Distribution Management:
Best practices from FMCG
K. Dasaratharaman
kdraman2000@[Link]
Objectives
• To discuss some of the best practices from the
FMCG industry in the area of Distribution
management
• To identify ways to use some of these best
practices.
Agenda
• The Indian landscape
• Classification of Markets and Outlets
• The Distribution Footprint and Options
• Margin, Inventory and Servicing paradigm
• Retail Growth paradigms
• The mechanics:
– Ongoing inventory management
– Supply chain practices
Deliverables of a S & D System
• Availability
– Not automatic, but needs to be created……….
– Physical distribution beyond the top 468 big towns is a challenge that
requires planning and proper design…….
– Rural distribution is another ballgame....esp. given the density of
demand !
– In smaller markets : Supply side economics works!
• Sustained Availability : Supply Chain planning + implementation
• Quality : Supply chain practices + Trade storage / FIFO
• Visibility :Planning and good implementation
• Service: AMC, Breakdown service, Spares
• Trade Advocacy : Relationship building and servicing excellence.
• Channel partner health and motivation : Policies + implementation .
Concept 1 : Classification of Markets
• Which markets to focus on and with what P Mix?
– Category Size vs Growth
– Category Size vs Profitability
– Category Potential vs Cost to serve
– Where Competition is strong or not?
• Horses for courses
– Depends on the Company situation & Objectives
– Depends on the Time Horizon
– Depends on PLC/ BLC issues
Concept 1 : Classification of Markets
Large Size
Selective Extensive
Focus Focus
Low Gr Hi Gr
Selective
Avoid Focus
Small Size
Concept 1 : Classification of Markets
• Focus where sales are growing or where
they are not?
– Allocation of resources
–Depends on the objectives
– Follow the 80/20 rule.
Concept 2: Classification of Retailers
Target
Group
• Why classify? User
• What criteria to use? group
• Role of different retailers Non User
Hi Cat Sales
Group
Sales : Star :
SUSTAIN DOMINATE
Low % of TG Hi % of TG
Future
AVOID Star:
BUILD
Low Cat Sales
Concept 3: The Distribution footprint……..
• Where is our market?
– Who is our Target Customer (TG)?
– What are their shopping habits for our Category?
– Who is our Competition at the retail outlet?
• What should our Distribution foot print be?
– How do we measure this?
• Retail Census / Syndicated Research
– What are the surrogate measures ?
• Benchmarking.
Factory 2 Factory 1 Factory 3
Central Warehouse
C & FA
C& FA C &FA
3
1 2
Distributor Flows:
1. Product / Inventory
2. Money
3. Promotion
Wholesaler
4. Service
Retailer
5. Information
6. Title
7. Liability ?
Buyer / Consumer
Direct vs Indirect Distribution
DIRECT INDIRECT
• Be Mod POP model • Cost -effectiveness model
• Positive actions • Variable cost
• More control over Trade • Pull model
inputs - Push possible • Less control over actions /
• More control over Retail inputs/ outputs &
Outputs/ Outcomes outcomes
• Introduction of New • Fast selling / volume SKUs
SKUs, schemes, policies only
• Better Trade relations • Poor control over Retail
Concept 4 : Distribution Options
• How do we reach these outlets?
– Direct vs Indirect Distribution – The Trade Offs !
– What layers in the Distribution set up?
– How many of each kind?
– What terms and conditions?
• What should the “Tasks“ be for each channel
partner?
Concept 4 : Distribution Options
• Direct Distribution + Indirect Distribution = Total
Distribution (A U B)
• Direct Distribution = F {Retail coverage &
frequency, Brand Pull & Velocity, SKU margins and
rotation, Visibility & other Promotion schemes}
• Indirect Distribution = F { Wholesale coverage &
frequency, W/s credit, Brand & SKU pull, Trade
margins, Promotion schemes}
What criteria to evaluate the options ?
Distribution Deliverables / Effectiveness:
• Reach
• Sustainability
• Retail Outlet Parameters
• Numeric & Weighted Distribution / Stock weights
Cost:
• Fixed Cost implications
• Opex implications
• Margin implications
Concept 5:Margin and Inventory Mgt …..
• Who holds how much inventory and why?
– Company
– CFA / Super Distributor
– Distributor
– Wholesaler
– Retailer
• How does Supply chain / servicing frequency impact
this?
• How are their margins connected with the above?
