Distribution Networks For Consumer Goods In India Marketing Essay

ABSTRACT

In this paper we look into the various distribution networks employed by leading companies in the consumer goods sector. We try to find the benefits of different distribution network designs to various companies. The reason why these leading companies have decided upon that particular distribution network design will be found out in this particular paper.in this paper we see into the role of distribution networks in the supply chain of consumer goods. The companies we look into are Hindustan Unilever Limited, PepsiCo Limited and Nestle India Limited.

Distribution networks are channels that move various kinds of products and services from one place to another. They are also known as marketing channels, they are made of independent organisations such as distributor, retailer, sales agents, etc. which are involved in the making of products and services and ensuring them to reach its final consumers. The concept of distribution network is a very wide concept of which distribution channel is just one component, they are tangible systems of interconnected sources and destinations through which products and services move on their way to final customers.

Every distribution network has two parts:

Places where the products and services are stored such as factories, warehouses, retail outlets, etc.

a set of paths that connect these places such as land, sea, air, satellite, cable, internet, etc.

Distribution networks can be categorized into complex and simple. A simple distribution networks the one which consists of a single demand and to fulfil that only a single source of supply and a fixed path that connect the source with other parts of the networks. Managers decide upon a particular distribution network based on what and how much they have to ship, based on internal purchasing and inventory consideration.

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In short distribution refers to the efforts done to move the products and services from the manufacturing plants to the final customers through the various independent organisations in between such as retailers and wholesalers. The main aim is to ensure the products reach the final consumers into the simplest way and also the cheapest way. A good distribution network provides a great competitive advantage to the firm whereas a bad distribution network can lead to the failure of even a very superior product. Hence a distribution network should be well chosen and a lot of thought process should go into it.

DISTRIBUTION CHANNELS FOR CONSUMER GOODS

The distribution networks that the companies usually use for consumer goods are the ones which use both the distributors or the wholesalers and the retailer and that’s because it allows them exposure to the wide networks that wholesalers have already established. Products that are of low quantity and of common use are usually distributed via intermediaries and those products that are expensive are usually sold by the producer itself. Products that are heavy and bulky or are perishable are subjected to shorter distances and are distributed directly. The main aim in all of it is to reduce the cost as much as possible. Products such as electronic appliances need after sales service also to provide the customers all the relevant information to use it.

The firms that produce large variety of products in large number may develop their own retail outlets and distribute their products through distribution centres whereas firms producing products in small quantity may contract wholesalers as intermediaries and get the products delivered to retailers to be sold to the end customers. For products that are newly launched they need a wider distribution network so that they can reach as many consumers as possible. They need to reach all the retailers before the marketing efforts start hence many intermediaries may be required. While products which are on the last few stages of their lifecycle may need less intermediaries because the sales and the demand drops down by this stage.

Firms that are small in size may depend on few number of intermediaries various large firms may appoint large number of intermediaries for a wider distribution network. The type of intermediaries also affects the choice of distribution networks like a consumer goods producing firm may require intermediaries which could increase the sales of the products i.e. the middlemen that are well known and have a goodwill in the market and those who have large storage capacities for large volumes of products to be distributed.

All the above discussed factors affect the decision on which distribution network to be chosen for consumer goods hence a manager should efficiently choose which middlemen to choose and what channel to follow for sending their products to maximum population of consumers in the minimum possible cost.

LEADING CONSUMER GOODS FIRMS OPERATING IN INDIA

Some of the leading consumer goods firms operating India may be:

Hindustan Unilever Limited

PepsiCo Limited

Nestle India Limited

HINDUSTAN UNILEVER LIMITED

It is a subsidiary of UNILEVER which has market capitalization of $ 14 billion. It is an FMCG major which owns around 35 of India’s very powerful and trusted brands and is a market leader in many of the consumer goods categories such as dish wash, personal wash, fabric wash, skin care, hair wash, jams, packet teas, talcum powders, etc. and it is number second in the toothpaste, instant coffee and ketchup segment.

