Orijnal 4 Sem Project - Copy

7/28/2019 Orijnal 4 Sem Project - Copy

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RESEARCH REPORT (2012-2013)

ON

MARKETING ING IN FMCG SECTOR

Submitted for the partial fulfillmentof the award

Of

Master of Business AdministrationDEGREE

(Session 2011-2013)

SUBMITTED BY:

Anurag kumarROLL No. 1103270028

.UNDER THE GUIDANCE OF

Mrs. Amrita singh

School of Management

ABES ENGINEERING COLLEGE

GHAZIABAD


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AFFILIATED TO

MAHAMAYA TECHNICAL UNIVERSITY, NOIDA

I Anurag Kumar declare that the work is being presented in this research report

entitleds Marketing in FMCG Sector is an Authentic record of my work carried out

under the supervision of Mrs Amrita Singh.

The matter embodied in this report has been submitted by me for the award of any Other

degree.

Dated: ANURAG KUMAR

MBA Department

This is certifying that the above statement made by the candidate are correct to the best

of my knowledge .


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PROF.RAKESH PASSI Mrs. Amrita Singh

(Head of Department) Designation: Assistant professor

Date Department: MBA

Date..


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ACKNOWLEDGEMENT

Research, a course module of MBA; plays a major role in shaping ones

career to at most perfection. Hence, as a management student this research

on the topicMarketing in FMCG Setor enabled me to acquire the knowledge

about importance of salesperson

I pay my deep regards to my parents whose blessings have made this project a success.

I am extremely thankful to my respectable Prof. Rakesh Passi (HEAD OF

DEPARTMENT) MBA, ABES Engineering College, Ghaziabad for allowing me to do

summer training so that I could use my theoretical knowledge that I learned in classroom

into practical knowledge.

I would like to express my heartfelt gratitude & thank to Mrs. Amrita singh

(Asstt.Professor) MBA Department, ABES Engineering College, Ghaziabad for her

proper guidance and supportthroughout this training project.

I would like to thank each & every member of airtel family for making me feel

comfortable & helping me in every possible manner.

I would also like to express my gratitude to every faculty member and all staff of my

MBA department to provide me proper guidance from time to time to complete my

Research Project.

DATE:

PLACE: Anurag Kumar


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ACKNOWLEGEMENT

Research, a course module of MBA; plays a major role in shaping ones

career to at most perfection. Hence, as a management student this

research on the topic Growing Relevance Of Marketing In India-With

Reference To FMCG Industry enabled me to acquire the knowledge about

importance of salesperson.

With due respect & sincere gratitude, I am very thankful Mr. Surendra Tiwari Faculty-

MBA for his proper guidance & encouragement during my research. Without her help

and guidance it will be very difficult for me to complete my research in time.

Shubham Chauhan

MBA-IV SEM.


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CONTENTS

1. ACKNOWLEDGEMENT

2. INTRODUCTION

3. RESEARCH OBJECTIVE

4. RESEARCH METHODOLOGY

5. PROFILE OF THE FMCG INDUSTRY

6. MARKETING CHANNELS OF VARIUOS FMCG INDUSTRIES

7. DATA ANALYSIS OF VARIOUS FMCG INDUSTRIES

8. SUGGESTIONS & RECOMMENDATIONS

9. CONCLUSION

10. BIBLIOGRAPHY


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INTRODUCTION

In the heydays of 1980's the business Mantra was distribution reach.Every distribution manager believed the way to market dominance wasby reaching the greatest number of brands to the maximum number ofoutlets across India. The large scale and geographical diversity in retailoutlets spread across the country meant that all FMCG markets neededto service a large percentage of these outlets to really reap economicsof scale. Over the period companies like HLL, Godrej, P&G along withrecent entrants like Nirma and Wipro have build their distributionnetworks diligently. Distribution is the crucial success factor for FMCG,but distribution at best cost, is vital.

For Company's like GCMMF (Amul) distribution is literally all, since itdeals in perishables like milk and milk products. For all higher product

visibility and lesser inconvenience for the customer in obtaining theproduct results in more sales.

CHANGING FACE

The Basic structure of FMCG supply chain has not changed in manyyears. What has changed is the attitude of efficiency of each element.The end of 1990's revealed a different way of looking at distribution. Anew movement called SCM had been slowly redefining the distributor'srole in channel. The market was changing and distributors wereexpected to corporate with suppliers and customers to decrease total

channel costs. While increasing customer expectations were nothingnew, they were unfolding at an alarming rate. The tasks required ofdistributors in order to satisfy customer expectations were notnecessarily the ones that distributor's would have chosen.

DISINTERMEDIATION MYTH

Disintermediation is the term that means elimination of distributor; itwas first suggested for distributors in the early 1990's no a response tonew technology and increasing pressure on the supply chain to cutcosts. Distributors were perceived as middlemen who added cost to

supply chain through redundant inventory, services and informationhandling. It scared logical that if suppliers and end users could"Automatic out in efficiency" they could eliminate the distributor. Thislogic follows from the reasoning that a shorter supply chain isinherently more inefficient

Until recently, most distributors described their core competency as 4Grelationships". The statement covers the need for the following two


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roles. First is that of a channel leader, who determines where thesources of supply are and how to access them. The second role isthat of a manager of customer information for manufactures. As suchthe classical relationship of these functions (Inventory management,financing for small customer, supplying technical info) became

unchanging or "frozen", the classic business-relationship has become"unfrozen" by business forces like Just in Time (JIT). The technologicalrevolution caused by the Internet and advanced information system.Traditional relationships are in flux. It is unclear now new channelsand new bus models will be structured. To eliminate the distributorfrom supply chain, channel members must eliminate the services thedistributor currently supplies. Thus this means eliminating someservices following others.

All in all, distributors sound like a rather noble bunch-always rising tooccasion for customer, willing to deal with uncertainty, provide

flexibility and focus as customer service

THE ECONOMICS OF DISTRIBUTION AND THE TRANSITION

The foundation for developing a successful channel arrangement restsin fully understanding the underlying economics of distribution. Theeconomic aspects of channel relationships extend beyond issues oflogistical operations. Several distinct functions must be completed toachieve effective distribution.

Early scholar grouped functional requirements for effective distribution

under 3 headings: Exchange, physical distribution and facilitating

BuyingExchange Function

ServingTransportation

Physical Distribution FunctionStorageStandardization

Facilitating Function Market FinancingRisk BearingMarket Information and

Research


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FIG. 1

The exchange functions involved broad activities related to buying andselling. As such exchange concerns activities required to transferownership's. The physical distribution functions are the origin of what

is referred to as logistics. The essential activity consists of getting theright products to right place at the right time. Facilitating functionsinclude standardization, Market Financing, Risk Bearing and MarketInformation and Research Activities.

In contemporary logistics the scope of operational concern issignificantly broader than transcending broad supply chainarrangements, logistics is viewed as encompassing all work related toinventory positioning, which can also involve aspects of satisfying firmand possession requirements.

Thus there is supply chain integration, below figure illustrates anoverall supply chain focussing on integrated management of alllogistical operations from original supplier procurement to finalconsumer acceptance.

Inventory Flow

Customers PhysicalDistribution

ENTERPRISE

Manufacturing Support

Procurement

Suppliers

Information Flow

Fig. - 2

TRANSITION FROM PUSH TO PULL ENVIRONMENT

Starting in 1980's customers began demanding faster deliver withnarrower delivery windows. In addition many customers were unableand unwilling to assist distributors by providing more accurate forecastinformation. This narrow time window on the front end and wide


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window on the back end is referred to as the "Distributors Dilemma"and contributes to increases in distributor inventories.

The supply chain was transitioning from "Push" to a "Pull"environment. A Push environment is the traditional environment in

which the manufacturer produces to a schedule that makes economicsense and entices other members of the supply chain to buy throughdiscounts (or) other means.

Distributor's Dilemma

A sequence on Time Windows

Supplier Distributor Customer

Fig. - 3

The push model assumes that customer outstrips capacity and can bemanipulated to optimize equipment utilization that changed in 1970'sand the more to a pull environment (such as JIT) has been accelerating

ever since.


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PUSH METHOD

Inventories pushed

to the distributor

through any means

necessary

(discounts etc.)

Inventory is pushed

to the customer

through any means

necessary

(discounts etc.)

P

ush

Distributor Push

Purchasing

Push

Sales

Overbuys and pushed to

the sales force to disperse

of excess absolute

inventoryFig. 4

The pull environment is a situation in which the customer places theorder and the entire supply chain responds immediately. Commonlycalled just in time, the system is dependent on flawless communicationdelivered in real time and without any system failures (machines,trucks, communication networks etc). This expectation was nearlyimpossible to achieve with the technology of the 1990's. Howevermany firms believed that JIT could be approached with e-bus. Such a

belief was major contribution to the dotcom craze in the late 90's.After dot corn crash, the next phase involved distributors as well asother members of the supply chain pursuing the objective of JIT.

Pull Method

Need is instantly Through good

Supplier Customer


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(electrically) delivered

to supplier who makes

the item immediately

and ships

forecasting and rapid

communication

customer prenotifies

distribution of needs.

