2.

Table 2. Advantages and disadvantages of (logistics) outsourcing

Advantages Disadvantages
Reduction in capital Loss of control
investment in facilities,
information technology
and manpower
Firm beco mes more Lack of appropriate informa tion
flexible to adapt to technology syste ms linking the
changes and respond various fir ms in the chain
quicker to demands
3PL firms convert a fixed Failure to select or manage 3PL firms
cost to a variable costs appropriately
Inventory turnover ratio Unreliable promise given by 3PL
is improved fir ms, inability to respond to
changing requirements and lack of
understanding of user' s business
goals

31
It could be more cost- Apprehension in user's e mploy ees
efficient co mpared with about job security
in-house operations
Improving customer Difficulty in assessing any benefits
service and satisfaction and cost savings gained through
outsourcing
Acquiring outside
expertise

Source: Bourlakis (2011)

Third party logistics contribute to improving custome r satisfaction and

access to international distribution network. It allows the reduction of
costs (investment in assets - tra nsforming fixed costs into variable,
operation and maintenance of equipment), inventory levels, order cycle,
time of execution, and improving client service. Their efficiency
contributes to the achievement of client's strategic performance goals
(Rajesh, 2011). Traditionally, third party logistics included only
transportation and storage. Today, they offer service, considerably
extended and this ha s a positive impact both on their and the client's
overall performance.

2. Performance fe atures o f outsourcing in retail

It is characteristic for the outsourcing industry, concidering the positive

characteristics, that it is expanding. On this basis, national economies
generate significant revenues. According to the rese arch in literature, in
principle, the motivation for the information technology outsourcing
service s are: reduction of costs (information system), focu sing on the
core capabilities, access to experts, improve business / process
performance, technical reasons, political reasons, a catalyst for change,
commercial exploitation (existing or new client), economies of sca le,
access to global markets, the harmonization of information systems and
business strategy, foreca sting costs, reduce staff, ne eds to generate c ash
(sale o f information technology property to vendors), quick delivery,
and innovation (Ohne mus, 2010) .

Lately, outsourcing is more and more used as a tool of improving

business efficiency, even though it is incomparably less than in
manufacturing and retail sector. For example, according to research in
Germany (for the period 2003 to 2006) share of wholesale trade was
32
49.21% and retail trade was 48.39% in the information technology
outsourcing (Ohnemus, 2010).

There are many reasons, as noted above, for the use of outsourcing in
the retail trade (Figure 1).

INDIVIDUAL - Increased knowledge and expertise

- Alternative staff increase for short term projects

ECONOMIC - Cost savings

- Increased return on equity

CONTROL - Share the risk

- Elimination/reduction of the weakness of the MIS
department

DATA/SEGMENT - Outsource the non-strategic

- Focus attention on the strategic

ORGANIZATIONAL - Outsource the weakness of the MIS department

- Applicable to the procedurally oriented organizations

Figure 1. Advantages of outsourcing

Source: Berke (2010)

These are, above all, cost reduction, improving governance and

competitiveness, participation in risk and focusing on core issues in
contemporary complex retail business. All this has a positive impac t on
the improvement of overall performance in retail. Table 3 shows main
e mpirical grounds (in percent) for the use of outsourcing, obtained in a
survey.

33
Table 3. Main empirical reasons to use outsourcing

Reduce costs 49%

Improve focus 17%
Variable cost structure 12%
Access to skill 9%
Growth revenue 4%
Improving quality 3%
Conserve capital 3%
Innovation 3%

Source: The 2004 Outsourcing World Summit. (According to: Berke,

2010)

Similar re sults were obtained with other e mpirical research. For

example, according to the Outsourcing Journal, grounds for the use of
outsourcing are: cost reduction 36%, improving the re sults o f core
business 39%, improving the current level of services 9%, lack of
appropriate (internal) staff 7%, implementation of large-scale initiatives
5% and avoidance of unnecessa ry investments 4% (Berke, 2010).
Therefore, the primary reasons for the use of outsourcing are: reduction
of costs, improve ment and better acce ss to new technology and
reduction of capital investments, all of which have a positive impact on
overall performance.

In addition to its advantages, outsourcing has so me flaws (Figure 2).

These are: loss of control, slow response time and language barriers.

34
 INDIVIDUAL - Loss of in-house expertise
- Severance or transfer costs of existing IS staff

ECONOMIC - Higher than expected outsourcing bills

- Increase tax liability
- Decreased profit margin
- Hidden costs

CONTROL - Loss of control over:

- Quality of IS services
- Disaster recovery
- Confidentiality

DATA/SEGMENT - Determination of strategic non-strategic

- Confidentiality/security

ORGANIZATIONAL - Loss of control in vertically integrated organizations

- Outsourcing requirements in dynamic organizations may
be difficult to contract
- The extent of end user computing and the ability to keep
the users happy

Figure 2. The weaknesses of outsourcing

Source: Berke (2010)

Regardless of certain weakne sses outsourcing is being more pronounced

in the retail. The main problem of most retailers are (high) costs.
Working towards its partial solution (i.e. cost reduction) retailers c ame
to conclusion that it is far cheaper to use certain services, for examp le,
in India than from own country. The reasons are: cheap labor, English
speaking country and quick adaptation to western accent, expanding
education system (Berke, 2010). Apart from India, the growing
importance of Eastern Europe, China and the Philippines in the
provision of outsourcing services is recognized.

