Improving market share of a company by effective sales and distribution

IMPROVING THE MARKET SHARE OF A FMCG COMPANY

BY EFFECTIVE SALES & DISTRIBUTION MANAGEMENT

VINOD GUPTA SCHOOL OF MANAGEMENT

A PROJECT REPORT

ON



Submitted In Partial fulfillment of

Master of Business Administration

Ravi Shankar (09BM8088)

GUPTA SCHOOL OF MANAGEMENT, IIT KHARAGPUR

MAY 2011

1



By


Under Guidance of

Prof. S. K. De

, IIT KHARAGPUR

2

UNDERTAKING REGARDING PLAGIARISM

I hereby declare that the research project “Improving the Market Share of a FMCG Company by

Effective Sales & Distribution Management” is genuine and original in nature and no contents

have been directly copied except where references are mentioned alongside. If any part of the

report is found copied from any source without mention, the research project may be considered

invalid.


Place: IIT Kharagpur

Date:

3

ACKNOWLEDGEMENTS

It is a great feeling expressing gratitude to my faculty advisor of the Applied Management

Research Project, Prof. S K De, VGSOM IIT Kharagpur for his continuous guidance on the

project. I thank Dr. Sushmita Mukhopadhyay for putting up her tireless efforts in coordinating

the whole process of AMRP. I am thankful to Prof. A K Tripathy, Dean VGSOM, IIT Kharagpur

for his encouragement and positive support at every front.

I also extend my sincere regards to the faculty of VGSOM for their direct and indirect support on

this project. In the end I thank all my friends and family members for making valuable

contributions and supporting me in development of the research project.


VGSOM, IIT KHARAGPUR

4

INDEX

Chapter Numbers Particulars Page No.

1.0 Introduction……………………………………………… 9 - 11

2.0 Review of Related Literature…………………………….. 12 - 14

3.0 Research Methodology…………………………………… 15 - 16

3.1 Data Collection Instrument………………………………. 15 - 15

3.2 Sampling Design………………………………………….. 15 - 15

3.3 Exploratory Research…………………………………….. 15 - 15

3.4 Descriptive Research……………………………………… 15 - 16

4.0 Analysis of Data & Inferences…………………………….. 17 - 32

4.1 Findings of Exploratory Research………………………… 17 - 20

4.2 Observations from Interview with Distributor…………….. 20 - 22

4.3 Analysis of financial condition of distributor under different 22 - 28

payment terms scenario

4.4 Observations from interview with retailers……………………. 28 - 29

4.5 Analyzing the distribution channel at retailer level…………. 29 - 32

5.0 Conclusions…………………………………………………. 33 - 33

6.0 Scope for Future Work…………………....................... 34 - 34

7.0 References……………………………………………….. 35 – 36

APPENDICES

Appendix 1 Analysis of Financial position of distributor

Appendix 2 Cost Benefit Analysis of implementing goods return policy

5

LIST OF TABLES

Table No. Particulars Page No.

Table 1.0 Distribution Channels of some of FMCG Companies …………… 17 - 18

in India

Table 2.0 Details of distributors in Kharagpur …………………………….. 19 - 19

Table 3.0 Parameters common to all the payment terms scenarios………… 23 - 23

Table 4.0 Cash inflow - outflow situation corresponding to scenario 1 …… 24 - 24

Table 5.0 Average net cash flow under scenario 1 at credit default of ……. 24 - 24

15% and margin of 5.5%.

Table 6.0 Average net cash flow under scenario 3 at credit default of ……. 25 - 25

15% and margin of 5.5%.

Table 7.0 Calculations of cost benefit analysis of implementing ………… 30 - 31

“goods return policy”

Table 8.0 Summary of cost benefit analysis of implementing …………… 31 - 32

“goods return policy”

6

LIST OF FIGURES

Figure No. Particulars Page No.

Fig 1.0 Schematic of FMCG Distribution Channel ………………………. 11 - 11

Fig 2.0 Company wise sales turnover share of Puja Traders …………….. 20 - 20

Fig 3.0 Marketwise sales turnover of Puja Traders………………………. 21 - 21

Fig 4.0 Average cash flow with the distributor at a credit default of 15%.. 25- 25

Fig 5.0 Average cash flow with the distributor at a credit default of 10%.. 26 - 26

Fig 6.0 Average cash flow with the distributor at a credit default of 5%... 26 - 26

Fig. 7.0 Average cash flow with the distributor at a credit default of 0%... 27 - 27

7

EXECUTIVE SUMMARY

Effective management of distribution network, in terms of ensuring efficient availability of

products in the market in the most accurate quantities and in cost effective way, is a key to

success of any FMCG Company.

The research project undertakes to study the distribution network of a FMCG Company with a

view to identify the loopholes and pain areas at the distributor as well as retailer level in the

distribution system which affect the achievement of higher sales volume of a product. The

project work attempts to arrive at alternative(s) thus creating win-win situation for distributor

and retailer so as to maximize the product availability in the market, thereby improving the sales

of product and hence the higher market share.

The research project comprises of two phases; exploratory and descriptive. During exploratory

phase, local retailers and local distributors were surveyed so as to study, in general, the

distribution system of various FMCG brands that are available with the retailers in the local

market.

The descriptive phase involves (i) detailed study of procurement and distribution practices of a

particular distributor (particularly representative of non-leading FMCG companies) viz. Puja

Traders (based in Malancha, Kharagpur), so as to understand the distribution management and

identify loop holes in the system and (ii) study of factors hampering the sale of product at retailer

level.