P

ull

Distributor Pull

Purchasing

Pull

Sales

Sales through automationof processes notifiedpurchasing immediately ofcustomer needs.

Fig. -5

Unfortunately, the challenges at the beginning of the 2000's weredeviating. Customers increased their expectations for JIT delivery, butthe forecasting, sales, automation and communication tools neededwere either not in place for most distributors (or) not even inventedyet. This led to manufacturers protecting their scheduling fromvariable distribution forecasts and distributor inventories rising to meetincreasing customer expectations in a supply chain that could notadjust to meet them through any means other than inventory. Thedistributor was caught in between manufacturer push and customerpull strategies. The resulting inventory increases led to margin

compression and forced distributors to seek other solutions to the leadtime/forecasting dilemma.

Supplier Customer


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Unfortunate Reality

Supplier employs the pushmethod to assure anaccurate forecast of needs

for its suppliers

Customer requires JITdelivery from distributorin order to minimize

inventory

Push

Distributor Push

Purchasing

Push

Sales

Sales throughautomation of process notifiedpurchasingimmediately ofcustomer needs

Fig. - 6

Other lead-time components are more controllable for distributors butfrequently get caught up in the general confusion and are notseparately addressed and minimized. Lead-times associated withtransportation through tracking system offered by many providers andby choosing providers will the most stable systems. Another area isthose lead times that fall directly under the distributors control.Receiving and quality control are internal processes that often getcaught up in overall times. If the item is not available for sale theplanning group must assume that the product is somewhere in thedelivery pipeline and treat it as additional lead-time associated withthese internal processes. The e-business movement offers great

promise of improving forecast error and thereby alleviating lead-timeproblems. If the distributor achieves a better forecast and users it toimprove supplier planning, both problems will be reducedsimultaneously. The lead time problem necessitates that great manydistributors achieve the same forecast accuracy improvements at thesame time, which is unlikely, but an improvement on the part of a lonedistributor will enable that distributor to improve activities under its

Supplier Customer


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control and negotiate with the suppliers for favoured treatment inexchange for better forecasting information (Jennings, et. al, 2002)

CURRENT STATUS

As already stated that FMCG supply chain has not been changed inmany years. What has changed is the attitude and efficiency of eachelement. Also several new business models have developed in therecent past like Direct Marketing, e-retailing, B2C, B2B, intranet andextranet. The increasing competition in the market place causedseveral changes through the chain.


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CURRENT TREND OF FMCG INDUSTRY IN INDIA

FMCG (CURRENT) SCM TRENDS IN INDIA (Table - 1)

Supply chain

element

Status today Trends towards

Retailer Dispersed,unorganised, not muchbuyer power

Larger retail outlets;more number of SKUs,concentration ofbuyers, retailer powerincreases

SKU Variety High numbers of SKUsof various sizes, offersand usage

Rationalization ofSKUs to optimise costs

Inventory at Plant Push to warehouse Pull from retailers / C& FAs

SKU Analysis Time-dated Dynamic,Instantaneous & fastcorrective action

Production Planning Top down (from parentto vendors); lots of

buffer stocks and time

Collaborative but stillwith some buffer time

and inventory

Manufacturingpractice

Long production runs,low overheads, fixedstations

Flexiblemanufacturing, shortruns, low change-overtimes, increasedoverheads.

Contactmanufacturing(outsourcing) / Third

Party manufacturing

Contractual,opportunistic

Strategic partnership,alliance, essential costcontrol element


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Information Aggregated at everylevel and thentransmitted upwardsloss of time in reactingto change in demand

pattern

Instant transmissionto hubs, redirected tosupply centres, ratherthan planners; fasterresponse to demand

change

Forecasting Historical data based;varying levels of accuracy, person based

ERP, trend data,qualitative field inputsand allowance forforce majeure

Replenishment To maintain stock level,on shelf, at stock point,at plant

Dynamicreplenishment : mix ofproducts replenisheddepends on an array

of factors, only onwhich is stock

Distribution systems Traditional liner flow;some hub and spoke

Hub and spoke atmore than one level;distributors get theirgoods directly from C& FAs.

Integrated DataSystems

ERP used internally ERP used with supplychain planning toimprove throughputand efficiencies

Technology E-mail, Fax, Telephones V-SATs, leased lines,mobile ordering &automatic

(Source : ETIG, L & SCM 2002)

The emergence of the Internet, ERP systems and contract

manufacturing are important trends in India. Each has a clearimplication for the FMCG supply chain. All the FMCG companies listlogistics above all other issues like price, how to get the product at theright time, in the right quantity, assortment and best cost is thechallenge of FMCG logistics.

The supply chain concept in the FMCG business in India really took rootduring the downturn of the industry in 1995-1996. A look at the FMCG


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industry growth trends in distribution, raw materials, finished goodsand ad spends clearly shows that the industry, while undergoing strongfluctuations in all aspects, never really suffered a de-growth. Post1996, while net margins grew by 7 per cent, distribution expensesgrew by 7 per cent, but still 50 per cent lower than 1999.

In other words, the same distribution set up was giving an increase innet margins. Most companies confirm they had initiated cost cuttingmeasures, but heading the list was control of supply chain costs.Other measures included longer credit periods to vendors; fastercollections, dropping slow moving brands and cutting back on adspend.(ET knowledge series, 2002)

The key trends emerging from the analysis include:

Increased focus on rural distribution has increased logistics spend

for the leading companies.

New alliances and re-negotiation with vendors is increasing, withthe concept of third party units (TPUs), already well established.

Working capital cycles are already turning negative for most FMCGmajors due to tighter control of credit, closer demand matchingand SKU rationalization (see table Good Control).


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FMCG industry supply chain today

Vendors

ContractManufacturers

Ownned plants Imports

Central Warehouse

Regional distribution Centres

C & F Superstockists

Stockists

Retail chainstores

Retailer Localwholesaler

CRM

Consumers

(Sorce : ETIG, L & SCM, 2002)

Supply

chain

planning

and ERP

software


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MARKET SHARE OF VARIUOS FMCG PRODUCTS

The Rs. 43,000 crore (listed companies) fast moving consumer goods(FMCG) industry in India, which been on a roll for many years, facestough times ahead, although many segments still show good growth

(see table 'Share Of Personal Care'). Net sales growth in 2003suddenly decelerated to less than

Share of personal Care

Indian FMCG Industry

Segment Market Value Growth Rate

(Rs. Cr) (%)

Toilet Soaps 4,500 2.4

Fabric Wash 1,600 7-E

Dental Care 2,600 9-1 0

Hair Care (Shampoos) 700 10

Skin Care & Creams* 550 25

Nail Enamel 150 25

lipsticks 70 25

Perfumes 100 20

Deodorants 100 25

Talcum Powders 350 12

Total 13,600 15

Source: ETIG estimates, industry, published literature foundations, lotions and

balms

5 per cent, down from the heady 10 percent plus growth of the early1990s. Although the picture does appear gloomy, it is not entirely dull.

The sector has negative working capital of 17 days (CMIE data) andprofit after tax has actually gone up to 33 per cent from 22 per cent in2002. So obviously, the sector is concentrating on the essentials -costs.


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What Matters Most

LogisticsParameters

KeyInformationRequired

Supply ChainElement

Key SCMEnablers

Order

Fulfilment and

Replenishment

Primary sales,

stock at various

levels of the

chain

Inventory

Visibility retail

level data

IT; integrated

standardized

data flow;

bottom up

aggregation of

information

Inventory

Management

Stock levels;

agening sales

v/s production

and stock,

possibility of

sales

promotions

Inventory

visibility across

the chain, mfg.

sites and

warehouses

ERP systems,

bar coding.

Forecasting Sales

historical

current trends,

likely offtake

estimates,

current

inventory level

Data

aggregation,

forecasting

software,

flexible

manufacturing

Data Capture at

all stages; ERP

system,

statistical

analysis ability

Distribution

Reach

Retail universe,

sales returns of

territory, mix of

retail outlet,

product sales,

distributors, C

Replenishment

/ inventory

management,

freight mix,

packaging,

IT, personnel

management,

goods

allocations

(ERP) system


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& FAs etc. untilisation GIS

Transport

Management

Number and

mix of

transportsused; fright

costs %

alternative

freight costs, %

loading, transit

time, idle time,

delivery time

Tracking,

palletisation

freight,scheduling

increase truck

loading, same

day dispatch,

transit times

Larger truck

sizes,

warehouselocations, third

party providers,

third party

Units (TPUs)

The immediate effect of competition as on margins Net margins for theFMCG industry have been falling. Decreasing margins meantmarketers had two choices, neither of which was very attractive. Theycould increase the prices and maintain their margins; or they could cutcosts and improve their net margins. With many prayers fiercely vyingfor mind share and market share, raising .v. ices was the shortestroute to shooting yourself in the foot. That left only the second optionand one which most companies had never thought of before: cost

control.To understand why cost control was a difficult choice, as well as theonly one the only one, each aspect of the FMCG business. The analysisreveals that of all the measures of cost control, the best one -and themost effective over a period of drastic market changes - is controllingsupply chain. The case studies of Hindustan Lever Limited (HLL) andProcter and Gamble support the hypotheses that in a slowdown,control over costs in the supply chain can prove to be the crucialdifference between market dominance and failure. The table whatMatter Most lists the concerns for the FMCG supply chain.