In addition, retail companies continuously seek to reduce selling,

general and administrative expenses (SG & A) by outsourcing. In order
to achieve this goal, they extensively use radio frequency identifica tion
(RFID) since 2004. It is considered that the main reason for the use of
outsourcing services is to reduce costs and, thereby, increase profits.
35
For exa mple, according to one study, outsourcing allows the retailer to
achieve: $ 56.5 million of free working capital, $ 106 million cost
savings over four years, 25% reduction in inventory, 3% reduction in
cost of sold goods (COGS) and improve inventory accuracy (according
to Kathleen Goolsby, Senior Write r, January 1, 2006, Recent Trends in
Retail Outsourcing, Article, Internet Source).

In the retail sector of developed countries (United Kingdom, United

States, and other developed countries in Europe) fro m year to year the
number of concluded outsourcing contracts is increasing. What is
particularly the case is that the structure o f ou tsourcing service s is
changing and within it the share of the business process outsourcing
(BPO) is increasing. Large retailers (such as Tesco, Target, Supervalu,
Walmart) increasingly use "mixed portfolio" operating model - ITO /
BPO, in order to improve competitiveness through adequate cost control
and efficiency of business facilities. Portfolio of integrated se rvices
(outsourcing and sourcing - extern al and internal) has positive e ffect on
performance in terms of growing complex - multi-channel retail
environment.

Because of its importance outsourcing has become the industry itself. To

minimize the risk of outsourcing retailers should align their strate gies
together with third parties - producers o f services, so as to "transform",
as much as possible, the negative effects into positive ones, in order to
improve overall business performance. Outsourcing not only provides
cost reduction by using cheap labor, but also by improving the
efficiency and creativity of the internal staff.

There is a relationship between the width of outsourcing and

performance. This is graphically shown in Figure 3.

36
 INPUT and OUTPUT
Sales Sales and
prospect sales growth
Marketing Logistics Customer
conversion
support ratio

EXTENT OF OUSOURCING PERFORMANCE

Other functions Cutomer Repurchase Customer

satisfaction intention retention

Figure 3.The relationship between the width of outsourcing and

performance

Source:Tarikere(2011)

Special research was conducted on the effect of outsourcing on the

performance of online retailers (on a sa mple o f 260) in the United
States. They are shown in Table 4.

Table 4.The influence of outsourcing on the performance o f online

retailers in the United States

Conversion Sales Custo mer Repurchase Customer

growth intention retention
rate satisfaction
Low 137.86 139.14 133.15 133.37 119.16
outsourcers
(Score
range- 0 to
4)
Moderate 119.59 113.14 108,923 104.57 103.64
outsourcers
(Score
range - 5
to 10)

37
High 138.81 144.72 133.29 134.74 146
outsourcers
(Score
range - 11
to 16)

Note: The data from 260 online retailers helped divide the companies
into three categories. In this statistical analysis, the lower the number,
the better the performance.

Source: Tarikere (2011)

As seen from the data presented in a given table, the best performance is
in the mid-level outsourcing. This in itself suggests that every retailer
should look at the optimal ratio between the width of outsourcing and
internal operations. The net effect is imp roving the business and
financial performance.

3. Outsourcing in the company Zara

Outsourcing is present in the industry (manufacturing) and retail

clothing. This is due to a variety of bene fits, including market
expanding, profit-making, increasing global presence, costs reduction
and corporate flexibility. In company Zara (which has been operating
since 1975, with headquarters in Spain) outsourcing is fully deployed.
Outsourcing is a critical factor in the succe ss of the company Zara. It is
used for efficient supply-chain management, logistics, as well as to meet
demand, customer and supplier efficiency. Outsourcing is an important
tool to create additional value in Zara.

The research conducted on the example of the company Zara repo rted
the merits and deme rits o f using outsourcing services. They are detailed
in Table 5.

Table 5. Strengths and weaknesse s of outsourcing in the company Zara

Advantages Disadvantages
Focusing on the co mpany's No knowledge of its own retail
core competitiveness
Better return on investment For the purposes of developing
qualitative relationships more
time on communication is needed
38
Better cost control It is not ea sy to communicate
with the special partners
More focus on R & D High costs of integrating data
(research and development)
Improve performance by Product knowledge will be
timely presence on the market disclosed by the suppliers
No need for investment on It is not easy to build trust with
purchasing new ma chines for suppliers
making new products
Reducing the total cost
Improved product quality and
reliability
Flexible retail service
Less risk of releasing new
products on the market
Improving custome r service
(quick respond for sampling
and mass production)
Less investment and faster
execution of orders P

Source: A Dissertation Paper on Outsourcing in Retail Clothes Zara:

Profit maximization or fair trade? January29, 2011. (Internet source)

The co mpany Zara developed alternative mea sures of outsourcing

efficiency. These are the followin g: 1. Planned process of production
efficiency and corresponding inventory control process, 2. Providing
efficient process of distribution and underlying logistics processe s, 3.
The ability to measure the performance of supply chain activities for
maintenance and the sustainability of supply chain processes within the
organization, 4. Conducting evaluation of supply chain based on the
buyer's response, 5. Ensuring customer/client/supplier satisfaction for
each supply chain process involved in the company, 6. Having a
continuous coordination among important suppliers, 7. The enterprise
network infrastructure must simultaneously operate efficiently,
depending upon the use of timely information through the supply chain,
and 8. The organization must capitalize the customer' s active
participation in organizational activities so as to gain competitive
advantage through greater sale s volume, improve operational efficiency,
receive positive publicity by "word of mouth", reduce marketing c osts
39
and increase custo mer loyalty (A Dissertation Paper on Retail Zara
Clothes in Outsourcing: Profit maximization or fair trade? , January 29,
2011). (Internet source)

Conclusion

Lately, the importance of outsourcing industry is increasing worldwide.