• The ROI model of Channel partners:
– What Investment level and why?
– What margin structure and why?
– What Trade policies and why?
Margin, Servicing frequency & Inventory
• Inventory = F {Nature of the Cat ( shelf
Life)Brand pull, capital & space for this
category, Margin%, rotation, servicing}
• Servicing frequency = F { Beat demand and
margins, cost to serve , retailer inventory &
purchase habits}
• Inventory = 1/α Servicing frequency
Trade ROI
• Trade member looks at his ROI on the Brand /
SKU.
• ROI is calculated as follows:
ROI = Margin % * 365/ Sales cycle
•Based on the following data, calculate the Sales (cash to
cash) cycle:
Entity A Entity B
Purchase Credit 30 days 20 days
Average Inventory 45 days 10 days
Sales Credit 30 days 0 days
30
30
Managing Trade ROI
• For a lot of companies, distributors tend to
favour Wholesalers
• This results in higher credit but less effort and
bulk volumes…..
• This also results in lack of control over retail
parameters.
• Normally this is compounded with “dumping“
by the company resulting in higher inventory.
• All the above leads to lower ROI
Margin, Inventory and Servicing : The FMCG Experience
Distributor Distributor
Current Proposed
Wholesale Sales % 80
Wholesale margin % 3
Retail Sales % 20
Retail Margin % 5
Blended margin % 3.4
Investment in Stocks - days 45
Investment in Credit – days 10
Investment in Claims – days 10
Total Investment - days 65
Gross ROI % 19.1 36.0
Costs % 12
Nett ROI % 7.1
Margin, Inventory and Servicing : The FMCG Experience
Super
Distributor Wholesaler Retailer
Distributor
Wholesale Sales % 100 50 25
Wholesale margin % 3 3 1
Retail Sales % 0 50 75 100
Retail Margin % 0 5 2 10
Blended margin % 3 4 1.75 10
Investment in Stocks - days 20 30 10 10
Investment in Credit – days 10 5 10 -4
Investment in Claims – days 5 5 0 1
Total Investment - days 35 40 20 7
Gross ROI % 31.3 36.5 31.9 281 %
Costs % 8 12 6
Nett ROI % 23.3 24.5 25.9
Other factors for Trade ROI
• Trade member looks at the Rs he earns by selling each unit of
SKU
• He calculates his investment (depending on your frequency
of servicing and his estimate/ experience with that category)
and gets a measure of his ROI – this determines his
investment level in the SKU.
• His other considerations may be:
– Space
– Infrastructure / Refrigeration
– Returns policy
– Marketing
– Company reputation
– Schemes
– Distributor reputation
Concept 6
Retail Sales Growth: the Twin Engines
More Sales from Sales from More
Existing Outlets Outlets
Sales Increase
Measuring Distribution - 1
Numeric & Weighted Distribution
Numeric Distribution = No. of outlets the SKU is
stocked in / Total No. of outlets stocking the
Category (in a given geography)
Weighted Distribution = Category sale in those
outlets where SKU is stocked / Total category Sale
(in a given geography)
Numeric and Weighted Distribution
• Total No. of Retail outlets in the market = 300
• No. of outlets stocking the Category = 250
• No of outlets stocking our SKU = 150
• Numeric Distribution = 150/ 250 = 60%
• Sales of the Category in those 150 outlets = 400
units/ month
• Total Sales of the Category in the market = 1000
units/ month
• Weighted Distribution = 400/ 1000= 40 %
Not all Retail Outlets have the same Sales…..
0.8
0.7
High Sales Outlets
0.6
0.5
Retailer
Sales 0.4
0.3
Medium Sales Outlets
0.2
Low Sales Outlets
0.1
0
0 2 4 6 8 10 12 14
Retailer Name
Growth Paradigm 1: Retail Mgt
• M/ Sh vs Weighted Distribution vs Numeric
Distribution imperatives
Market Num Distn Wtd Distn Outlet
Share Share Share Shares
Case 1 30% 40% 70% ?
Case 2
30% 50% 40% ?
Fish where the fish are…..
0.8
0.7
High Sales Dealers
0.6
0.5
Dealer
Sales 0.4
0.3 Medium Sales Dealers
0.2
Low Sales
0.1
0
0 5 10 15
Dealer Name
Outlet shares
• How to get more Sales/ Sh from existing
outlets?