Retail Universe

The key to the development of the FMCG business in India continues to be retailing.

As customers become choosier, are more aware of costs and increasingly fickle in their

loyalties to brands, marketers are facing tough decisions about stocks, types of outlets to

serve, delivery agreements, reverse logistics and costs of serving the outlets. Retailersare more aware of the fast moving and slow moving SKUs and are no longer willing to

be pushed into selling. The trend towards a pull system has begun although only a small


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percentage of retailers actually pull stocks on their own. The marketers themselves col -

lect primary sales data and then the replenishment is done. The issue would have been

simple if retailing in India had been organised and geographically concentrated. In thatscenario, most FMCG companies would have been more than happy to directly reach the

top 80 per cent of their outlets and leave the remaining 20 per cent for the others to pick

on. Unfortunately, FMCG retailing in India is anything but simple. For starters, as manyas per cent or all outlets are smaller than 250_s4. ft in size and yield Rs 69,000 per month

on an average to the marketer (see table 'Size Matters'). 34 per cent of all retailers are

grocers, who by nature carry a wide assortment of SKUs and whose

Size matters

Organised Retailers Served

FMCG Number Share of Monthly

Foods / Outlets Total % Turnover (Rs.)

Over 1000 Sq. R 5,996 0.3 97,000

501-1000 17,248 1.0 95,000

251-500 1,00,327 5.6 69,OO0

>250 16.70,399 92.5 25,000

Total 18,06,733 100

Total 60 00,000- 100

Source: ORG, MARG, ETIG report on retailing, 'Retail 2002-03'

investment capacity and inventory holding capacity is limited (seetable 'Stalls To Malls'). The cost of serving all these retailers isprohibitive for mgst companies (when compared to sales turnover from


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DISTRIBUTION NETWORKS

In the heyday of the 1980s, the business 'mantra' was distribution reach. Every dis-

tribution manager believed the way to market dominance was by reaching the greatest

number of brands to the maximum number of outlets across India. The large scale and

geographical diversit, in retail outlets spread across the country meant that all FMCG

marketers needed to service a large percentage of these outlets to really reap the

economics of scale.

Over a period of 50 years, companies like HLL, Godrej and Procter and

Gamble along with recent entrants like Nirma and Wipro have built

their distribution networks diligently. The result: India, today, can

boast of one of the best and most cost-effective distribution systems

anywhere in the world. While this meant that the smallest village or

taluka was being served one way or the other by the FMCG companies,

a study of the distribution costs over the past five years shows that

these costs have been rising. Also, the attendant logistics were either

ignored or a patchwork effort was made to reach the consumer.

This, in turn, meant that the marketers very well served whole regions

of ,he country directly, but entire regions were supplied by distant

locations. Inevitably issues like transport costs, inventor.,, holding,

warehousing and network of distributors came into the forefront.

The best price or product offer, the best advertising and highest

margins across the chain will not help the product succeed if one

critical ingredient of the marketing mix is not focused upon:

distribution.

Distribution is the crucial success factor for FMCG, but distribution at

best costs is vital. For companies like the Rs 2,300 crore Gujarat Co-

operative Milk Marketing Federation (Amul), distribution literally is all,

since it deals in perishables like mill,. For HLL, higher product visibility


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and lesser inconvenience for th2 customer in obtaining the product

results in more sales.

Today, HLL arguably has the best network, the most aggressive

distribution strategy and the deepest pockets to push it through. Italso has some of the finest managerial talent in India. See HLL's pro-

file for how it organises itself across a vast nation.

A classic case of distribution efficiency is of Nirma. Says Hiren Patel,

Chairman and MD, We worked on one basis only; Low cost. We have

two models. In our unique principal channel, we do not use C & FAs,

as traditional FMCG set-ups do. All our dealers, are supplied directly

from our plants. We have 10 standby warehouses, but these are

activated only during times of transport strikes.'

In those days, Nirma supplied these warehouses by rail. From these

warehouse., the dealers are supplied. This direct system allowed

flexibility, speed and economies of scale. Nirma has only 400 dealers

throughout India, which means that each of their dealers has a very

large volume to handle.

This, in turn, meant that even w hen Nirrna reduced margins to 2 per

cent or less, the heaters were still happy. The other channel is for

brands like Nirma. Nima a was launched basically as a response to

competition like HLL's Breeze. It was never meant to be a big brand.

But today, Nima itself is a large and strong brand.

"For this brand, we cannot completely avoid the traditional distribution

chanfiels of C&FAs and depots and stockists," Savs Pate]. Nirma's

overall distribution Costs are today less than 3-4 per cent of sales and

when you see the reach of Nirma even in rural India, you realise the

extent of this model's success.


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PRODUCT MIX

The massive proliferation of SKUs has complicated the business ofFMCG companies. The consumer is split for choice

Take your pick

SKUs for FMCG Segments

Segment Pack Size Range (SKUs)

Hair Care (Shampoos) 10m-1 litre

Skin Care & Creams 4Og-100g

Nail Enamel 5mi-17mi

lipsticks log

Perfumes 50mi-loomi

Deodorants 50-100g

Talcum Powder 5Og-soog

Source: ET estimates, industry reports

today and can choose any size depending on his usage pattern, hisbudget and storage. The easy availability of FMCG products has alsomade the consumer buy lesser quantities more frequently. All thistranslates into an overgrowing number of units - from 10 ml to 1,000

ml (see table Take Your Pick').


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FMCG LOGISTICS

The basic structure of the FMCG supply chain hasn't changed in manyyears (see chart 'From The Stack To The Rack'). What haschanged is theattitude and efficiency of each element. Also, several new business

models have developed over the past few years - direct marketing, e-tailing, B2C, B2B, intranet and extranet. The increasing competition inthe marketplace caused several throughout the chain (see table Ripple Effect) Theemergence of the Internet, ERP systems and contract manufacturing are important trends

in India. Each has a clear implication for the FMCG supply chain.

All the FMCG companies that ETIG spoke to during this research-listedlogistics above all other issues like price, as the table 'What MattersMost' earlier in the chapter shows. How to g product at the r ht time,in the right quantity.

Most companies ETIG spoke to confirm they had initiated cost-cuttingmeasures, but heading the list was control of supply chain costs.Other measures included longer credit periods to vendors, fastercollections, dropping slow moving brands and cutting back on adspend.

The key trends emerging from the analysis include:

* Increased focus on rural distribution has increased logisticsspend for the leading companies.

* New alliances and re-negotiation with vendors is increasing, with

the concept of third party units (TPUs), already well established.

# Working capital cycles are already turning-negative for mostFMCG majors due to tighter control of credit, closer demand matchingand SKU rationalisation (see table 'Good Control').

The organised FNFCG business in India (soaps, detergents, cosmetics,hair me, skin care, perfumes and deodorants) Is today worth Rs 4,000crore in gross sales. Overall, the PMCG business _ cod-1d- LQ aroundRs 80,000 crbre. Excise daties@orr manufacturing have remained ataround 16 per cent. Import regulations are more relaxed now andcontract manufacturing is the industry norm.


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VARIOUS TYPES OF CHANNEL

MARKETING IN INDIA

Conventional Channels of Distribution

Wholesale channel: In most sectors the distribution channel evolvedwith the wholesale route. Here the company supplies to thewholesaler collects its revenues and seldom is involved beyond that.The retailer either either buys from the wholesaler or is servicedthrough a host of other semi-wholesalers. The chain not only lackspro-activeness but is al so low in responsiveness. Being distancedfrom the market has its own pitfalls. This chain is prone towards highinventory pile-up. Almost all textile fabric brands like Grasim, Bhilwaraand Century are facing the heat because of this factor. Also because

of the long chain, price to the retailer is very difficult to monitor anddiscounting is prevalent.

C&F channel: With functional products in lesser varieties, companiescould afford to stock close to the market place and improve onresponsiveness. This led to the evolution of C&F channel wherein salesfunction is separated from distribution. Response is greatly improvedin this case, as the marketer himself is involved in selling. Themarketer passes on information on distribution of goods to the C&Fagent. Companies in products like cement or FMCG's that have stapleproducts and fewer SKUs usually opt for this channel. Arvind Mills used

this channel for Newport jeans which was marked as a staple product.

Distributor channel: With increasing launches addressing the masssegment, companies had to look for partnerships which could providemarketing muscle focused to territories as they themselves lackedmarketing reach. This led to the evolution of the distributor, a formatwherein the distributor buys the products and markets it for thecompany. A good example, of this has been the mega launch of PeterEngland by Madura Garments. This channel is high on efficiency as thedistributor, who is typically a local selling organisation services themarket. However, as there is tier added between the company and the

retailer, some amount of responsiveness is lost.