This particularly applies to two categories o f outsourcing: information
technology outsourcing and the business proce ss outsourcing. "Offshore
outsourcing", which makes significant profit possible for multinational
companies by using cheap labor and other reso urces in developing
countries and countries in transition to a market economy, also has
particular importance.

Based on the re sults of e mpirical research it is founded that there are

small positive diffe rence s in performanc e (mea sured by ROA, ROE, ROI
and net profit margin) between the companies that use infor ma tion
technology outsourcing of servic es and non-outsourcing companies.
Significant positive cost effect is realized and it is expressed as a ratio
of selling, general and administrative expenses and net sales, and
operating expenses and net sales. In the long-term, information
technology outsourcing has a positive effect on the overall performa nce
of all firms, including retail (Yu Ping (2010).

Considering this, the retail uses outsourcing concurrently with other

strategic modern techniques. This provides a positive synergy impact,
especially on the cost-effectiveness (i.e. cost reduction), thus improving
the overall performance of retail. Large retailers such as Tesco, Zara,
Walmart and others generate significant profit by coordinating parallel
implementation of all strategic conte mporary techniques, including
outsourcing. Use of information and communication technologies,
including radio frequency identification (RFID) significantly contributes
to the reduction of total costs (cost of goods and operations), which has
a positive impact on profits.

Following the example of global retailers, retailers in developing and

countries in transition (as is the case with Serbia, for exa mple) should
use outsourcing more in the future. Along with the use of other modern
strategic techniques outsourcing will have positive impact on overall
performance (i.e. it will contribute to the transformation of current
negative to positive performanc e) and accordingly - the perception of
40
ratings in the country and abroad. Well, it will reflect the character "of
the global retailer."

Reference

A Dissertation Paper on Outsourcing in Retail Clothes Zara: Profit

maximization or fair trade? January29, 2011. (Internet source)

Agarwal, S. (Septe mbe r 2007), Outsourcing in the Retail Industry: From

Europe to India and China; A dissertation presented in part
consideration of the degree of Management MA. (Internet source)

Aligning growth with talent - Insights from KPMG's 2010 China

Outsourcing Summit.

Berke, F.M. (Decemb er12, 2010), Outsourcing in the Retail Industry,

The university of Arizona.

Berman, B. and Evans, B. (2010), Retail Manage ment, Prentice Hall,

Boston.

Bourlakis, M. and Melewar, T.C. (2011), Marketing Perspe ctives of

Logistics Service providers, Europe Journal of Marketing, Vol. 45, No.
3, pp. 300-310.

Central and Eastern Europe IT Outsourcing Review 2010, Project of

Central and Eastern European Outsourcing Association.

Depen, J.M. et al. (2008), "Beyond Expectations: An Exa mination of

Logistics Outsourcing Goal Achievement and Goal Exceedance", Journal
of Business Logistics, Vol 29, No. 2, pp. 75-1005.

Gluckman, H. (November 2006), Retail Industry: What's in Store for

Outsourcing? A Trend Comparison of the recent 2006 and a Look
Beyond Knowledge powering results, Technology Partners International,
Inc.

Gwebu, K.L. et al. (2010), "Does IT outsourcing deliver economic value

to firms?", Journal of Strategic Information Systems , 19, pp. 109-123.

Horngren, C.T. et al. (2003), Cost Accounting, Prentice Hall, Perason

Education, Inc.., Sadle Upper River, New Jersey.

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Kosowska, E. (2008), IT outsourcing market in Poland, PMR
Publications (www.intandtelecompland.com).

Levy, M. and Weitz, B.A. (2007), Retailing Management, McGraw-Hill,

Irwin, Boston.

Lovreta, S. et al. (2010), Menadžment odnosa sa kupcima, Datasatus,

Beograd (Manage ment relationships with customers, Datastatus, Faculty
of Economics, Belgrade).

Lukic, R. (2011a), Raþunovodstvo trgovinskih preduzeüa, Ekonomski

fakultet, Beograd (Accounting for trading companies, Faculty of
Economic s, Belgrade).

Lukic, R. et al. (2011b), "Asse sment of productivity in retail food

trade", Technics Technologies Education Management, Volume 6,
Numb er 2, pp. 503-515.

Lukic, R. (2011c), "The Effect of Private Brands on Business

Performance in Retail", Economia. Seria Manage ment, Volume 14, Issue
1, pp. 25-39.

Lukic, R. (2011d), "Estimates o f economic performance of organic food

retail trade", Economic research, Vol.24, No. 3, pp. 157-169.

Malhotra, Y. (2005), "Integating knowledge management technologies in

organizational business processes: getting real time enterprise s to
deliver real business performance", Journal of Knowledge Management,
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Niranjan, T.T. and Rao, S.S. (May/June 2011), "A Toolkit for Balanced
outsourcing", Industrial Manage ment, pp. 19-24.

Ohne mus, J. (Nove mber9, 2010), IT Outsourcing and Employment

Growth at the Firm Level, Centre for European Economic Research
(ZEW), Mannheim.

Rajesh, R. et al. (2011), "Influence of 3PL se rvice offerings on client

performance in India", Transportation Research Part E, 47, pp.149-165.