The study revealed that maintaining enough cash flows is one of the serious issues with

distributor. The distributor purchases goods from supplier on cash payment whereas sell goods to

retailers on credit of atleast15 days. In order to entice retailers for cash payments, he has to offer

discounts of upto 2-3%. This leads to a situation where the distributor always has negative cash

flows which ultimately affect the quantity of goods he purchases, inventory levels at warehouse

and also hampers the motivation level thereby causing frequent stock-outs and hence lost sales.

Taking above facts into consideration, different alternative payment terms scenarios have been

analyzed for the distributor so as to suggest one that is favorable to both the supplier as well the

distributor. It has been found that the supplier must revise the payment terms in such scenarios to

8

allowing a credit period to the distributor for payment of the goods supplied while charging a

little extra price and also asking them to achieve higher sales targets. This will enhance the

channel motivation and would ensure that sufficient quantities of the product are available in the

market.

The study at retailer level revealed that the major factor that discourages a retailer from

purchasing sufficient quantity of a product (of non-leading FMCG Company) is whether the

supplier would take the unsold goods back or not. As reported by retailers, the purchase quantity

in such a case is only 70-80% of the actual demand of the product just because they are skeptical

of whether the quantity, if purchased more, would sell or not. Even if the retailer is offered

significantly higher margin, he/ she would purchase in lesser quantity than the actual demand of

the product. This causes stock out of product even when there is a demand and hence results in

lost sales.

In order to overcome this problem, a cost-benefit analysis of implementing the goods return

policy, has been conducted. It shows that implementing the goods return policy would cost

approximately 3-4% of the retail price which if implemented, would enhance the sale by 20%

(appx.). The policy may be implemented by reducing the margin of the retailer by 2% and

bearing the remaining cost. The policy would result in, retailer purchasing higher quantities of

product which increases the product availability and minimized the chances of lost sales.

Implementing above mentioned strategies in the distribution system would ultimately improve

the product availability at both the distributor as well as retailer level. More a product is

available lesser are the chances of lost sales and more will be the chances of sale as substitute as

a result of which the market share of the company would improve.

9

CHAPTER I

INTRODUCTION

This chapter deals with introduction to distribution system for FMCG in Indian context,

importance of distribution system for the supplier and key objectives of the research.

Product distribution (or place) is one of the four elements of the marketing mix. The distribution

channel is defined as a chain of intermediaries through which the product is passed down the

chain to the next organization viz. distributor & retailer, before it finally reaches the consumer or

end-user. This process is known as the ‘distribution chain’. Each of the elements in these chains

will have their own specific needs, which the producer must take into account, along with those

of the all-important end-user. (www.wikipedia.org).

Yet the distribution chain is merely assuming a part of the supplier’s responsibility; and, if they

have any aspirations to be market-oriented, their job should really be extended to managing all

the processes involved in that chain, until the product or service arrives with the end-user. This

may involve a number of decisions on the part of the supplier:

� Channel membership

� Channel motivation

� Monitoring and managing channels (Marketing Management, Philip Kotler)

The distribution network plays a vital role in maximizing sales and market share of any FMCG

company as a result of deeper market penetration, efficient product availability and promotion.

In case of fast moving consumer goods, the total demand for any particular product (physical

offering satisfying a particular need) in the market is constant which is met by all the competitors

which are functional in that market corresponding primarily to their efficiency of distribution

achieved through establishing policies favorable to channel members, other factors being less

important. The reason for this is that fast moving consumer goods are low involvement products

which are easily purchased by the customers interchangeably as per their convenience. Brand

10

switching is very common, that is if a product is not available in one brand, the consumer would

conveniently purchase the same product of another brand.

The penetration efficiency of distribution channel is largely governed by the distributors &

retailers. Well managed distribution channels ensure timely availability of forecasted quantities

of goods, lower inventory holding costs, minimized lost sales, high substitution sales (sale of

own product as a substitute in case competitors products are not available in the market). This

ultimately increases the total sales figure of the company and hence ensures higher market

shares.

Promotional support viz. higher retailer margins, incentives during promotional events, provision

of display racks etc. by the supplier are amongst other factors which affect the sale of a product.

Channel motivation is a concept wherein the supplier makes attempt to motivate its distribution

partners so as to tempt them to push the product into the market effectively. It is difficult enough

to motivate direct employees to provide the necessary sales and service support. Motivating the

owners and employees of the independent organizations in a distribution chain requires even

greater effort. There are many devices for achieving such motivation. Perhaps the most usual is

`incentive’: the supplier offers a better margin, to tempt the owners in the channel to push the

product rather than its competitors; or compensation is offered to the distributors’ sales

personnel, so that they are tempted to push the product.

The efficiency of distribution channel, however, is a function of company’s terms and

conditions with the distributors. Distributor favoring terms and conditions result in motivated

distributors who ultimately show it in their order management and final distribution of goods to

retailers. Also, retailers have a major role to play by promoting the product against competing

brands’ poduct.

The study, hence has been taken up to study the distribution channes of a few of companies

(HUL, ITC, Marico, Park Avenue, Agro Tech Pvt. Ltd., MTR Foods, Unibic, in the local region

(Kharagpur) with a focus on Agro Tech Pvt. Ltd., MTR Foods & Unibic (which are non leading

FMCG players) so as to study their distribution channel in detail and identify loopholes/problems

at distributor as well as retailer level that hamper the sale and suggest solution mix to improve

the product availability to the customer so as to minimize lost sale and maximize substitution

sale.

11

The distribution channel in case of FMCG comprises of

Fig. 1.0 Schematic of FMCG Distribution Channel

Following are the objectives taken up in this study, so as to arrive at a robust distribution

management solution for any particular non-leading FMCG company:

Objectives of Study:

1. To study and understand the operation of local distribution channels in case of FMCG’s.

2. To study and identify major issues/loopholes in the distribution channel which affect

availability of product to customer.