As innovation in product increases, marketers cannot distancethemselves from the retailers. Most marketers have recognised theimportance of getting information from retailers, almost on a dailybasis. It is thus logical, that some innovative players are trying toshorten the chain, bypassing the conventional modes to retail andinstead opting for newer channels which offer direct market access.


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Direct to retail: Along with innovation in products, differentiation hasstarted appearing in the level of service being provided viz.

Merchandise in-stock

Ease of location for a consumer walking in

Ambience of outlet

Convenience of location of outlet

Display fixtures

Time taken for checkout

Returns policy

To have a common format for all is possible if the brand has its own

outlets either franchised or owned. In order to meet the servicerequirements for such outlets where innovation and servicerequirement is high, responsiveness is essential. In ready-madeclothing for example, this option has been extensively used by MaduraGarments in Alien Solly. Arvind Mills in Arrow & Lee, Ambattur ClothingCompany for Colourplus. Titan is another good example in thischannel. Distribution is usually given to third party contractors likecouriers and freight-forwarding companies. Daily download of shop'ssales and stock information by e-mail, stock tracking at all points withthe help of bar coding are some of the common traits of this channel.

New Approaches

Network marketing: Amway, Avon and Orifiame have made thisparticular format of non-store retailing popular. They have a host ofdistributors and dealers, all linked from the top to the grassrootsforming a pyramidal structure. The chain upto the final consumer islong with stocking at each point. Owing to the long and unwieldlychain, it is difficult to respond to sudden spurts of demand or oversupply. For functional products, however, this chain offers masspenetration possibilities.

Mail orders: This format is at a nascent stage of development in

India, however in mature markets, non-store retailing which includestele-shopping, catalogues, magazines and computer on-line servicesconstitute around five per cent of total consumer goods sales. Tocounter the lack of thrill/excitement in this kind of a shopping format(so important to an Indian consumer), marketers like Otto Burlington,TSN and ASN are trying to widen their acceptability by introducinginnovative products that lack wide availability. Responsiveness wouldneed to be high in this format, as stock-outs and delays would shake


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the confidence of consumers using this channel and would deter futurepurchases. Distribution, after order processing, is undertaken bypostal and courier services associated with the mail-order company.

Retail Warehouse: This channel is relatively unknown in India but isextensively used in developed markets like USA & UK. Here,manufacturers ensure delivery to the retailer warehouse from wheregoods are shipped to individual retail outlets as per their orders. Thischannel assumes multi-location large retail formats, as yet not presentin India. Tailored for mass appeal, these stores usually are forfunctional products and a very high level of efficiency at low cost isrequired for the success of the operation.

Being a flat chain, and with economies of scale operation, this channelis also responsive however, as the products handled are largely offunctional orientation, efficiency is sought after target. Retailers arenow asking for shopfioor ready merchandise from their vendors so as

to decrease the operations at the warehouse and hence reduce thetime for turnaround. increasingly for very functional products, vendorsare resorting to various forecasting systems like Vendor ManagedInformation Services (VMIS) which requires them to plan theirshipments based on forecast.

Today, the job of the logistics manager is not just in selecting adistribution channel but opting for a distribution format whichmaximises the 'value' to the customer. This is all the more difficult in ascenario wherein the perception of 'value" itself is undergoing a rapidtransition - from price and quality, there are now several intangibles

viz. Availability, convenience, ambience in the equation.

Thus, it is imperative to understand the very nature of your productand its perceived value to the consumer before opting for a distributionchannel.


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PROFILE, PRODUCT, LOGISTICS AND DATAANALYSIS OF HINDUSTAN LEVER LIMITED

HINDUSTAN LEVER LIMITED

(HLL)

You simply cannot think of the FMCG industry in India withoutHindustan Lever Limited (HLL). At Rs.10,000 crore plus, it is a personalproducts behemoth. It is difficult to define HLL's competition on anoverall scale. The only way to do it is to go down segment by segment(Nirma in soaps, for example) to find out who can (if at all) challengeHLL.

On any given day, you end up using at least one HLL markets 110

brands with 950 pack sizes across categories as diverse as foods andsoaps. The logistics handled vary from the cold chain for its 'Walls'range of products to the open-air cycles in the rural hinterland of Indiafor 'Surf. All possible and feasible modes of transport are used andvast quantities of products and unlimited information zips across fromone end of the country to the other.

It is an ethos HLL shares with its parent company, Unilever, whichholds 51 per cent of its equity. A Fortune 500 transnational, Unileversells over 1,000 foods and home and personal care brands through 300subsidiary companies in 88 countries worldwide with products on sale

in a further 70. Individual consumers choose Unilever's foods andhome and personal care brands 150 million times a day across theworld. Unilever is the number one consumer goods company in theworld in market competitiveness, according to a survey of leadinginternational corporations by Prof. Jean-Claude Larreche of theInternational business school, INSEAD.

A few numbers drive home the scale of operations at HLL 7,500distributors, 100 manufacturing locations, SKUs varying from 5 ml to 1litre going to 56 distribution locations. With 36,000 employees and1,300 managers, it reaches about 1 million retailers across the

subcontinent. HLL's distribution network directly covers the entireurban population and reaches as far as villages with over 2,000 people.In the rather smallish Indian market for cosmetics alone, it has 70brands. This diverse product range is manufactured in close to 100factories located across the length and breadth of India. Theoperations involve 2,000 suppliers and associates. About 28 factoriesare situated in backward areas. Obviously, the company has itsfinancials well under control


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HLL is known today for its massive and penetrative distribution set upMany of its products are no different from those manufactured byothers, but what sets HLL apart is its unique approach. The companyweb site explains: "While the distribution system, is quite similar fordifferent businesses, each of the businesses have, over the years,

fine-tuned the system to meet their objective of serving theirrespective customers and consumers in the most efficient manner.The differences, therefore, lie in the manner business use an existingdistribution network, and the channel players involved therein, toimprove their reach and service to their customers and end users.

HLL has several lines of business detergents, personal products andfoods, the detergents & soaps division is the largest (contributing 18and 16 percent respectively to turnover), followed by the personalproducts (16 percent) and foods lines with tea contributing 16 percent.In almost all lines, it holds dominant market shares. Analysis and

company estimates suggest that at tight focus on supply chain andusage of IT has saved HLL up to US$ 125 million (Rs.6,000 crore) ininventories right across the various levels of the chain.

INBOUND LOGISTICS

In the mid - 1990s, HLL realised it had too many suppliers for its rawmaterials. Raw materials procured ranged from chemicals to foods toglass bottles to plastics- a logistical maze. Around 40 odd key rawmaterials and 60 plus finished goods vendors supplied to HLL'sfactories. Overall numbers of suppliers were around 1,000 not to

mention overseas unilever vendors for products like deodorants andafter shaves. Earlier, there was a lot of uncertainty regarding vendors,their abilities and plans leading to a proliferation of vendors,sometimes up to five supplying the same item. This meant not justchecking the quality of each supplier, but also five items in the samepaperwork. In the 1980s, the inbound side of not just HLL, but all othercompanies was dominated by paperwork.

Then came the crunch of the 1990s. Several factors combined to helprationalise the inbound side. Foremost was the spiralling transactioncosts.


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Taking Stock (HLL)

Inventories 1998-2003

1998 1999 2000 2001 2002 2003

Total inventories 685 904 1,045 1,146 1,310 1,182

Raw Materials 298 366 456 535 565 515

Finished Goods 322 470 521 549 674 590

(Source : CMIE Prowess database)

Table : 18

Company figures clearly show an improvement in raw materials

inventory with days of raw materials falling continuously from 84 daysin 1990 to just 29 days of stock in 2000 (see table Remarkable Result).That's a reduction of over 66 per cent over the past 10 years. Thisreduction has been made possible largely due to better forecastingdata which is now being transmitted throughout the HLL supply chainquickly-and the increasing visibility of business data. HLL haslaunched a number of e-commerce initiatives that will bring e-business to the heart ofthe company's operations. HLL's visionis 'Connect, Attract and Fulfil' on a massive scale. In the supply chainfor example, the vision is to link in with some 3,000 stockists, 30,000retailers and 100 suppliers spread over some 1,000 locations. The size

of the ambition is based on HLL's unique ability to leverage on scaleand technology and the development in the telecom infrastructure.HLL's Internet vision encompasses three opportunitysegments- business ,connectivity, consumer connectivity andconsumer commerce.

The Net- based e- tailing will work on a combination of HLL's own V-SAT network, that of others, mobile telephony and the public network.HLL is creating an extranet covering its key stockists and retailers tooptimise the supply chain right up to the front end. Similarly, anextranet is also being created covering the suppliers, factories and the

purchasers with the aim of achieving real time, vendor- managedinventory.

Today, the inbound side of HLL is a very different from what it waseven five years ago. There are upwards of 240 supply chain locations-be it own plants around the country, or third party manufacturers, orstock points or transit/transportation points. Almost all are linked byone form of IT or another - from the simple telephone call to V-SATS.


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The plants and TPUs are, in fact, linked by V-SATs and HLL's ERPsystem (MFG-PRO). MFG-PRO today works on more than 220 locationsall over the country, including the head office, branch offices, factories,depots and key redistribution stockists. Also, HLL plans to movetowards vendor- managed inventory (VMI). "VMI has already been

used in the auto sector in India.