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Rigby, D. and Bilodeau, B. (2011), Management Tools & Trends, Bain &
Company.

Stolz, T. et al. (2011), ICT in Serbia, At a Glance, Deutsche

Gesellschaft für Internationele Zusamenarbeit (GIZ), Progra m for
Private Sector Development in Serbia and Vojvodina ACCESS ICT
Cluster.

The Financial Director Polska Guide To(2006): Outsourcing in Poland,

Spring.

Tsai, M.C. et al. (2008), "Risk perception on logistics outsourcing of

retail chains: model development and empirical verification in Taiwan,"
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Varadarajan, R. (2009), "Outsourcing: Think more e xpansively," Journal

of Business Rese arch, 62, pp. 1165-1172.

Yu Ping, (2010), Can IT Outsourcing Enhance Firm Performance of

Banks: an E mpirical Study of IT Outsourcing Impact on Ba nks'
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International Business, (Thesis Advisor: Steen Nielsen), Department of
School Business, Aarhus School of Business, Aarhus University.

43
Part 3. The effe cts of application kaizen concept in food retail

Abstract

All retail sectors, including food sector, apply numerous strategies and
techniques of modern business as a function of improving ma rket,
business, financial and sustainability performance. One of the m is the
application of the concept of kaizen - the Japanese business
philosophy. The essence of the concept of kaizen is small, but
syste matic "continuous improve ment" of process in order to increase
productivity, improve quality of products / servic es, reduce re spo nse
time (customer service), reduce costs (goods and business), eliminate
waste and maximize value creation (through the retail chain), especia lly
for customers. Conducted research on the application of kaizen concept
in food retail, particularly in the West, showed significant improvements
in productivity, food sa fety, relationships with cu stomers, reduction of
cost and wa ste, all of which has a positive impact on the achievement of
better market, business, financial and sustainability performa nce.
Concerning those positive experiences, all retail food chains, especially
in developing and transition countries should also apply the concept of
kaizen in order to achieve target profit perfo rmance, with maximum
satisfaction of customers needs. In addition to highlighting the
importance of empirical significance, this paper points out the specific
supportive concepts, innovative methods of conducting business - kaizen
methodology in food retail.

Keywords: continuous improvement, kaizen lean strategy, innovation,

reduction of costs and waste, kaizen costing and budget.

JEL classification: D40 L81 M41

44
Introduction

"Kaizen" is a special kind of management that allows the improvement

of the business at all levels of organization, manage ment that is aimed
at "continuous progress" and it is widely used by many Japanese
companies and factories. Due to the outstanding results achieved in
Japan it is also applied in the U.S. and Western Eu ropean companies. It
was created about 15 years ago as a result of a study which needed the
answer to the question: Why is the Japanese automotive industry so far
ahead of Ame rican and European competition?

Kaizen concept is, therefore, a Ja panese business philosophy applicable

to all economic sectors, including retail. The word "kaizen" comes from
the Japanese words "kai" which means "change" or "to correct" and the
word "zen" which means "good". Kaizen is basically a little "continuous
improvement". Theoretical basis of this concept is set out in Imai
Massaki book Kaizen: The Key to Japan s's competitive success. Kaizen
concept is picturesquely presented as an u mbrella with a large number of
Japanese method s o f practice: a buyer's orientation, total quality
control, robotics, quality cycle, suggestive syste m, automation, work
discipline, total productive maintenance, kanban, quality improveme nt,
zero defects, small group activities, cooperative labor-manageme nt,
productivity improvement and new product development. Significant
kaizen toolkit components are: 5S, suggestive sy stem, quality control
cycle, Total Quality Management, Toyota' s production system, just-in-
time system, kanban syste m. Among the m a tool 5S is seen as very
important for the improve ment of quality and productivity. It is derived
from a Japanese words Seiri (sort), Seiton (queue), Seiso (shine),
Seiketsu (systematized), and Shitsuke (standardized / self-
discipline). Food store space planning contributes to continuous
improvement. So, for exa mple, the application of new technologies
enabled Marks & Spencer to significantly improve the layout in its
Simply Food facilities, and to do it in almost identical manner. Retailer
reduced the number of products distribution on different shelves in
different parts of the store, which was one of the main objections of the
customers at that time (Source: Planet Retail). In addition, proper
accommodation of goods in food stores provides a better flow of
customers, visibility of employees and reduces the theft.

For all the retailers that apply the concept of kaizen, special
significance has just-in-time operations syste m tool, as well as
supporting concepts of continuous improve ment: collaborative planning,
45
forecasting and inventory replacement, quick response delivery system,
electronic data interchange, coding, electronic commerce, multi -
channel retail, private label development, and customer (and suppliers)
relationship mana gement (Levy, 2007; Lukic, 2011).

There are signific ant diffe rence s between Japanese and Weste rn
approaches to continuous improve ment, i.e. kaizen and innovation.
Kaizen continuous improve ment is oriented on people and existing
technology (without significant investment). As a way of continuous
improvement innovation (product or process) is based on significant
investments in new technology. Kaizen is a gradual long-term
continuous improvement. Innovation is a significant short-te rm
continuous improve ment. In retail sale s a number of innovative business
models are implemented (regardless of the type of business - food or
non-food goods) in order to achieve a target profit with maximizing
customer satisfaction (Sorescu et al., 2011).

