Distribution Management:

Best practices from FMCG

K. Dasaratharaman
kdraman2000@gmail.com
 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