3. Propose a solution mix which minimize lost sales and increase substitution sales of a

product as a result of improved product availability.

Distribution

Centre 1

Distribution

Centre 2

FMCG Company (Supplier)

Redist.

Stockist 1

Redist.

Stockist 2

Redist.

Stockist 3

Redist.

Stockist 4

Retailer Market 1 Retailer Market 2 Retailer Market 3 Retailer Market 4

12

CHAPTER II

REVIEW OF RELATED LITERATURE

This chapter will provide an overview of some of the relevant research works that have been

done in the past.

Gavirneni et al. (1999) and Cachon and Fisher (2000) studied and quantified the value of sharing

sales information to overcome demand distortion due to order batching, and Chen et al. (2000)

analyzed the effects of the forecasting process on information sharing.

Rajiv Mehta et.al (2001) emphasized the role of sales managers at all levels in channel

management so as to achieve optimum performance of the market channels and hence higher

sales and market share.

Lee et al. (2000) addressed the bullwhip effect and considered the value of information sharing

under a known autoregressive demand process.

Julius Chu et.al (2003) modeled the situation as a Bayesian game, and found that, in equilibrium,

whether the retailer reveals or withholds the information depends on two things—the cost of

revealing the information and the nature of market demand signal that the retailer receives. If the

cost of sharing the information is sufficiently large, then the retailer will withhold the

information from the vendor regardless of the type of signal that is received. If the cost of

sharing the information is small, then the retailer will reveal the information to the vendor if a

high demand is signaled, but will withhold it from the vendor if a low demand is signaled. In

general, reducing the cost of sharing information and increasing the profit margin of either the

retailer or the vendor (or reducing the cost of the vendor or retailer) will facilitate information

sharing.

Kaipia et. al (2003) examines the options open to the grocery retailing industry that will enable it

to attack the problem of stockouts in managing increased number of SKUs, through outsourcing.

A new process innovation, vendor managed category management, is proposed. A potential

application is presented by means of one real-life case, in which a distributor offers the retailers

full management of one category that includes assortment forming and logistical functions.

13

S. Bhardwaj (2006) had discussed in detail the types of marketing channels, roles/onus of

channel members and major issues being faced by distributors viz. selling goods to retailers at

their own risk, requirement of financials for procuring and maintaining inventory.

L. Whicker et.al (2006) investigated, through the use of an industrial case study, how analysis of

both time and cost can be combined to provide a more accurate view of supply chain

performance which can lead to better informed decision making. The subsequent analysis

provided an insight into the relationship between time and cost in supply chain processes and

demonstrated how product costs accumulate in the supply chain.

Armstrong et.al (2006) had elaborated use of combined forecasting techniques viz. judgmental

and quantitative or statistical methods based on given situations. They suggested that use of

combined forecast models results in more accurate forecasting. Integration is effective when

judgments are collected in a systematic manner and then used as inputs to the quantitative

models, rather than simply used as adjustments to the outputs.

Aixa Citron et.al (2009) described a multiple criteria mixed-integer linear program used for

designing the best possible supply chain distribution network for a consumer goods company.

The model determines the optimal configuration of the manufacturing plants, distributors and

customers in the distribution network. The model selects the best option for each

customer/distributor based on several criteria: profit, lead time, power, credit performance, and

distributors’ reputation. The model is validated with real data from a consumer goods company

to show its functionality.

Haan et.al (2009) characterizations of lean (what, when needed but perfect) and agile (first, fast

and best) show the paradigmatic differences between the two. When applied in a case study in

Poland on a distributor of lifestyle oriented fast moving consumer goods, established after the

transition, it appeared that these characterizations enabled a proper description and analysis.

During the volatile period (1996–2002) an agile approach provided the flexibility and

competitiveness needed. However, when the market matured the overly expensive agility caused

last minute crisis. Then a lean approach enabled the optimization of processes needed to supply

14

customer in a more reliable way. Both approaches stress different aspects but have quite a few

tools in common.

Pradeep Narain, Sanjeev Kumar Jha and Soumitra Devi (2008) provided insights into the

evolution of distribution network of Hindustan Unilever Limited, its strategies of distribution

management and presence of its distribution network across nation.

Kumar Vaibhov (2009) presented the overview of FMCG industry and analyses of FMCG sector

in the country with a focus on studying the sales and distribution network management and

analysis of demand and supply of Proctor & Gamble.

Michaelraj et. al (2009) proposed two models which ranks the retailer on the basis of their

demand and payment policies and accordingly establish replenishment policy so as to minimize

the balance payment and maximize the sale of a particular distributor. The models proposed if

followed by the distributors could reduce the closure of business due to the financial burden,

which is frequent in the present scenario.

15

CHAPTER III

RESEARCH METHODOLOGY

This chapter discusses the methodology adopted for conducting the research. Types of surveys,

Design of data collection instrument, pre-testing of data collection instrument, sampling

approach and types of research adopted.

3.1 Data Collection Instruments

Personal In-depth interview technique had been used as a data collection instrument. In this,

personal interview were conducted with people involved in different functions of the distribution

to have an in-depth understanding of operations of distributor as well as retailer.

3.2 Sampling Design

A convenience sampling approach had been adopted for surveying. Retailers and distributors

(respondents) had been chosen from the nearby local markets for the study.

As, the first objective of research was to identify a distributor who represents non-leading FMCG

brands so as to further study that particular channel in detail, the research problem has been

divided into two phases: 1. Exploratory and 2. Descriptive.