Kaizen activities depend on problem that should be solved (e.g. space

planning in food store) according to the principle: proble m
identification, analysis of problem and finding the cause of the problem
(Štefaniü et al., 2012). Vital means of supporting its successful solution
is a cycle: Plan - Do - Check - Act, namely: 1. Plan: Defining expected
results and actions; 2. Do: Process execution in accordance with the
plan, 3. Check: The results obtained are compared with the expected,
and 4. Action: What actions should be standardized, or new cycle should
be started (Štefaniü et al., 2012).

Starting fro m the general theoretical ideas about the concept of kaizen,
this paper mainly analyzes the problems and effects of applying kaizen
in the food retail. These findings should serve as a message to apply the
concept of kaizen in all retail food chains, espe cially in developing
countries and transition economies, such as Serbia and its neighboring
countries.

46
1.Proble ms, aims and methods of analysis of the effects o f Kaizen
concept application in food retail.

Starting from the general theoretical and practica l features of Kaizen

methodology central problem of resea rch in this work are the specifics
and effects of its application in food retail se ctor. The problems and the
effects of Kaizen concept are very different because of the nature of the
business in c omparison to other retail sectors, such as
furniture. (Furniture retailer IKE A is known for Kaizen methodology
application in their operations. By redesigning packaging and customer
service proce sses it achieves significant cost efficiency as a factor in
overall performance.)

The aim of the present study is to thoroughly analyses (ba sed on

theoretical and practical analysis of kaizen methods feature s, primarily
through literature) the specific processing problems and the effects of
its application in food retail. Such research should serve as a basis for
further study of the complexity of the application and analysis of the
effects of kaizen concept in food retail (primarily in developing
countries and transition economies, such as Serbia and the countries in
its neighborhood). In order to achieve the research aims and
objectives care ful analysis of the p roble ms was conducted in this paper,
altogether with appropriate research methods that are applied, such as
literature survey, comparative analysis of various aspects of research
and typical cases from concrete practices in food retail (i.e. known food
retailers after applying kaizen methodology in its operations).

In retail sales today there are numerous strategies and techniques for
improving the business market, business and financial performance
(Berman, 2010; Lukic, 2012 a, b and c). This includes the application of
the concept of kaizen - the Japanese business philosophy, small
syste matic continuous improvement of process in order to increase
productivity, improve quality, shorten time, reduce costs, eliminate
waste and maximize value creation, particularly for custo mers. Specific
proble ms o f application of kaizen concept in food retail were caused by
the very nature o f the businesses. In addition to the practical analysis of
the results they are also the subject of thorough analysis in this paper.

47
2. The diffe rences between retail kaizen and lean methodology

Ʉaizen, the Japanese philosophy of "continuous improvement", includes

all e mployees in continuous imp rovement process of retail chains. Food
retail also applies the concept of lean. Kaizen is not equivalent to the
lean concept. There are significant differences bbetween them.

As a concept, lean is the concept with eliminating wa ste throughout the

retail value chain (food) (Evans, 2005; Cox, 2005, Coleman, 2006;
Christopherson, 2007; Reichhart, 2007). Dissipation is defined a s an
activity or process that does not add value for the custo mer. In all
sectors o f retail, i.e. food sector - in accordance with lean principles -
customer value is de fined as collection of elements of the product or
service s that we believe customer needs and should pay, regardless of
the added value. Created value for the customer should, consequently,
be at a level at which waste is minimized. The application of lean
concepts in retail (food and non-food goods) requires significa nt
investments in modern technology, but regardless of this, many global
retailers such a s Wal-Mart, Macy's, Bloomingdale's, The Gap and J. C.
Penny, concerning the overall effects of their operations, apply lean
principles. The company Zara is also known by the application of the
lean principles in their operations.

These principles are increasingly e mployed by large retailers in India,

such as the Future Group (Saxena, 2011). It is quite understandable
when we consider the fact that lean principles improve employee
satisfaction thus having positive impa ct on increasing sales and
profitability. The application of lean concepts reduces wasteful
activities throughout the supply chain (all kinds of goods, including
food). The benefits of lean supply chain are increased inventory
turnover and accelerated collection of receivable s from customers (less
time, expre ssed in days). Application of lean prin ciples revealed that
some retailers in the West realize cost reductions of 10-20% in the
store, inventory costs 10-30% and 20-75% of the costs associated with a
lack of supplies (Saxena, 2011). In principle, lean process is focused on
generating more value for the custo mer.

In contrast to the concept of lean, kaizen methodology is small

continuous improvement. Signific ant improvements e ffects are visible
on the global level. Kaizen can not itself lead to the elimination of
waste of effort, time, materials, and increase of motivation, but its
numerous innovations lead to "doing things faster, better, cheaper and
48
easier." It is very important to include as many employee s at lower
organizational levels (in the shop) when applying the concept of kaizen
concept in food retail. This requires investment in training and talent
developing, what is in accordance with the principles of lean. Kaizen is,
in its essenc e, the part of the concept of lean (Ortiz, 2010). The lean
concept is the vision and the kaizen is reality.

The success o f lean kaizen strategy is reflected in improvement of

managing all activities, i.e. achieving organizational goals (increa sed
customer satisfac tion, increased productivity, effic ient manage ment of
working capital and capital e xpenditures), long-term increase of
competitiveness and promotion of business culture. Altogether, this
leads to significa nt growth and improving of corporate performan ce (in
all retail sectors, including food). In defining and implementing the
strategy, management and all e mployees should to be involved (at all
organizational levels, particularly at the store). For the success of
kaizen lean stra tegies both physical and behavior changes of all
e mployees are needed. With a large nu mber of employee s in the
operation of storage (in the shop) and logistics, continuous proce ss
improvement, su pported by appropriate integrated information system
(Enterprise Resource Planning Systems - ERP and Radio Frequency
Identification - RFID), is the basis for the realization of "operational
excellence".