Information exchange is critical for HLL. Sales information systems willbe linked, eventually, to the retail level. They are already linked at thestockist level. The moment HLL sells 5,000 pieces of Lifebuoy in anyone region, a signal traces right back via the stockist to the regiondepot and the branch office straight through into the production andreplenishment plans, and thence onto the factory. It is this backwardtrace ability, which gives HLL a sharp edge over competition in the onearea that is crucial for any FMCG manufacturer stock at the point ofsale.

OUTBOUND LOGISTICS

HLL works on the hub and spoke system. The hubs are the motherdepots and regional depots, while the spokes radiate from these to thestockists, depots and retailers. But HLL's large number of SKUs andbrands demand a more sophisticated version of the hub and spokesystem. Fittingly, HLL uses not a one-tier hub and spoke, but a three-tier set up.

HLL has a three-tier system of stocking and order

replenishment On the first tier it has the all - India bufferdepot, the second level has the regional depots and the lastlevel h has the JIT (just-in-time) depots. From the last level,they supply the products to the brand that needs to travelmore than two days goes to this depot. These are sent. fromthe manufacturing sites to the all India buffer depot wherethese products are accumulated up to a full truck load for thatsales region. Once the truckload is made up, the goods aresent to the regional buffer depot in the states, where breakbulk occurs- the load is split into the supply as per areademand. The smaller lots are now sent onto the JIT godowns

in the cities or towns and then onto the retailers via thestockists.

The real challenge for HLL begins now when the FMCG industry is in adownturn. Most analysts predict that HLL is well poised to fight it out.HLL itself has started focusing on supply chain as a means tomaintaining its leadership profile. How it manages the chain will bethe only factor that will ensure its sustained leadership.


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HLLS DISTRIBUTION NETWORK

Raw MaterialsSuppliers

Packing MaterialsSupplier

Manufacturing unitsin-house, third party

Head office All-India buffer depot

Regionaloffices

Regional bufferdepot

JIT godowns

Stockists

Wholesalers Retailers

Consumers

Fig - 22

Rolling sales forecasts &

mktg plans


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Minor But meaningful

FMCG Logistics Costs Trends

1998 1999 2000 2001 2002 CARG*

Sales (Rs. Cr) 17455 19421 22192 24559 25290 6.0

Cost of production (Rs.Cr)

13882 14953 16828 18592 18335 5.4

Distribution cot (Rs. Cr) 465 483 542 584 653 2.9

Outbound cost/Sales (%) 2.7 2.5 2.4 2.4 2.6 0.6

RM Inventory (Rs. Cr) 876 1108 1150 1104 1042 2.8

FG Inventory (Rs. Cr) 1285 1417 1398 1552 1438 2.7

RM Inventory Holding(Days)

41 50 52 50 49 1.5

FG Inventory Holding(Days)

31 33 30 28 29 1.1

Interest Cost (%) 16.4 14.6 11.9 12.2 11.3 1.4

Inventory Holding Cost(IHC) (Rs. Cr)

355 370 304 323 280 2.4

IHC/Sales (%) 2.0 1.9 1.4 1.3 1.1 1.0

Material Consumption(Rs. Cr)

11016 11800 13174 14537 14055 5.0

Inbound Logistics Cost(Rs. Cr)

294 293 322 346 363 2.3

Inbound LogisticsCost/Sales (%)

1.7 1.5 1.4 1.4 1.4 0.8

Total logistics Cost (Rs.Cr)

1114 1146 1168 1253 1296 2.8

Total Logistics Cost/Sales(%)

6.4 5.9 5.3 5.1 5.1 1.0

(Source : CMIE Prowess database; ETIG analysis)


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Marketing Monarch

Key Indicators

Parameter1997 1998 1999 2000 2001 2002

Net Sales (Rs. Cr) 3337 6560 7736 9426 10116 10588

Freight (Rs. Cr) 138 279 289 345 366 446

Freight / Net Sales (%) 4.1 4.3 3.7 3.7 3.6 4.2

Growth in Net Sales YoY (%) 6.8 4.6 5.4 6.3 12.2 17.7

Growth in Freight Costs, YoY(%)

97 18 22 7 5 5

(Source : CMIE Prowess database; ETIG analysis)

HLL : Gigantic Giant

Market Shares

Personal ProductsFoods & Beverages

Toilet Soaps 59 Tea 36

Detergents 39 Instant Coffee 32

Detergent Bars 47 Roast & Ground Coffee 54

Scourers 59 Ice cream 25

Oral Care 36 Ketchup 41

Shampoo 64 Jams & Squashes 74

Hair Oil 15 Atta 18

Skin Care 55 Salt 17

Talcum Powder 62 Edible Oil & Fats 2


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Remarkable Result

HLL Inputs *

Inventory Cycles1996 1997 1998 1999 2000 2001 2002

R. M. 48.5 47.8 29.6 32.3 31.7 32.1 29.0

WIP 8.4 6.3 3.1 2.4 1.9 2.1 2.4

Finished Goods 33.2 39.2 28.8 27.3 23.9 27.8 23.7

Debtors 17.5 17.2 8.0 6.9 7.5 8.4 9.1

Total 107.6 110.6 69.5 68.9 65.0 70.5 64.2

WC Cycle 16.8 5.7 13.3 26.0 24.8 27.8 33.8

(Source : CMIE Prowess database, ETIG Analysis)

Vital Signs

HLLs Main Indicators

Growth1997 1998 1999 2000 2001 2002

Sales 19.3 96.6 17.9 21.8 7.3 4.7

Freight 4.1 4.3 3.7 3.7 3.6 4.2

PAT 35.5 63.1 40.8 42.2 33.2 23.6

(Source : CMIE Prowess database)

The IT Way

HLL has launched a number of e-commerce initiatives that will bring e-business to the heart of the company's operations. HLL's vision isConnect, Attract and Fulfil on a massive scale. In the supply chain forexample, the vision is to link in with some 3,000 stockists, 30,000retailers and 100 suppliers spread over some 1,000 locations. The size


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of the ambition is based on HLL's unique ability to leverage on scaleand technology and the development in the telecom infrastructure.

HLL's Internet vision encompasses three opportunity segments -business connectivity, consumer connectivity and consumer

commerce.

Announcing its Internet plans, the Rs.10,918 crore company said thereal potential of HLL's e-tailing foray emerges when the companystands to realise Rs 5,000-6,000 crore which are locked with stockistsand retailers. Around Rs.1,400 crore of HLL inventory is currentlyblocked with stockists and retailers and an additional bulk of Rs.3,000-4,000 crore of similarly stuck non-HLL inventory could also be factoredin through its Net venture. HLL can buy on B2B basis, bring it to any ofits 7,000 stockists and fulfil the transaction. However, the companymaintained that its ambitious plan of emerging as the largest e-tailer is

likely to be hindered by lack of infrastructure. The Net-based e-tailingwill work on a combination of HLL's own V-SAT network, that of others,mobile telephony and the public network.

HLL is creating an extanet covering its key stockists and retailers tooptimise the supply chain right up to the front end. Similarly, anextranet is also being created covering the suppliers, factories and thepurchasers with the aim of achieving real time, vendor-managedinventory. E-banking initiatives are also being piloted to enablepaperless financial settlements. The Aviance business, for example, isbeing configured to run mainly through the Net.

In consumer connectivity, HLL has already progressed some distancethrough the Pond's interactive web site, Hello Hindustan and MeraHindustan initiatives in the detergents business as well as events likeClose Up Antakshari on the Net. Interactive kiosks for the Lakme andPond's ranges are being tested out in a few cities -- these enable aconsumer to try out how various beauty products will look on thescreen before buying them.

However, increasingly, interactive communication on the Net will beconsumer centric, rather than brand centric. Internationally Unileverhas announced ventures such as the JV with iVillage, a woman's portaland participation in start-ups such as Wowgo. HLL is exploring similaropportunities in India.


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FORECASTING AT HLL

Every sales region in HLL's world has territory-in-charge (TSI) thathandles the stockists in his area, and generally makes his HO at one ofthe stockists. Sometimes he goes along with the stockist's man on his

daily order rounds and sometimes on his own to get market feedback.His job is to gauge the movements of the SKUS, track what competitorsate doing and hopefully exert pressure on retailers to push more HLLproducts.Every month, the area sales manager (ASM) of HLL holds a TSI meet.One of the most vital tasks in this meeting is the review of the pastmonth, assessment of sales potential for the next month andagreement on performance of the TSIs. The TSI s brings their marketfeedback, while the ASM brings in the interpretation of corporate salesstrategy, in the form of schemes, discounts, marketing push,promotions, new products or market intelligence. At the end of the

day, a set of sales figures is arrived at: typically more than the TSIs liketo commit and less than the ASM would want. These numbers are thenaggregated for all sales regions at the branch offices and a salesforecast for the entire region or state is arrived at. Furtheraggregation of all state demands goes to corporate headquarters,where the planning for production, imports of third party production isdone. As can be seen, aggregation of data is done at several levelsand if each level adds a margin for sales - either due to lack of skill orlack of faith in production's ability to deliver stocks - the net result atthe factory level can be that the actual sales will differ from theproduction by as high as 25 per cent.Data is crucial for this process. HLLs MFG-PRO system throws up the sales data ofwhatever period is asked for, brand, region and person wise. It can also throw upvariances between forecast and actuals, collection data and regional, stockist-wise

performance. Importantly, there exists transparency throughout what is basically a

negotiation between field tactics and corporate strategy.

