Lubol India Limited

A Case Study on the Structure of Distribution Network

Introduction to the case

Target of LIL : To increase market share from 1% to 9%

3 Types of Outlets:

NOC Retail Outlets (Petrol Pumps) Bazaar Trade (Automotive stores & Service Centres) Direct Large Customers (OEMs, large fleet owners, & large industrial customers)

Distribution Channels Own (Bazaar Trade and Unicorn) NOC (Retail and Direct)

1.Criterion for selection of distribution network

Expected market growth Inventory carrying cost & handling losses

Transportation Cost

(Narrow or Wide)
Promotional campaign & Risk mitigation Professional CFAs availability Wholesalers cost

Narrow Distribution Network

LCW Trombay Ahmedabad CFA Rajkot CFA

Ahmedabad (W&S)

Ahmedabad (E)

Nadiad

Dholka

2.Recommendation for LIL

Location Maharashtra, Gujarat, Tamil Nadu*+Kerala UP*+Delhi, WB MP*+Bihar Chandigarh*+Punjab +Haryana+ HP Karnataka, Andhra Pradesh Rajasthan Demand High High High Moderate Low Sales Tax High High Low Moderate Moderate Operating Cost High Moderate Moderate Moderate Low Accessibility High Moderate Low Moderate Low Growth Opportunity High Moderate Moderate High Moderate Policy Environment Supportive Neutral Supportive Supportive Supportive

The remaining markets can be more profitably catered through NOC retail channel as demand is low

3.Criterion for method of Depot Management

Factors Operating Cost NOC Lowest Warehouse Highest CFAs Moderate

Customer Service Operational Efficiency

Customer Reach Division of Work Marketing

Lowest Lowest
Highest Moderate Lowest

Highest Moderate
Lowest Lowest Highest

Moderate Highest
Moderate Highest Moderate

4.Selection of Distribution Nodes

High demand, Competition, Responsiveness, Long term Plan

Warehouse

Gujarat, UP

CFAs

Moderate demand, Operational Efficiency, Expected ROI less Low Demand, Customer scattered, Low Accessibility, Growth Potential low

Bihar, Andhra Pradesh, Rajasthan

NOC

Low demand Markets

5.Inventory Norms not Linear

Batch production
Demand uncertainity ABC classification

Service frequency
Supply uncertainity

6.Recommended fee structure for CFAs

CFA
Example: Andhra Pradesh

Own Warehouse
Example: Maharashtra

Sales=285 KL; Inventory=100 KL Physical space Cost=7*50*100=Rs. 35,000 Fixed Operating Cost= Rs. 5000 Variable Cost=100*285= Rs. 28,500
Total Cost= Revenue=48*285*1000= Revenue/Cost= Profit=12*285*1000= Rs. 68,500 Rs. 1,36,80,000 Rs. 199.7 Rs. 34,20,000

Sales=803 KL; Inventory=300 KL Physical Space Cost=10*50*300= Rs. 1,50,000 Fixed Cost= Rs. 25,000 Variable Cost=100*803= Rs. 80,300
Total Cost= Revenue= Revenue/Cost= Profit=12*803*1000= Rs. 2,55,300 Rs. 3,85,44,000 Rs. 150.9 Rs. 96,36,000

Contd..
Fee structure should be according to strategic growth plan and customer service level so that participative growth is ensured and the entire distribution moves in harmony towards targeted growth

F=0.01*S1 + G + S
G= [0.05* {S1-S0}] if G>=0 else G=0 S=0.05*(CSL-0.85)*(S1-C1) Example: Andhra Pradesh F=0.01*13680000 +0.05*478800 + 0.05*(0.9-0.85)*(12*285*1000) =136800 + 23940 + 8550 Fee=Rs. 1,69,290 Cost=Rs. 68,500 Profit to CFA agent=Rs.1,00,790

7. Source Allocation
Transportation model is the solution to this problem with known data of transportation cost per unit
Depots
D1 D2 D3 D4 D5

S1

Blending Sources

S2

S3

11

Multiple depot Selection

Chandigarh

Vadodara

Kolkata

Existence of three sources influence the need for multiple depots High demand markets and locations away from blending plants and having maximum adjacent market coverage to be given preference for setting up depots Unnecessary Material handling cost can be reduced Optimum distribution of inventory according to demand

Mumbai

Chennai Salem

Existing plant location Multiple depots

THANK YOU