By optimizing the supply chain, significant cost savings are accumulated

as a factor of pe rformance in (food) retail chains. Main stages of the
supply chain optimization are: Logistics, Quality, Innovation,
Sustainability and Financing (Source: ING Economics Department -
Addressing Challenges in Global Supply Chain).

3. The cycle "plan-do-check-action" as retail kaizen methodology tool

To achieve the objectives of retail kaizen (in all sectors, including food)
the cycle "plan - do - check - action" is very important. At each stage in
the cycle plan - do - check - action retail kaizen is implemented through
the development, implementation and evaluation. Initial phases of a
given cycle in (food) retail are: 1) evaluation of data, 2) establish of
kaizen team, 3) map existing process, 4) map the ideal process, 5)
analysis of the ca use s, and 6) the development of counter-measures. The
focus is on increasing custo mer satisfaction. In connection with the
question: What do customers want (?), three important principles are: no
defects, timeliness and caring. In addition, creating a better retail
49
experience has a positive effect on profitability in all retail sectors.
Table 1 presents the general application of Toyota's key learning
methods in retail, which is, with certain adjustments, applicable to all
sectors, including food.

Table 1. Key learning methods in applying the Toyota Way in Retail

Plan Check

- Involve retailers in the - Evaluate both market-wide

planning process to motivate indicators (e.g., CSI) as well
their involvement. as local retailer results.

- Identify key interactions in - E mploy root cause analy sis

Sales and Service that in the evaluation phase.
contribute to a satisfied
customer. - Compare results fro m
participating retailers with
- Map new process to serve as those of non-participants.
guidance for customer facing
association. - Mine data for benefits that
can influence retailers to
- Consider any retail kaizen a participate, such as
long-term commitment to profitability, expense
retail improveme nt. reduction and efficiency of
retail staff.

50
Do Action

- Create-proce ss improvement - Exa mine results for kaizen

teams that rely on retail staff, opportunities.
with oversight by process-
improvement personnel fro m - Expand on successes at retail
the NMSC. by offering advanced training
(e.g., management-targeted
- Create launch presentations syste ms).
that target both retail
management and custome r- - Use the Customer First
fa cing staff, possibly as principle of the Toyota Way -
separate events. place the needs of Toyota
shoppers, owne rs and after-
- Recommend a pilot program sale customers and retailers
for its value as a learning above all else.
experience.
- Treat dealer fe edback and
suggestions as gifts fro m
internal customers who are
offering beacons for guiding
kaizen.

Source: Applying the Toyota Way at Retail, Toyota Global Knowledge

Center Bulletin, November 2007, vol. 43.

51
4. Kaizen costing and budget in food retail

Due to the importance of practical application of kaizen methodology, it

is necessary to develop an appropriate system o f kaizen costing and
kaizen budget in food retail.

Target costing and kaizen costing are two comple mentary methods for
continuous costs reduction and value increase (in all retail sectors).
Regardless, there are significant differences between the m. Ta rget
costing (in food retail) focuses on the redesign o f products or se rvices
as a function of cost reduction. The first stage in calculating the target
cost is use of co ntinuous improvement (kaiz en) and operational control
in order to reduce costs. Kaizen is a small continuous process
improvement, fast and efficient performance of existing activities
without their elimination. Target costing is based on the realization of
the custome r' s wants and needs, while kaizen costing focuses on the
accomplish ment of manager's pro fit goals. Both methods, because of the
significant cost reduction, decrease selling prices over time, which has a
positive impact on attracting customers and, thereby, increasing the
profitability.

The calculation of target costs and kaizen costing (in food retail) largely
rely on the activity-based costing (Rof, 2011). Activity-based costing
provides a basis for understanding the benefits and costs of each activity
in the food retail value chain (Lukic, 2013).

In connection with activity-based costing, activity based manage men t is

also applied in food retailing. According to the activity based
management, costs can be reduced with the review of the activities that
add no value. "Activities that add value" are those whose reduction or
elimination, decrease the value or benefits that customers can get from
using the product or service. Typical examples include: product quality,
after-sales servic e, warranty, durability, reliability and so on. Unlike
the m, "activities that do not add value" are those whose reduction or
elimination does not diminish the value or utility that customers re ceive
from using the product or service. Typical examples are: secondary
packaging, decoration displays, air conditioning, etc. With the complete
elimination or minimization of activities that do not add value,
realization of the target cost can be affected. Since customers do not
want to pay the costs of these activities, with their complete elimination
or minimization, optimal utility of product or service, for the customer
at the given level of ta rget sales, is achieved. If a retailer, even after
52
eliminating activities that do not add value, can not achieve the total
target cost, he then adjusts (decrea ses) operating margin in order to
maintain price competitiveness o f products and services on the ma rket,
before the correction (increase) in the sale price.

In order to achieve the objectives of kaizen costing, every activity is

continuously being improved in the sense that it is performed fa ster and
cheaper, usually without elimination. This is not always the case with
reaching the objectives of the target cost calculation, which minimiz e or
eliminate those a ctivities do not add value for custo mer.