The ability to forecast demand helps Unilever reduce costs significantly. There isextreme volatility in demand at the moment. If you're able to call it correctly, you win.

Wilkins says that since going live with the system, the company hashad far greater stability in forecasting. At present, half the productsUnilever sells are within 25 per cent of expected demand.

NEW INITIATIVES

Operation Harvest

Around 1989, this was a brand building exercise in rural India, usingvans, below the line promotions and signage. This was the first of theoperations to drive rural growth of HLL brands. The vans, operated by


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third parties would also check out potential distribution sites andareas. Eventually, these vans themselves began to service thehinterland.

Operation Bharat

It was HLL's desire to make 'Fair & Lovely' reach more than 10 per centof rural India that really prompted this operation. HLL created the'Bharat Pack' consisting of Fair & Lovely, 'Ponds Dreamflower Talc','Pepsodent' and 'Clinic'. A price point of Rs.15 was found comfortablefor rural consumers. A team comprising one driver, four salesmen andone supervisor goes from home to home introducing the product to thepeople. Purchase opportunities are presented by the vans that nowreach the villages. Today, HLL claims to reach 36 million households,up from 10 million before Operation Bharat in 1997.

Operation Streamline

Operation Streamline is also one of the major initiatives undertaken byHLL, in recent times, to penetrate the rural markets. In the case ofOperation Streamline, the goods are distributed from the C&F Agentsto the redistributors, who in turn pass it on to the star sellers.Operation Streamline being a cross-functional initiative, the star sellersells everything from detergents to personal products, etc. For theadditional 30,000 villages that HLL wanted to reach, it created a super-

stockist-substockist structure. The super-stockist in the bigger townsservice these sub-stockists who are paid 1-2 per cent more marginsthan the retailers. This is to cover the sub-stockist's costs in servicingretailers in his area. HLL believes that once the exercise of buildingdemand is done in the rural areas - not an easy task offtakes willincrease.


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MARICO

Marico Industries manufactures and markets nature care andhealthcare products. Its 2000 sales turnover was RS 650 crore withnet profits of Rs 35 crore. Popular brands include 'Parachute', 'Saffoia'and 'Sweekar'. In 2000, the company entered into an agreement withProcter & Gamble to distribute their brands 'Clearasil', 'Ultra Clearasil','Pampers', 'Old Spice', 'Ariel' detergent bar and 'Camay' in India.Manufacturing facilities are situated in Goa, Kanjikode, Jalgaon, Sewreeand Saswad. The company exports its products to the Middle East andSAARC countries. Raw/refined oils accounted for 80 per cent of fiscal2000 revenues; hair oils, 5 per cent; services,

nominal and others 15 per cent. Sunflower oils account for 56 per centof the 20,000 tonnes edible oils market.

For Marico, supply chain management has two clear -and inventory.

These are crucial for both inbound and outbound logistics. Time, -because it affects planning and working capital and inventory becauseif affects demand fulfilment.

The edible oils supply chain holds keen interest for Marico since 80percent of its revenues are from the brands Saffol and Sweekar.Sweekar has both sunflow and soybean oils, while Saffola is based onSafflower (both blended with corn oil and as safflower oil itself). "Boththese brands have different supply chains, but some parts do overlap,"says Mayank Bhardwai, Buying Manager for the healthcare division.

Says Bhardwaj, "While sunflower oil is a transaction issue, safflower oil is a souringissue." The supply chain transactions for sunflower (Sweekar brand) are basically as

simple as calling the traders and placing the order at that day's price; while in safflower,

supply chain management includes everything from growers to monsoons to crop failuresand harvests. The supply chain becomes even more complicated due to price

fluctuations, speculations and changing demand patterns across the world. Much higher

liquidity and involvement of many stakeholders characterise the sunflower oil market.

To a large extent, the supply chain for Indian companies like Marico ismade more complex because no domestic systems have developedand whatever did are now unable to cope up (see table 'Action List').The Indian edible oils story is a sorry one. Over the past 10 years, a

combination of several factors have resulted in India importing up to50 per cent of its total oils requirement. At one time in the not toodistant past, India was one of the largest producers of oils. But betterand cheaper quality from the Far East and South ,.America;government inaction and rampant inefficiencies together have madeIndia dependent on imported oils. In fact, after crude oil, edible oils isthe second largest commodity imported, crucial enough to shake


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governments and make fortunes. Marico, as a leading branded edibleoils company, is no exception to the sourcing story.

Since import content is high, inventory management of both saffloweran sunflower oils becomes crucial. The worst thing that could happenis to have a stock-out of products which contribute so much to sales!In sunflower, the cost of inventory holding can be managed if youperceive the market trends correctly. Marico sources more than 70 percent of for sunflower oil from Argentina, Eastern Europe and theEuropean Union. Argentina alone supplies about 85-90 per cent of thisimport. There are established players in this global business withwhich Marico has already set up trading relations.

In spite of this rather developed market for prices, there exists no metric for total

transaction costs in the deal. Unlike soybean, no official futures exchange exists for

sunflower. Marico estimates the costs to be not more than per cent of CIF value.

Of course, logistics costs in Buying Plans the form of sea freight; demurrage, inter-

modal transport and duties do in the marketplace exist. The oil is shipped by tankers toMumbai and offloaded using oil loaded onto logistics explained further on (see chart

Slick Schemes) ups for Mumbai further on (see time: 30 days) chart 'SlickSchemes')

Marico is Indias largest buyer of safflower oil. The rather smallbusiness world in safflower comprises about 10 buyers and sellers. Inthat context, Marico becomes a major player, but it is still impossible todetermine marico share

port silos buyers and sellers. In that context, Marico becomes a major

player, but it is still impossible to determine Maricos share in buying,as not all players by or sell consistently nor are demand patterns thesame over time. Bhardwai however, estimates that Marico's sharewould have varied between 20 and 30 per cent in the past 2-3 years.Safflower can also be bought in seeds. For Marico, the oil to seed ratiohas been changing in no particular order and today stands at 70 percent oil, 30 per cent seeds. In any case, processing has to be done inIndia.

Marico faces no supply chain issues in soya. There's already a largeproduction base, both domestic as well as international. However,India's consumption of soya in refined oils in consumer packs (ROCP)category is very small as compared to safflower or sunflower.

Marico also sells Saffola refined kardi and corn oil blend. They are thelargest buyers of corn oil in India belt unlike other oils, corn oilproduction is restricted because maize is used for starch and not somuch for oil. Corn oil in India is a byproduct. Today, Marico'sconsumption is just about balanced by production. But as Marico looksat the rising demand of its oils, it may have to look at imports.


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INBOUND LOGISTICS

In the edible oils supply chain, time is as critical as stocks. The sailing time from

Argentina to India is around 4 weeks, 1 week to 10 days for intermediate storage in the

port and a further three (-lays to the factory at jalgaon. That's a total lead-time of 10-12weeks from the time of placing the order, 7 of which are used in just transactions. "But

it's difficult to see where more time can be saved', says Bhardwai. "The ports could clearthe cargo faster by providing for more berths, but at present no such signs are visible'. In

fact, Bhardwaj says, JNPT is just as efficient as any other port for oils. JNPT has a dis-

charge rate of more than 200-400 tonnes per hour. Against this, some of the best ports in

the world are in the range of 600700 tonnes per hour. In addition, the losses due toleakage, unclean tanks at the port and theft are very much at par with any world port.

The major issue lies in tackling vessel demurrage through providing berthing

infrastructure.

According to Bhardwaj, the Government of India placed the end-usercondition for import of sunflower oils, which means no traders, onlycompanies like Marico can source oil for their use from overseas. Thismeans that number of buyers has drastically reduced which impliesthat total order quantity is not large enough to merit frequentshipmentfrom Argentina. As a result, there may be a gap of 10 to 12weeks between t,Yo sailings for Mumbai which means that inventorieshave to be held here in India to at least hedge over the times betweenthe two sailings. Add price volatility to this mix and you have a rathermurky concoction to handle.

The moment Marico confirms an order for sunflower oil with a trader inArgentina, its well-oiled machinery swings into action. The processingunit(s), which is normally riverside/port side, pumps the oil directly intothe ocean vessels. These vessels are loaded either from the BabiaBlanca or San Lorenzo ports. The tanker sets sail and advance notifica-tion goes to the buyer, in this case Marico' After a sailing time of 30days from Argentina along well-travelled routes, the tanker arrives inMumbai.