3.3 Exploratory Research

The research had primary as well as secondary data collection phases so as to study and

understand the management of distribution channels in FMCG industry in general and also to

explore the distribution channels established by reputed FMCG firms in India.

Initial phases of primary research had been exploratory in nature to understand retail and

distribution channel in the local market, availability of various FMCG brands in local market, the

flow of goods from distributors to retail shops and distributor practices and their margins.

3.4 Descriptive Research

This part of research has further been divided into two phases.

16

3.4.1 Phase I

Having understood the scale and operation of FMCG distribution channel in the local market,

further research had been to study in detail one local distribution channel of selected FMCG

companies in terms of its replenishment policies viz. payment and delivery terms with

distributors, inventory policies, logistic modes, lead times of replenishment, lost sales and causes

for lost sales and effectiveness of supply demand match being maintained at distributor’s end.

The instrument of data collection for above mentioned purpose had been chosen as personal in-

depth open ended structured interview. This particular instrument had been chosen as the

objective of research was to explore as much as possible, the process of distribution, pain areas

for distributors and identify loopholes in the distribution system. The questionnaire would be

analyzed primarily for those parameters which will ultimately improve product availability and

hence market share of the selected FMCG Company. A detailed interview was conducted with

distributor so as to unfold the facts with respect to issues affecting product availability.

3.4.2 Phase II

The second phase of the research had been to study and understand various factors/ issues that

affect the availability of product to customer at retailer level. The information had been collected

by conducting personal in-depth interviews with a few retailers operating in the nearby local

market.

The data/information collected had been analyzed so as to arrive at a solution mix which would

benefit all the channel partners, improve product availability in the market thereby minimizing

chances of lost sales and maximizing substitution sales ultimately resulting in improvement in

the market share of the company.

17

CHAPTER IV

INFERENCES AND ANALYSIS OF DATA

This chapter provides details of the data that had been collected during the exploratory and

descriptive phases of the research and analysis of the same so as to arrive at a solution mix for

the problem.

4.1 Findings of Exploratory Research

The exploratory part of the research was focused on to collect information on distribution

channel management (national as well as local) of a few leading FMCG companies in the

country. The detail had been collected on various parameters such as product range of the

company, product categories being supplied by the company, nation distribution network and

local distribution network set up by the company to distribute its product assortment. The details

such as the payment terms and replenishment policies, mode of transport used for distribution,

supply demand match and channel motivation etc. were also collected. These details had been

collected with a view to understand different types of channel management practices and systems

being used by various FMCG companies in the country. The table below briefly presents the

same:

Company

Name

Agro Tech Marico ITC- FMCG Hindustan

Unilever-

FMCG

Product

Range

Sundrop oil &

peanut butter, ACT

II, Snack Break,

Rath etc.

Sweekar,

Saffola,

Parachute,

Mediker, Hair

& Care, Revive

Ashirvaad,

Sunfeast, Bingo,

Vivel, Fiama DI

Wills

Brooke Bond,

Kissan, Knorr,

Annapurna,

Fair & Lovely,

Pond's,

Sunsilk, Clinic

plus,

Pepsodent

Product

Categories

Foods Personal Care,

Foods

Personal Care,

Foods, Stationery,

Personal Care,

Skin Care,

18

Lifestyle Foods, Home

Care

National

Distribution

3500 towns, 265,000

retailers, Direct

selling agreements

with Reliance Retail,

Food Bazaar, Aditya

Birla D-Mart etc.

882 Direct

distributors, 153

super

distributors,

catering to

2,393 small

stockists and

4523 van

markets

2.0 million retail

outlets, 1.0 Lakh

markets

4,000

redistribution

stockists,

covering 6.3

million retail

outlets,

reaching to

more than 700

millions

Local

Distribution

1 distributor 2 Distributors 2 distributors 1 distributor

Payment &

Delivery

Policies with

distributors

Immediate Cash Immediate Cash Immediate Cash On credit

Supply

Demand

Match

Low Medium High High

Channel

Motivation

Low Low High High

Table 1.0 Distribution Channels of some of FMCG Companies in India

Further in the exploratory part of the research, a number of distributors were identified taking

help of retailers located in the nearby IIT Khragpur market and interviewing them rudimentarily

(distributors) so as to locate them and fix an appointment for further discussion on subject of

study.

19

The local distributors of HUL, Agro Tech, MTR Foods, UNIBIC, ITC and Marico have been

interviewed so as to understand the practices being followed and the replenishment policies on

which the distribution system operates, modes of logistics used, size of their market. The details

that had been collected are given as under:

Distributor

Name

Puja Traders G.R Enterprise Basak

Enterprise

Dutta

Decorator

Kar

Enterprise

Company Agro Tech

Private

Limited, MTR

Foods, Unibic

Hindustan

Unilever

Park Avenue ITC Marico

Contact

Person

Sushil Kumar

Goel

Gautam Kumar

Bhunia

Naresh Gauri Shankar Kar Babu

Address Malancha,

Near Axis

Bank.

Gol Bazaar,

Main Market

Road

Inda Market Gole Bazaar Malancha

Distribution IIT, Gole

Bazaar, Gate

Bazaar, Prem

Bazaar,

Kalaikunda

IIT, Gole

Bazaar, Gate

Bazaar, Prem

Bazaar,

Kalaikunda

Jhargram,

Kharagpur,

Midinipore

IIT, Gole

Bazaar,

Malancha, Prem

Bazaar

Monthly

Sales

15 Lakhs

(appx.)

- 3 Lakhs

(appx.)

- 6 Lakhs

(appx.)