In food retail sales kaizen budget is also prepared. "Kaizen budgeting"

is such approach that includes continuous improve ment expectations in
the budget, i.e. it is based on desired future operational processes and
costs for the budget period. It starts with an analysis of the existing
food retail pra ctice in order to identify areas for improvement and
determine expected changes needed to realize the desired
improvements. The budgets are prepared on the basis of improving
practices and processes (i.e. food value chain). As a result, the
budgetary costs are often lower than in the previous period. So, for
example, kaizen budgeting may require a reduction of about 10% of
operating costs or cost of g oods sold for the budget period.
Consequently, if labor costs are $ 500, according to this kaizen budget,
they will be presented in the amount of $ 450.

Kaizen budgeting in food retail is not limited to internal improveme nt.

It can also refer to the suppliers in the sense that they are required to
reduce the cost of delivery for a certain percentage (e.g. 3%), which is
included in the food retail kaizen budget (Blocher, 2008).

5. The effects o f applying kaizen methodology in the co mpany Sonae

Sonae is the first company in the world (based in Portugal), which

implemented kaizen methodology in the food retail sector (Sonae - Press
Release, Maia, 20. April 2012). Since 2007 kaizen methodology of
company Sonae is widely applied in order to continuously improve
existing processes. The main objective was to identify, reduce and
eliminate waste through the use of continuous improvement process and,
therefore, reduce costs and increase productivity and customer
satisfaction. The effects of the application are very positive, particularly
in terms of increa sed productivity, efficiency and sales, reduced
operating costs a nd levels of waste, lack of supplies. The increase of
53
efficiency and productivity (using kaizen methodology) has a positive
effect on the competitiveness of the company Sonae (in the food retail
sector): better prices are offered and custo mers are provided with much
better quality of se rvices. It attracts more customers, thus improving
profitability.

According to data for 2011 the co mpany Sonae implemented kaizen

progra m in 171 stores, included ab out 25,000 e mployees, with 1,460,000
hours of training.

As a re sult of continuous improvement and innovation of proce sses

stimulated by kaizen methodology application, e mployees in a co mpany
Sonae had more than 20,000 ideas for imp roveme nt, resulting in over
2,000 prototypes, and with more than 200 imple mentations.

According to the Kaizen Institute, the company Sonae has the best
practice of continuous improvement as a means of stimulating
innovation and generating competitiveness. It includes all employees in
the continuous improve ment process, and the key objectives are to
create value, customer satisfaction and eliminate waste. Kaizen project
has changed the way the company' s stores are operating, significantly
increased efficiency and productivity and, in addition, has changed the
culture of conduct of all employees a s well a s their relationship with
customers. Now, Sonae is a company where the innovation is priority for
all e mployees, and where every employee tries to do its work " fa ster and
more efficiently".

Continuous process improve ment in the company Sonae became a

regular management practice whose methods to ensure adequate se rvices
and delivery of products are constantly evaluated (especially in terms of
impact on custome r relationships). Improvements are based on the
efficiency, e ffectiveness and flexibility (as a basis for meeting new
business demands in the food retail sector). These processes are applied
operationally, and typical examples in this area are: cleaner warehouse
and its better organization, which reduces the theft of product in the
store; greater efficiency and faster supply of goods before store opening
in order to improve productivity and allocation of available resources to
other tasks; visual manage ment tools which are used for de fining rules,
guidelines, required behavior, and more.

From the moment of application of kaizen methods in the co mpany

Sonae, it was found that the policies, strategies and manage ment
54
techniques have great success, as seen from perspectives of effective
operating organization of stores a nd inclusion of all the employees by
encouraging them to generate new idea s, sugge stions and appropriate
solutions for spe cific problems. Significant organizational changes at
the store, in sta ff training (using appropriate illustrative pictures how to
perform the operations quickly and efficiently) are the "path to success".
Rules and guidelines are de fined for the execution of almo st every
operation. So, for example, policies and guidance for informing
customers about health and food sa fety are developed. Primary
objectives of application of kaizen methods in the company Sonae are
every day improvement, involvement of all e mployees in all operating
areas, ensuring operational efficiency and maximum customer
satisfaction.

Previous e mpirical studies show that results achieved from the

application of kaizen concept in food retail are very satisfactory. So, for
example, the results of the application of the conce pt of kaizen in food
retail (in store operations) - according to research of TLANTIC - Kaizen
Institute - are as follows: increase in sales 15%, increase productivity
27%, reduction in costs 5%, increase custo mer satisfaction 7%, increase
market share 2.2%, lack of supplies - 21%, reduction in inventories
12%, increase food safety, and increase o f motivation of support staff.

According to the sa me Institute, as viewed from the store productivity

and work planning, the effects of the application of the concept of
kaizen are: more efficient distrib ution of employees according to the
dynamic s of de mand, reduced labor costs by more than 5%, 1/3
reduction in the ranks, planning in store is more efficient and twice
fa ster, there is no fine or penalty, motivation is greater and the effort is
reduced. Therefore, this empirical resea rch shows that the application of
the concept of kaizen has positive impact on improving the overall
performance in food retail.

6. The importanc e and the e ffects o f kaizen methods in food retail in

Serbia

Kaizen management, the secret of Japanese business success, is

considered to be the key to recovery of the Se rbian economy. The
solution for the sustainable development of economy and the curre nt
econo mic crisis is seen in introduction of kaizen management in
operations of all companies in Serbia, including food retail.