This is where the bottlenecks in logistics really start. For starters, thetanker may not get a berth the day it arrives, in which case it waits onthe high seas. Waiting charges start from the first day. Thedemurrage for the cargo could touch USD 1.5 per tonne per day. Incase of 7-8 buyers per ship, these charges get divided, but if Maricowere to be the only buyer with around 500 tonnes of oils, demurrageitself would touch US$ 20,000. This fortunately has never occurredsimply because Marico found a way out. It char-


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Oils Well

Marico Financial

1995 1996 1997 1998 1999 2000 2001

Net Sales 280 346 406 483 548 646 653

`Purchase ofGoods

14 14 24 19 22 59 80

RMConsumed

148.4 180.9 212.7 254.8 308.0 319.8 234.1

Source : CMIE Prowess Database

ters barges with tanks to meet the sea tanker in anchorage andtransfers the oil to the barges. These barges cost just Rs 150 per

tonne (US$ 3.5). Given this disparity, barges offer the best option.Everything from hiring, to personnel to offloading is included in thischarge. Marico can insure the oil till Mumbai at around 0,2 per cent ofCIF value. Once the oil is brought by the bares to the dockside, it couldbe either directly pumped into truck tankers or into shore tanks at theclocks. Ideally, says Bhardwaj, the best way is to pump the oil viapipelines out of the docks into road tankers and transfer it to thefactory. Clearance of port dues and documentation takes about 3-4days. Import duties are currently 75 per cent of CIF price.

But once out of the port, the oil can reach Jalgoan - where Marico processes 80 per cent

of its branded oils - within 24-36 hours. The truck tankers can carry up to 10,000 litres.These are ordinary 9-tonne trucks modified to carry the oil tanks. Marico also certifies

each tanker for its roadworthiness, history, cleanliness and cost. Marico has had noissues with truck tankers -- for one, supply is more than demand, Yearly contracts at

competitive rates has been negotiated and a penalty system is in place to guard against

theft or late delivery. In addition, tanker rates have been low, ranging from Rs 700 pertonne to Rs 1,000 per tonne. Total freight bill for a truck of finished goods could touch

Rs 12,000 between Mumbai and Delhi and around Rs 4,500 between Mumbal and

Jaigaon.

The oil takes three days to reach Jalgaon from Mumbal. This does notpose much of a problem because there is sufficient inventory at theplant. Besides, there are tanks at the port too, for which Marico paysforthe whole month. As Bhardwaj says, "If we were to transport all thetonnes of oil we get from the ship nonstop to Jalgaon, our qualityassurance people would spend days testing the quality. For thosedays, inventory would lie at the plant %,;here 1 don't have muchspace. I'd rather keep refined oil, more value added, than raw oil."


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Seen in that context, time does ha-,,c less value in this stage of thechain.

Land transport accounts for just around 1-1.5 per cent and withtransaction and inventor holding costs, Matico could be spending 7- 8per cent on total logistics. A look at Marico's figures over the past 10years show that expenses on raw materials consumed have risen from

Rs 56 crore in 1991 to Rs 234 crore in 2001 (see table 'Oil's Well').While this is a rise of over per cent, as a percentage of sales,this figure has remained at around 4 per cent, which seems to tallywith Bhardwaj's estimate of inbound logistics costs (see table 'Spill-Over Effects'). Expenses of purchase of goods have also fallen from 16per cent of sales


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Oils Well

Marico Financial

1995 1996 1997 1998 1999 2000 2001

Net Sales 20.0 23.2 17.5 16.9 13.4 18.0 1.0

Freight 8.4 1.0 66.2 -19.7 17.6 159.9 35.3

Freight /Sales

3.3` 3.5 3.5 3.8 4.0 3.9 4.8

R.M. / Sales 52.8 52.3 52.3 52.7 56.2 49.5 35.8

Source : CMIE Prowers database, ETIG Analysis

in 1991 to 12 per cent in 2001. Marico believes this is due to

efficiencies in purchase and long-term contracts with key vendors.OUTBOUND LOGISTICS

In the edible oils market, Marico has Sweekar and Saffola, each withtwo variants. In the healthcare division, there are a total of 17 SKUS,ranging from 0.5 litre to 15 litre (1 litre = 0.91 kg). 80 per cent ofMarico's edible oils supply is from the jalgaon plant. It also sourcesrefined oils from other locations like Indore (soybean), Islampur,Hyderabad, Mumbai and Silvassa mainly for sunflower. Jalgaonhandles sunflower, corn and safflower oil.

Marico's distribution width and penetration is acknowledged as one ofthe best in the industry and is a strength that can be leveraged. Itssales orgnization distributes over 100 SKUs through a network of14,00,000 outlets spread over towns with a population over 5,000.In act, Marico's network is highly reputed and considered to be thethird largest in FMCG in India P & G and Indo-Nissin Foods Limited havetied up with Marico for distribution of their brands on a national basis.Marico's parallel rural sales and distribution network contributes 25percent to the company's top line. Marico's infrastructure comprises morethan 100 super distributors, catering, to 2,300 small stockists and9,000 van markets.

At 'the- -plants, says Rajeev Ran)an, Manager -- Materials, theinventory management practice is to keep lowest inventory at thestage of manufacturing where value addition is high and relativelyhigher inventory at the stage where value addition is low. Theobjective is to be prepared to respond quickly to opportunity at a lowcost. FG inventory is lowest, RM/PM is relatively high. Refining and


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filling capacities are flexible with respect to SKU mix, capacity andcost.

Raw materials comprise mainly HDPE/MB granules bought frompetrochern majors like Reliance. Marico gets the jars at the line at thelast possible moments so that space is not blocked unnecessarily.Other inventories are of oils after refining, lids, caps, packagingmaterial like cardboard and labels. All of those are outsourced. Infact, Marico does not own any ancillaries.

In Marico, production batch sizes affect finished goods inventory. TheJalgaon capacity for refining is 145 tonnes per day, while maximumcapacity of filling is 190 kilolitres a day.

Currently, stock levels are 8-9 days at the plant, 7-8 days (at peakseason to 25 days at lean season) at the stockist and around 25 daysat the retailers. Marico wants to bring these levels down by 25-30 per

cent to 7-10 days at retailers and 7-10 days at stockists. Jit dispatches,stocks at the factory and bette, forecasting will do this.

Nearly 450-500 trucks are used t(, transport oil from Marico's plantsevery month. Marico does not see any need to reduce trucks, or tomove towards larger tonnage trucks like Volvos. Ranjan says, "We didundertake some surveys and studies, but then found for our demandlot size, 9-tonne trucks offer a balance of servicing and costs". Theoption of using containerised trucks was considered but not taken asthese are 6-7 per cent more expensive than open trucks although theyoffer the benefits of security, integrity of goods and lower in-transit

damages.'We did look at the third party option,' says Ranjan. "In fact, vendorslike Sembcorp have already made presentations to Marico.Unfortunately, all 3Ps we talk to want to cover the entire gamutactivities -- from factory to warehold operations to distribution. We feltwe were not yet ready for such change in ourworking philosophy.' Sorather thari outsource everything, it mightbe a good idea to try theconcept in a small market because the costs of failure are extremelyhigh. Adds Ranjan, "Besides, the benefits were not clear cut, the valueproposition was not good enough.'

What's the way forward for Maricos supply chain? The Internet is, ofcourse, a key player today. In fact, it has opened up a new channel formost players. However, we believe that the Net can only be suc-cessfully harnessed if the back-end physical delivery systems are inplace." In the various areas of supply chain, truck costs, transactioncosts and time loss can be reduced only to a certain by the companiesthemselves. Beyond this, a push has to come from the governmentby way of infrastructure, easing of import/export procedures and taxes


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rationalisation, competition, developing international trade and thedevelopment of integrated logistics players. Till then, opines Marico,the supply chain game for Marico remains very much its own.


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CAVINKARE

Cavinkare is a predominantly regional CFMCG player in India, based inChennal and consolidating its. hold across India. It was started up in1983 as Chik India Private Limited by C K Ranganathan with aninvestment of Rs 15000 only (@ 300). By 2001 sales were Rs 200crore staffed by 550 employees. - It services 7.25 lakh retailers from its2300 distributors. Cavinkare has some of the famous brands in India -Fairever, Nyle, Chik. Spinz, Indica and Meera. Chik and Nyle competeagainst HLL's Sunsilk and Clinic All clear; and P&G's Pantene and Headand Shoulders. Fairever competes against the market leaders like fair& lovely from HLL and fairglow from Godrej . Other CavinKare brandslike Meera hair care remain regional brands.

Supply chain and logistics in CavinKare are altogether simpler than inthe other FMCG majors, but complexity still rules (see table'CavinKare : Top 5 SCM Concerns'). The vital issue to note is that

CavinKare has invested in people, technology attitude which will give ita launching pad to go National and make inroads into an FMCG marketruled so far by MNCs and large Indian majors. ETIG studied

CavinKare basically for its regional focus and how the supply chain isbeing addressed to in a growing company with National ambitions.

In CavinKare, corporate strategy and logistics strategy are interlocked.Several supply chain issues flow from the basic tenets of business thatC K Ranganathan set down years ago.