Modes of

Transport

Mopet Pick up van Mopet Pick up van Mopet

Table 2.0 Details of distributors in Kharagpur

Based on preliminary survey and discussion with different distributors, ‘Puja Traders’ – the local

distributor of ‘Agro Tech Private Limited, MTR Foods and Unibic’, being one of the largest

distributor supplying goods to almost all the local markets, was selected so as to further the

research with an objective of studying the practices such as replenishment policies, payment

terms with supplier and retailer, inventory management, frequency of reordering, frequency of

distribution (supply) to retailers, credit period extended to retailers, credit (if any) from supplier

etc. The data was collected so as to identify major issues/ factors

the product availability in the market

4.2 Observations from the interview with

Puja Traders is a distributor of AgroTech Pvt. Ltd, MTR Foods and Unibic and is located in

Malancha. The owner of the business is Mr. Sushil Kumar Goel

25 years. He hails from northern India (New Delhi). The product range being distributed

Traders is Sundrop oil, popcorn

turnover of his distribution business is

from 3 – 8% depending upon product types and the supplier

IIT Kharagpur and Gate Bazaar, Prembazaar, Kalaikunda (whole Kharagpur region to be more

precise).

Out of total sales, 20% share is from MTR foods, 70% from Agro Tech and re

Unibic and of the total turnover, 30% is derived from Gol bazaar market, 15% from IIT market,

20% from Gate bazaar and remaining from other

share of companies in total sale and share of different

below.

Fig. 2.0 Company wise sales turnover share of Puja Traders

MTR Foods

20%

Share of Sales Turnover Company


ted so as to identify major issues/ factors at distributor level

in the market.

nterview with the distributor

distributor of AgroTech Pvt. Ltd, MTR Foods and Unibic and is located in

The owner of the business is Mr. Sushil Kumar Goel. He is in this business since last

northern India (New Delhi). The product range being distributed

Sundrop oil, popcorns, Unibic cookies, snacks, MTR foods jam, pickles etc.

turnover of his distribution business is between Rs. 10-15 lakhs, out of which his margin varies

depending upon product types and the supplier. The markets served are Golbazaar,


f total sales, 20% share is from MTR foods, 70% from Agro Tech and re


20% from Gate bazaar and remaining from other retail shops in Jhargram and Med

share of companies in total sale and share of different markets are presented in fig. 2 and fig. 3

Company wise sales turnover share of Puja Traders

Agro Tech

70%

MTR Foods

Unibic

10%

Share of Sales Turnover Company-wise (%)

20


at distributor level that affect

distributor of AgroTech Pvt. Ltd, MTR Foods and Unibic and is located in

. He is in this business since last

northern India (New Delhi). The product range being distributed by Puja

, Unibic cookies, snacks, MTR foods jam, pickles etc. Monthly

15 lakhs, out of which his margin varies

. The markets served are Golbazaar,


f total sales, 20% share is from MTR foods, 70% from Agro Tech and remaining 10% from


retail shops in Jhargram and Medinipur. The

markets are presented in fig. 2 and fig. 3

Fig. 3.0 Marketwise sales turnover of Puja Traders

The average period for which the stock lasts in distributor’s warehouse is 4

reordering frequency for all items is one week except Unibic items whose re

two weeks. The rent paid by distributor for the warehouse is nominal i.e. Rs. 3000 only

x 100’ warehouse.

The mode of distributing goods to retailers

distribution is borne by the distributor only.

The distributor supplies goods to Big Bazaar on purchase order basis. The quantities are asked

form supplier (manufacturer)

Bazaar.

Order processing time of supplier (

usually both at distributor as well as

The distributor dispatches goods to retail outlets routinely and th

decided by him based on his past experience. Distributor find

to record and maintain past sales data.

Money rotation is a big constraint for the distributor as he has to pay immediate cash to the

supplier for taking delivery of goods while the payment terms

days. Moreover, the credit is difficult to recover and there is alw

money blocked with the retailers for long periods.

Gate Bazaar

20%

Marketwise sales turnover of Puja Traders

The average period for which the stock lasts in distributor’s warehouse is 4

reordering frequency for all items is one week except Unibic items whose re

two weeks. The rent paid by distributor for the warehouse is nominal i.e. Rs. 3000 only

The mode of distributing goods to retailers is pick-up van (capacity – 100 cartons). The cost of

distribution is borne by the distributor only.


supplier (manufacturer) and delivered against what is mentioned in purchase order of Big

supplier (manufacturer) is 3-4 days. There exists a demand supply gap

usually both at distributor as well as supplier end.

istributor dispatches goods to retail outlets routinely and the quantities of dispatch are

decided by him based on his past experience. Distributor finds it cumbersome and cost incurring

to record and maintain past sales data.


for taking delivery of goods while the payment terms on retailer end are credit of 15

days. Moreover, the credit is difficult to recover and there is always a significant amount of

locked with the retailers for long periods. This results in low cash

Gole Bazaar

30%

IIT Market

15%Gate Bazaar

20%

Others

35%

Marketwise Sales (%)

21

The average period for which the stock lasts in distributor’s warehouse is 4-5 days. The

reordering frequency for all items is one week except Unibic items whose re-order frequency is

two weeks. The rent paid by distributor for the warehouse is nominal i.e. Rs. 3000 only, for a 50’

100 cartons). The cost of


ntioned in purchase order of Big

4 days. There exists a demand supply gap

e quantities of dispatch are

it cumbersome and cost incurring


retailer end are credit of 15

ays a significant amount of

in low cash flow available with

Gole Bazaar

IIT Market

22

the distributor, ultimately affecting the reorder frequency and re-order quantity and hence the

stock levels being maintained to meet the market demand.