55
"By applying kaizen management in Serbia considerable success would
be achieved in the development o f the domestic economy" - said founder
of kaizen practices and Director of Kaizen In stitute Masaaki Imai during
one visit. In time s of transition kaizen is, in his opinion, the ideal way
to overcome difficult period with minimal investment and relianc e on
human resources. The consequences of the global econo mic crisis may
be diminished, according to him, by direct application of kaizen in all
areas of busine ss (including retailers, especially food).

During visit Ima i was especially pleased with application of Kaizen

management into "Japan Tobacco International - JTI" company in Senta
and he believed that this example will be followed by other companies
in Serbia, regardless of the sector they belong to. JTI is the first factory
in Serbia, which introduced the full implementation of kaizen methods.
Since the introduction of methods, productivity of factory JTI in Senta
rose by 50% and the amount of waste is reduced by 46% (said General
Director JTI for the Western Balkans Christian Kring). He added that
the goal is to attract small and medium-sized enterprise s (SMEs) from
all sectors and to show them how the application of kaizen methods can
make them thrive and grow, increa se profits, and contribute to the
econo mic development of Serbia.

One of the leading processors of coffee, Strauss Adriatic was a mong the
first in Serbia to imple ment this philosophy in order to improve their
own business. Implementation of kaizen in this co mpany began in 2010
when the first training started. Application of specific principles began
after a visit to Japan Tobacco International in Romania 2011. In
accordance with the basic principles of kaizen "that all aspects of the
business should be continuous, with the optimum use of all available
resource s and with an e mpha sis on the development of hu man qualities,"
responsible mana gers developed a plan for the implementation of this
philosophy in the co mpany Strauss Adriatic.

As one of the first steps is the "infection" and motivation of all

e mployees, from managers on senior positions to personnel entrusted
with maintaining the hygiene fac ilities, to give suggestions, Strauss
Adriatic formed six working groups at the beginning. Entire process was
interesting because the working groups received special names by its
me mb ers, so the suggestions fo r improving the work process were given
by Stuntman, Marathon runners, Dream team, the Lions. Such practice is
only the beginning of the implementation process in which e mployees
are encouraged to propose the be st solutions to the problems they face
56
during workflow, said the Strauss Adriatic responsible executives. In
2011, there were 58 proposals for improve ment, among which 31 was
adopted.

In Strauss Adriatic, kaizen methodology is currently represented only in

production, and realized adjustments relating the modification of
previous performance or certain procedures that employees recognized
as a barrie r to work, were changed together. The advantage kaizen offers
is the fact that its application does not require huge investments, it
provides a significant increase of productivity, and reduces the amount
of wa ste. As a re minder, the application of the kaizen in Strauss is the
use of "coffee-husk briquettes" for heating, and the proposal came from
one of the e mployees. Using coffe e-husk for heating is a unique example
in the world, and because kaizen is a continuous process, focused on
continuous improvement, it is possible that some new idea s will
originate from th e factory in Simanovci - Serbia, the company known by
Doncafé brand.

As shown by analysis of concrete c ases the kaizen method is

successfully imple mented in the food industry (as well as banks and
hospitals) in Serbia and it is expected that this positive trend will be
expanded to other sectors of the Serbian economy. It is especially true
for local retailers because the global retail chains already apply kaizen
method in their operations to certa in extent. Leading foreign retail chain
in Serbia is a global retailer Delhaize Group. Positive experiences in
applying kaizen method in business of global (food) retailers should
serve a s an incentive for its use in other countries (especially in
developing countries and transition economie s, Serbia and its
neighboring countries) in order to create greater value for customers and
thus its o wn pro fit. In the region (Croatia), retailer Konzum is known
after applying kaizen methods. The application of kaizen method in
Serbia would be very important business tool of independent retailers
from all sectors in order to improve their poor financial situation in the
future.

Conclusion

Kaizen concept is a small continuous process improvement (fully

applicable in food retail) that finds its application in increasing, above
all, value for the customer. Consequently, the components of the kaizen
control syste m (the principles of effective improvements) are:
elimination of waste, the involve ment of all e mployees, development of
57
visual manageme nt, improving the "Gemba" (where the real value is
added), and creation of greater customer value. The application of the
concept of kaizen in retail food in order to achieve the greatest possible
success of the business should be supported by more efficient integrated
information system (i.e. mode rn information and communication
technologies, such as enterprise resource planning syste m and RFID).

Because of practical importance, kaizen concept is predominantly used

in all retail sectors, including food, not only in developed but also in
developing countries and transition econo mies, such as Serbia and its
neighboring countries (Croatia). The subject of con tinuous improvement
in food retail is every activity. In the context of it, special "rules and
guidelines" are developed for performing each activity faster and
cheaper. Business effects of application of kaizen concept in food retail
are significant. These are: increased productivity, reduction of costs and
waste, increase of motivation of employee s, more efficient distribution
of e mployee s according to the dyna mics, improved quality of products /
service s and processes, increased satisfaction and value for the
customer, and increased sales. All this re flects positively on the total
(market, business, financial and sustainable) performance in food retail.
Following the global food retail chains, local food retailers should apply
kaizen methodology in its operations.

Effects of applying kaizen methodologies are especially beneficial in

development of sustainable business through the entire chain of food
retailing. This is particularly important for business during the
econo mic crisis. The essence of sustainable development is to increase
environmental, social and economic value in food retail with "green"
cost-effectiveness, and corporate social responsibility. The future is to
create greater "sustainable value" in food retail and there is a big role
and importance in the application of kaizen business methodology in it.

58
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