CavinKare's corporate strategy revolves around three cardinal rules.First, Cavinkares , will never venture into manufacturing and will onlyfocus on brand building, R&D and distribution management. Thecompany has a line of third partly manufacturers including exclusiveproducers mostly in the tax haven of Pondichery. "When we refrainand outsource products, we are able to maintain a clear focus on brandbuilding. There is no desperate working capital requirements andabove all, we are able to maintain flexibility in juggling with products,"he says,

Secondly, CavinKare will never undertake to distribute products ofother manufacturers. "We have been receiving offers from both Indian

and multinational FMCG companies to distribute their products. But weare firm that we will never do that," says Ranganathan. "Thirdly, wewill not let our products be distributed by other people," he adds.

Supply chain and logistic strategy takes priority for Cavinkare, as itplans to cross Rs 5000 crores in sales within 10 years. CavinKare plansto enable its supply chain using predominantly IT initiatives.


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The pieces are in place for future complexity in handling its supplychain. Consider this: Cavinkare has no manufacturing of its own.Instead it has 25 Third party units making all its products spreadacross southern India. It has 3 mother depots, 4 regional offices, 27depots, and 2300 stockists selling 5 brands and 110 stock keeping

units to over 7.25 lakh retailers. As usual, 60 of the 1 10 SKUs are fastmoving which need special focus. In its infancy, CavinKare had veryrudimentary IT systems to get data. Today it has already felt the needto go in for SAP, and integrate its activities. 45 percent of its annualsales come from south India even today.

"We needed real time information,' Says B.Raiagopalan, Group VicePresident, Finance for CavinKare in Chennai. " Even though our saleswere Rs 200 crore and analysts said we were regional, we knewtoday's competitive FMCG market needed action on a real-time basis."

"We asked Productivity Consultants to help us create a totally aligned

organization, " Raiagoplan continues. "They recommended a supplychain solution ). The idea was to connect all our different entities andget visibility on what was happening at all levels."

IT'S THE WAY

It is instructive to trace CavinKare's journey through to SAP. Notsurprisingly, in its younger days, CavinKare had the simplespreadsheets and Fox Pro based systems to keep track of standardFMCG data like production, sales, returns, outstanding, accounting andso on. For a time this was fine, as business was not so strong to

warrant a full-fledged investment into expensive technologies like ERP." In 1990, our systems were basically designed as a stock ledger andwas created for the purpose of preparing statements for the balancesheet.- All other reports had to be culled from it," recalls BRaiagopalan.

But as business expanded and ambitions grew, says Raiagopalan, datarequirements also grew. Working capital was vital to handle well. Webegan to realize we needed to graduate from the simple datasheets tosomething more sophisticated - and more importantly-, which gave usthe flexibility to react to a changing situation.

CavinKare came to the conclusion that it needed an ERP solution. After7-8 months of deliberation and discussions, Cavinkare finally settledupon SAP R/3 as its ERP. This itself was a rather surprising decision formost analysts. It was conventional wisdom that a Rs 200 crore compa-ny did not really need an expensive and sophisticated ERP like SAPR/3. " But our logic and focus were clear," says Raiagopalan. we hadour company expansion , diversification and growth ambitions in


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mind. We felt SAP would give us the discipline and the platform fromwhich we could scale up."

CavinKare started off with SAII R/3 implementation in January 2000.Like many other companies, it went in first for the Sales andDistribution and Material management modules. These could be usedalong with the Fox Pro systems that CavinKare already had.. WithinSAII, CavinKare also implemented the Controlling module, whichoversaw operations of product sales, distribution and budgeting. Workfirst started in the Chennai Head office. By September 2000, SAP wentlive there, reportedly the fastest ever implementation of the SAP any-where. The next phase was to roll out SAP to the other regions. But by2001, CavinKare was fully on SAP. Things were


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GCMMF (AMUL)

The Gujarat Co-operative Milk Marketing Federation (GCMMF) is thelargest food marketing company in India today with sales turnover ofRs. 2,500 crore. While there are a host of other players in the foodsmarket, GCMMF reigns in the milk and milk products and perishablessegments.

GCMMF has come a long way. It is the largest organised collector anddistributor of milk and its value added products are marker leadersunder the brand names of Amul (cheese, butter, milk, powder) andDhara, Lok Dhara (oils). Amul's brands of paneer, ice cream andsweets like Gulab Jamun and Shrikhand are fast catching up with themarket leaders in various segments. Among with a sustained brand-building exercise over the past two decades. GCMMF is today in aposition to leverage all its assets for exports. Some thing not evenconsidered some years ago.

GCMMF owes its market dominance to several factors. Crucialamongst these is its milk procurement system, which gives it access toa vast reservoir of milk at massive economies of scale. The logistic ofmilk are considerably more difficult than for most other foods products.

INBOUND LOGISTICS

Inbound logistics in milk are governed by time. "Within 2.5 hours, they

collect, check, transport and process up to 1 million litres of milk everyday - 365 days a year, non stop." "Amul is committed to acceptingevery drop of milk it is offered, whether they have use for it or not.

GCMMF and the National Dairy Development Board, under the ableguidance of Dr. Verghese Kurien and Tribhuvnadas Patel, formed whatis today called the Anand Pattern of Co-operatives. In the Anandpattern of co-operatives, the farmer - in most cases the small marginal,non-landed farmer with 2.3 cows in his herd - sells directly to thecooperative society and then by extension to the dairy. The traditionalmiddlemen the brokers, the consolidator, the trucker - who are so

potent in other agriculture markets, are conspicuously absent here.The direct implication of this structure is on costs of [Procurement, fairreturns to the producer and quality of the milk.

So how does GCMMF procure milk? The farmers tip over their milk intoa standard container that the village society has. The computer linkedto the scale electronically notes the weight of milk and container. The


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same computer automatically deletes the weight of the container fromthe total to give the weight of the milk.

At the same time, another man at the counter (again an employee ofthe society) takes a small sample of the milk into a machine called the

lactometer. This machine determines the fat content of the milk andautomatically transmits the result to the computer. The price to bepaid to the farmer is predetermined based on the fat content. Thecomputer then generates a pay slip for the farmer who is paid either inthe evening or the next morning, as the case may be. There is nocredit period and the disbursements are completed within one day ofselling the milk to the society. Rationalisation of vendors is notnecessary. At the farmer level, the aggregation is low - from 1 litre to1 0 litres/. But at the society level, the total volume of milk may touchmore than 5,000 litres a day. GCMMF found a way out by developingvillage chilling centres or VCCS.

Having collected the milk at the VCC and ensured its quality level, themilk now has to be transported to the chilling centre or the dairy. Eachdairy has 4-5 chilling centres. Earlier, the vehicles used were eithermatadors or jeeps or 9-tonne trucks. Today, the 9 tonne truck and theinsulated truck are the norm. The insulated stainless steel truck-tanker, with capacities up to 10,000 litres, goes from society to societyand collects the milk. The trucks reach the dairy by 9 am and the 'milkrun' is completed. The next run is in the evening around 7 pm.

At the dairy, the milk is either processed into butter, cheese or powder,

or is pasteurised. GCMMFs priority is for liquid milk, which has a shelflife of a hours at the dairy, while the powder has a life of anything upto 18 months.

Take a peek into the scale of Amul Dairy 120 trucks arrive daily at thegates with milk from the societies. Around 1.5 to 2 lakh litres comefrom other dairies, either due to excess at their ends, or for furtherprocessing at Anand into powder. Each truck can carry up to 10,000litres in its tank, chilled and ready for processing. On an average, themilk travels 150 to 160 km. every day the whole year around, all ofthese arriving in a span of 4 hours upto 9 am.

OUTBOUND LOGISTICS

As Critical As The Inbound Side Is For Amul, the outbound is just ascomplex with 108SKUs - all at various levels of perishability. Amulbutter, cheese, shrikhand, curd, ice cream and mithaee all areperishable and time-bound products. This means they have to be sold


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within a very tight window from the date of production. GCMMFs reachextends nation-wide, so accounting for packing time, transfer timesand delivery to retail outlets time, the net time available for sale canbe as low as four days for curd and is less than one day for milk. this,in turn, means that inventory management is of prime importance in

GCMMF. Unlike other products, the inventory of milk is practically oneday. So GCMMF follows a strategy where plans of procurement andproduction are made for 12 months rolling forecasts and inventories ofbutter and others are built up during flush season for the followingsummer.

Too much milk is also a problem, says Vyas. "I have to have an outletfor all the milk that 1 collect and process. This means that a vast salesand distribution network is almost imperative". GCMMF certainly hasspread its wings. Today, it directly reaches half a million retailers andaims to expand its reach to a million by 2005 (see table 'Wide Reach').

Its products need a rather different set-up than a typical FMCGcompany, due to the requirement of the cold chain. Says Sodhi, "wereach 4,000 distributors across India, serviced from our 48 officesnation-wide. These distributors invest in facilities like freezers, coldrooms and insulated vans." Sodhi claims GCMMF has had no problemsin all these years with this set-up.

Fig. 23

Farmer

1.5 hours

Documents

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