– Intensive distribution / stock weights
– Stock Visibility, Brand blocks and Hot spots
– Retailer Branding, Incentives and Advocacy
– Retailer Cards and their use.
– Sales Force Automation (SFA)
Growth Paradigm 2: Distribution Expansion
• Direct vs Indirect Distribution
• Super Stockist networks:
– How does it work
– Role of the super stockist
– Remuneration / supervision.
Factory 2 Factory 1 Factory 3
Central Warehouse
C & FA
C& FA C &FA
3
1 2
Distributor
Wholesaler
Retailer
buyer / consumer
C&FA
Town Distr
Super Stockist
Town
Ret
Town W/S
Sub Stockist
Big Vil W/s
Big Vill Ret
Small Village W/S
Small Village Retailer
Concept 7:
The Mechanics: Ongoing Inventory Mgt
• The Golden equation (OS + R = S + CS )
– Use in planning
– Use of Norms / self correction algorithm
– Use in Primary sales mgt
– Forecasting in times of volatility (the hedging
principle)
– Use in Retailer Cards
– IT practices.
Concept 8:
The Mechanics: Supply chain mgt
• What is OTIF and why?
• Fill rates :
– Range fill : No. of skus supplied/ No. of skus ordered
– Quantity fill : Quantity supplied / Quantity ordered
– Quality fill : Quantity OK / Quantity supplied
– Time fill : No. of days delay vs committed delivery date
• How to manage OTIF ? (the SnOP process)
• IT practices in Supply Chain mgt.
Concept 9: Distributor / Promotion
Management
• Distributor Mgt:
– Objectives and Review
– ROI mgt
– Claim mgt
– Distributor Loyalty programs
• Promotion Mgt:
– Accuracy of Trade stocks
– Adequacy of scheme stocks
– Communication of scheme to trade members
– Accounting matters
Small Town & Rural Distribution
The relevance of Rural markets in India
Small Town & Rural Distribution:
The Hub & Spoke model
The Left is a Point – to Point Distribution
The Right is a Hub & Spoke Distribution
Hub & Spoke model
for the Last mile in Small Town and Rural Distribution
Feeder Town / Large Village
Distributor
Route Load Plan with Hub & Spoke as the Last Mile
Feeder market
Route Plan
Rural Coverage
• Use the Hub and Spoke / Route Planning model
• Identify Hubs – being the big town / route centre
• List villages by Route
• Assess Potential for Category / Co. by Route
• Cover directly, if Potential Margin > Cost of Servicing
• Determine frequency of coverage basis Sales data
• If Direct Distribution not viable, attach village dealers to Town dealer
/ Wholesaler , with a purchase scheme……..
Measurement & Review
• Town markets:
– Outlet coverage and frequency – by classification
– Productivity, Lines / call, Unique coverage
– Outlet sales - by classification – trends
– Displays
– Average Inventory
– Numeric vs Weighted Distribution trends
• Rural markets:
– Route coverage and frequency
– Route sales and trends
SHAKTI AMMA
E choupal
Wheel Rural marketing
The Power of Forcasting?
• What is Forcasting?
• What all can you forcast?
• What is the difference between Planning and
Forcasting?
• Why Forcast? / How does it help?
What is a territory?
• A geographical area?
• A set of distributors?
• A set of consumers?
• A set of Channel members?
• A team of people – own/ outsourced?
• A Business unit for decision making and
deployment / A Business opportunity
Territory Planning
• Sales Volumes / Value – Primary Sales
• Secondary Sales
• Coverage and Availability
• Sales Productivity and Range selling
• Infrastructure and Distribution expansion
• Visibility & Quality
• Promotion management
• Channel Inventory management
• Channel relations and development
• Team development and growth
• Special objectives
• Input deployment – who will do what and where?
Objectives
Planning &
Deployment
RESULTS
(Outputs &
Outcomes)
OUTCOMES
• Consumer
Offtake
Here to There
• Trade Inventory
Data
Planning/Execution
Past trends Infrastructure
Outputs • Trade Advocacy
Past issues Coverage Availability
Opportunities & Threats Display Visibility
• Infrastructure
OBJECTIVES Expansion Quality / Service
health
Inventory & Promotion Channel engagement
PJP
• Team
Team engagement
Motivation &
Productivity, LPCC, U ECO
Growth
• SALES
Trends in Selling and Territory Management
Transactions Relationships
Individuals Teams
Sales Volumes Sales Productivity
Management Leadership