In order to entice retailers to make payments immediately in cash, the distributor offers discounts

ranging from 0.5 to 2.0%.

Feedback: As reported by distributor, the expenses of operating the distribution business have

gone up but the margins offered by manufacturers have not increased and payment terms also are

not favorable. This is encouraging distributors to shift away from this business of distribution to

some other ones.

4.3 Analysis of Financial Condition of Distributor under different payment terms scenarios

It may be inferred from the responses during the interview that one of major pain area for the

distributor is very low or negative cash flow with which it is very difficult for him to continue

the business. Hence a scenario analysis for the distributor had been conducted so as to ensure the

positive cash flow to the distributor and increase in sales of the FMCG Company. The financial

condition of distribution has been analyzed under four different payment terms scenarios (given

below) while assuming his position at four credit default levels (unpaid credit after the due credit

period) viz. 15%, 10%, 5% and 0%, and four margin levels (range of distribution margins) viz.

5.5%, 6.5%, 7.5% and 8.5%.

The payment scenarios are:

1. Purchase by cash payment and sell on credit of 15 days.

2. Purchase by cash payment and sell on cash receipt, at a discount of 2%.

3. Purchase as well as sell on credit of 15 days.

4. Purchase on credit of 15 days but at 2% higher cost, sell on credit of 15 days.

The data presented below show the analysis of payment terms of supplier with distributor and its

impact on distributor, under different scenarios. Table below represents sample information from

the distributor which would be used to calculate the net cash flow left with the distributor under

these different scenarios. Scenario 1 & 2 are the existing scenarios of the distributors whereas

scenario 3 & 4 would be the scenario when the payment terms are revised. All the four scenarios

have been analyzed so as to calculate the average cash flow available (calculated over a period of

23

3 years) with the distributor. The calculations, for the purpose of understanding how average

cash flows values were derived, are shown in table 3.0 through 6.0.

Monthly order amount to manufacturer (Rs. Lakhs) 12.5 12.5 12.5 12.5

Ordering cycle (weeks) 1 1 1 1

No. of orders per month 4 4 4 4

Each order's average amount (Rs. Lakhs) 3.125 3.125 3.125 3.125

Retailer's cost (as percentage of price) 0.89 0.89 0.89 0.89

Distributor's cost (as percentage of price) 0.835 0.825 0.815 0.805

Average margin of distributor (%) 5.5% 6.5% 7.5% 8.5%

Distributor's each cycle's sales turnover (Rs. Lakhs) 3.33 3.37 3.41 3.45

Table 3.0 Parameters common to all the payment terms scenarios.

The table 4.0 shown below presents a sample calculation of cash inflow, outflow and net margin

under scenario 1 at 15% credit default level and margin of 5.5%. The calculations for other levels

and credit default, margins and payment scenario have also been done similarly. The

interpretation of analysis of different payment term scenarios at given credit default levels and

margin levels, are presented in bar charts below.

24

Table 4.0 Cash inflow - outflow situation corresponding to scenario 1

The calculations below show the average cash-flow available with the distributor under scenario

1 and scenario 3. Table 5.0 shows the calculation of 3 year average net cash-flow with the

distributor whereas table 6.0 shows cash flow situation of the distributor under payment terms

scenario 3.

Table 5.0 Average net cash flow under scenario 1 at credit default of 15% and margin of 5.5%.

Table 6.0 Average net cash flow under scenario 3 at credit default of 15% and margin of 5.5%.

The scenario and sensitivity analysis of financial condition of the distributor has been elucidated

below in the form of bar charts. The charts under figure 4.0 through 7.0

cash flow available with the distributor at

different payment term scenarios.

Fig. 4.0 Average cash flow with the distributor at a credit default of 15%.

Average net cash flow under scenario 3 at credit default of 15% and margin of 5.5%.

sensitivity analysis of financial condition of the distributor has been elucidated

e form of bar charts. The charts under figure 4.0 through 7.0 present the average

cash flow available with the distributor at given levels of credit defaults

different payment term scenarios.

Average cash flow with the distributor at a credit default of 15%.

25

Average net cash flow under scenario 3 at credit default of 15% and margin of 5.5%.

sensitivity analysis of financial condition of the distributor has been elucidated

present the average net

given levels of credit defaults and margins under


Fig.5.0 Average c

Fig. 6.0 Average cash flow with the

-0.4000

-0.2000

0.0000

0.2000

0.4000

3-y

rs A

vg

. C

ash

Flo

w (

Rs.

Lak

hs)

Scenario 1

-0.1000

0.0000

0.1000

0.2000

0.3000

3-yr

s A

vg. C

ash

Flo

w (R

s.

Lak

hs)

Scenario 1



5.5 6.5 7.5

Margin (%)

Cash flows at default of 10%

Scenario 1 Scenario 2 Scenario 3 Scenario 4

5.5 6.5 7.5 8.5Margin (%)

Cash flows at default of 5%

Scenario 1 Scenario 2 Scenario 3 Scenario 4

26

credit default of 10%.

distributor at a credit default of 5%.

8.5

Scenario 4

8.5

Scenario 4

Fig. 7.0 Average cash flow with the distributor at a credit default of 0%.

It may be noticed in figure 4.0

cash flow with the distributor under scenario 1 is highly negative at

However, the average cash flow dramatically improves to slightly negative and then positive one

as the default levels go down to 5% and 0% and margin l

fact, the average cash flows

situation at all the margin levels.

Nevertheless, having zero credit defaulters is not a practical situation. Hence, Scenario

always a painful situation for the distributor.

positive, it is not feasible on all the sales that distributor makes to retailers.

in the payment terms with the supplier would be ma

the distributor.

The alternatives available to the distributor

difficult to negotiate as it does not offer any take

period allowed. Distributors could negotiate for the scenario 4, as

positive cash flows with distributor as a result of credit period that is allowed by the supplier at


.0 and 5.0 that at credit default levels of 15% and 10%

cash flow with the distributor under scenario 1 is highly negative at


as the default levels go down to 5% and 0% and margin levels increase from 5.5% to 8.5%. In

with the distributor are positive enough under no

situation at all the margin levels.

Nevertheless, having zero credit defaulters is not a practical situation. Hence, Scenario

always a painful situation for the distributor. Though average cash flows under

is not feasible on all the sales that distributor makes to retailers.

in the payment terms with the supplier would be mandatory so as to improve the performance of

available to the distributor are scenario 3 and scenario 4 but scenario 3 is

difficult to negotiate as it does not offer any take-away to the supplier in exchange of the credit

s could negotiate for the scenario 4, as it would result in

distributor as a result of credit period that is allowed by the supplier at

27


at credit default levels of 15% and 10% the average

cash flow with the distributor under scenario 1 is highly negative at all the margin levels.


evels increase from 5.5% to 8.5%. In

itive enough under no credit default

Nevertheless, having zero credit defaulters is not a practical situation. Hence, Scenario 1 is

Though average cash flows under Scenario 2 are

is not feasible on all the sales that distributor makes to retailers. Therefore, a revision

ndatory so as to improve the performance of

are scenario 3 and scenario 4 but scenario 3 is

away to the supplier in exchange of the credit

it would result in enough

distributor as a result of credit period that is allowed by the supplier at

28

the cost of some extra margin. The credit period from the supplier eliminates the initial financial

assistance required for the working capital management during the retailer’s credit period. The

revised payment terms improve the financial condition of the distributor such that they could

comfortably continue their business and remain in market. Higher cash flow would enable

him/her place sufficient quantities of items in each order thereby optimizing his cost of ordering

and also would enable him make sufficient quantities of items available to the retailer as and

when required.

4.4 Observations from interviews with retailers

Personal interviews were conducted

• Promotional support is extended to retailer in the form of higher margins, provision of

display panels/racks & return of damaged/unsold goods.

• Cadbury, Nestle, Frito-Lay, PepsiCo, Coca Cola, Wrigley etc. provide display panels.

• Suppliers offer fixed incentives to retailers for their support during promotional events.

• Suppliers of medium-end brands shed higher margins to retailer as compared to those of

established brands (leaders).

• Supplier of established brands actively takes returns of damaged/expired goods.

• They focus on display also by providing retailers with display panels/ racks and insisting

on keeping only their brands in those panels.

• As reported by retailers, the displayed items sell better and hence higher stocks are kept

for these items.

• Medium end brand suppliers do not focus on display, it is upon the discretion of the

retailer to arrange display of items in a way he/she deems fit.

• Retailers themselves promote items on which they get higher margins.

• They also are reluctant in taking back the damaged/expired goods hence causing loss to

retailer and loose good will. (e.g. Sundrop oil takes return while Unibic does not). As a

29

consequence of this, retailers are hesitant in purchasing goods in sufficient quantities.

They usually purchase goods in quantity equivalent to 70-80% of the actual demand.

• On an average 5-15% of unsold (damaged/expired) goods are returned to supplier in case

there exists a goods return policy.

• Stock out is usual and under such circumstances, retailer purchases items from open

wholesale market – Gol Bazaar, at same margin. Transportation cost, however, is added.

• Where utility is a criterion for the consumer, retailer promotes items of greater utility and

with higher margins. (e.g. Bisk farm – Coco malai 300g – Rs. 20/- sells better to

families seeking utility, cheaper toilet cleaners also appeals better to these families).

• In case of stock-out between two successive replenishments from the distributor, the

retailer purchases items from open market (Gol Bazaar).

• Credit period varies from 1 week to 4 weeks. Payments to distributors are made in

installments.

4.5 Analyzing the distribution channel at retailer level

It has been inferred from the observations of the interviews with retailers that non-leading

FMCG players do offer relatively higher margins to retailers so that retailers accept their product

and promote them to end customer as well. These non-leading FMCG players however, do not

focus on return of unsold/damaged goods which, as reported by retailers, are equally important

parameters affecting the sale of the product. If a particular supplier does not take return of unsold

expired/damaged goods, the retailer does not purchase enough quantity of the product fearing

excess quantity would go unsold and get wasted thus causing loss. The retailer, in general,

purchases only about 70-80% of the actual demand of the product. This shows that absence of

goods return policy affects the product availability and hence cause situation of lost sales.

On an average 5-15% of unsold damaged/expired goods are returned to the supplier in case there

exists a goods return policy.

In order to assess whether implementing the goods return policy would benefit the retailer as

well as supplier or not, the cost benefit analysis had been conducted. The following assumptions

have been taken in the analysis:

30

• The supplier sells 50% of returned goods as scrap and recycles the remaining goods.

• The cost incurred in selling goods as scrap is 70% of cost of goods to the distributor and

cost incurred when goods are recycled is 15% of cost of goods to the distributor.

The details of cost-benefit analysis are presented as under:

The table below shows calculations under cost benefit analysis when 15% goods are returned to

the supplier. The cost benefit analysis had been done for an average of 7.5% goods returned out

of which 50% are recycled at an average cost of 15% of supplier’s price and remaining 50% are

sold as scrap at an average cost of 30% of supplier’s price that is at a cost of 70% of supplier’s

price.

No return of Goods

Purchase quantity of retailer as a percentage of total demand 0.8

Amount of goods distributed in a month 1.25

Retailer's Margin 0.2

Monthly sale of retailer 1.5625

Net profit of retailer 0.3125

Cost to supplier 0.72

Supplier's sale in a month 1.125

Return of goods

Purchase quantity of retailer as percentage of total demand >=1

Amount of goods distributed in a month 1.5625

Retailer's Margin 0.2

Monthly sale of retailer 1.953125

Net profit of retailer 0.390625

supplier’s price (as a fraction of retail price) 0.72

Supplier's sale in a month 1.40625

Increase in supplier's sale because of return policy 0.28125

Percentage increase in sale of supplier 0.25

Increase in net profit amount of the retailer 0.078125

Cost of return policy

31

Percentage of goods returned 0.15

Amount of goods returned (cost to supplier) 0.248162

Back transportation cost as a percentage of cost of goods 0.015

cost of scrapped goods 0.7

cost of recycling goods 0.2

Transportation cost 0.003722

Assumption: 50% of goods recycled, 50% of goods sold as

scrap

Scrap cost 0.086857

Recycle cost 0.024816

Total return cost 0.115395

Cost as a percentage of retailer's sale 0.059082

Benefit to supplier 0.165855

Table 7.0 Calculations of cost benefit analysis of implementing “goods return policy”

Return of goods

(%) Particulars

Rs.

Lakhs

5% Increase in net profit of retailer 0.078

Increase in revenue of supplier 0.281

Cost of Return (recycle + scrapping) 0.033

Net Benefit to supplier 0.249

Cost of Return as percentage of retailer's sale 0.017










32


GRAND AVERAGE VALUES

Increase in net profit of retailer 0.078





Table 8.0 Summary of cost benefit analysis of implementing “goods return policy”

It may be noticed that the average cost of implementing the goods return policy would be 3.6%

of the total sales of the product. Therefore, this policy may be implemented by sharing the cost

equally with the retailer. This would result in a reduction of approximately 2% in the retailer’s

margin but stands justified as this causes an increase in sale benefiting both the retailer as well as

the supplier.

Thus, from the analysis we did at distributor as well as retailer level in the distribution channel

reveal that revision in payment terms with the distributor and implementing the goods return

policy would motivate both the channel members to stock enough volumes of the product with

them. The higher stock levels increase the availability of the product in the market which

ultimately minimizes the chances of lost sales and improve chances of substitution sales.

33

CHAPTER V

CONCLUSIONS

This chapter provides the overall conclusions of the study based on the analysis done in the

previous chapter.

The analysis at distributor and retailer levels in the distribution channel of the FMCG Company

suggests that following modifications/revisions are required to be made in the distribution

channel so as to improve the sale of the product.

� Revise payment terms with the distributor to ‘scenario 3’ of payment terms.

� Implement goods return policy by sharing the cost of the strategy with the retailer.

As the cash flows of the distributor improve, he/she would order and stock enough quantities of

product with him to meet the market demand. Also, if the supplier encourages the retailer to

return the unsold expired/damaged goods, the retailer would not hesitate in stocking sufficient

levels of the product with him. As a result, the availability of the product in the market increases

which leads minimized lost sales and maximized substitution sales. This helps in achieving the

higher market share to the company.

34

CHAPTER VI

SCOPE FOR FUTURE WORK

The scope of the study was limited to only improving the availability of the product in the

market. However, there are many other factors such as efficient demand forecasting, information

sharing, efficient replenishment policies, promotional support to enhance the brand recall etc.

which affect sale of the product. Hence a research could be taken up in any of the above-

mentioned areas wherein more insights could be developed so as to identify what factors and to

what extent these factors are important determinants of sale of the FMCG product. A more

precise future research project could be to assess how important is the “display support” for

achieving higher sales of the product.

35

CHAPTER VII

REFERENCES

• S. Bhardwaj. Distribution and channel management. Indian Institute of Technology,

Chennai. 2006.

• J. Scott Armstrong, Kesten C. Green. Demand forecasting - Evidence based methods.

Chapter of forecoming book - Strategic Marketing Management – A Business Process

Approach. 2006.

• Uta Jutter, Martin Christopher, Susan Baker. Demand chain management - integrating

marketing and supply chain. Industrial Marketing Management 36 (2007) 377 – 392.

• Prahlad Krishnamurthy. Marico’s distribution network. FMCG & Retail Marketing Blog.

2007. http://fmcg- marketing. Blogspot.com/2007/12/maricos-distribution-network.html.

• Pradeep Narain, Sanjeev Kumar Jha, Soumitra Devi. A study on distribution management

of HUL. XLRI Jamshedpur. 2008.

• Danuta Kisperska Moron, Job De Haan. Improving supply chain performance to satisfy

final customers. International Journal of Economics. 2009.

• Kumar Vaibhov. Study on sales and distribution management of Proctor & Gamble.

IIMT Greater Noida. 2009.

• L.A. Michaelraj, P. Shahabudeen. Replenishment policies for sustainable business

development in a continuous credit based vendor managed inventory distribution system.

Computers & Industrial Engineering 56 (2009) 260–266.

• Agro Tech Private Limited – website: www.atfoods.com

• Unibic – website – www.unibic.com

• MTR Foods – website – www.mtrfoods.com

• Marico Limited – website - www.marico.com

• Park Avenue – website – www.parkavenue.co.in

36

• ITC Limited - website – www.itcportal.com

• HUL – website – www.hul.co.in

• www.wikipedia.org

37

APPENDICES