HUL products are available at approximately seven million distinct outlets of the country, it is used in one of every twenty eight houses and fifty nine percent of these outlets are located in rural India. HUL also serves certain stores directly and that amounts to around one million and has a wide network of seven thousand stockists and distributors

There are about 35 CFAs (Carry Forward Agents) appointed by HUL in the country who serve the stockists with the products. The trade mainly comprises of grocery stores, chemists, kiosks, wholesalers and general stores. It is known for providing tailor made services to all its distribution channel partners. They have about two thousand suppliers that supply to forty different manufacturing plants of HUL that are decentralized across two million sq meters of the territory.

HUL’s approach to distribution is divided into 3 segments based on the accessibility of the area and the turnover per market:

Direct coverage: under direct coverage HUL distributes its products from its manufacturing plants to the Carry Forward Agents. From there the products are transported to the stockist or the distributor and finally to the retailers.

Indirect coverage: HUL has certain stockists for a group of villages located nearby, the products are first delivered to the stockists from the manufacturing plants and then they deliver the products to the villages around them.

Streamline distribution: in areas of low accessibility but high turnover per market, the products are delivered to the distributor by the CFAs which delivers the products to sub-stockists in rural areas located in the villages itself, they are also known as the Star Sellers.

In order to reach the rural population HUL started the PROJECT SHAKTI in 2000. Under this project HUL has partnered with Self Help Groups (SHG) of rural women who get trained by HUL and also get support from government agencies and NGOs and they first receive HUL products from the rural distributor and sell them to various villages. They are basically Shakti entrepreneurs commonly referred as Shakti Amma who have helped HUL extend its distribution network to around 80000 villages of India.

PEPSICO LIMITED

Pepsico entered India in 1989 and has since then grown to be one of the largest food and beverages company of the country. Pepsi owns many of the leading food and beverage brands of the country such as Pepsi, Mirinda, 7up, Aquafina, Gatorade, Tropicana, Slice, Leher, Dukes, Lays, Uncle chips, Kurkure, etc.

For the distribution of their products they use the Direct Store Delivery (DSD) system which is the key method for distribution of products such as food and beverages, home and personal care products, etc. It is a type distribution process in which the companies ship their products directly from the manufacturing plant to the final consumers.

Direct Store Delivery (DSD) system: Pepsico uses a system called GES which stands for geographical enterprise solution and it is the reshaping of the powerful direct store delivery system. In addition to great products and tremendous brands, the strength of Pepsico’s DSD supply chain has been another driver of the company’s success. DSD means that it brings their products directly to stores and then their employees put the products right on to the store shelves. This system has a multiple benefits:

it ensures the company gets great penetration of all its products

that the products are delivered safely and efficiently

it also enables Pepsico to provide great service to its customers and gives them an opportunity to work directly with their customers to get the space they need to reach their consumers.

DSD system is one of its greatest competitive advantages. The aim at GES was to use the latest technology and lean supply chain thinking to dramatically improve their DSD system and ensure that they could support another 30 plus years of growth. For their customers they have improved their service and accuracy and dramatically improved their ability to bring new items to the market. For their consumers they will be able to improve their product’s freshness by over one week and get unique products that they want at their store instead of just a general line up of products.

As the product is made at their plants from where it is then sent to large distribution centres in the metro areas, also to the distribution centres in the rural markets.

Now in this model store orders are either picked at the distribution centre or even at the back of the road truck. Once the orders are placed they are then sent to the stores on the familiar trucks that one sees on the road today. Their sales team members are limited by the number of line items that they can carry based on what’s in a distribution centre or on the truck and that means their customers don’t always have full access to their full line of products.

Well GES changes all of that. With GES the orders are not placed at the distribution centres but are hand held and are transmitted back at the manufacturing plant and the plants are now all fitted with the latest automated picking technology where these orders get assembled. Once they are assembled they can now take the large format orders to the stores like Big Bazaar or other super markets and they can go directly from plant to stores completely bypassing distribution centres altogether. This is the most efficient supply chain possible direct from plant to store. It also enables their customers to choose from their full line of product offerings as they no longer can be limited by what the distribution centre or the truck can carry. For small format customers like seven eleven our other stores things are slightly different. In this scenario they ship orders to small cross dock facilities called product exchange centres. Once the product gets there it is then transferred on 12 trucks and driven to stores by their own sales people. So since they no longer carry inventory on their trucks they are able to use much smaller vehicles and reduce drive mile and that helps them improve their environmental footprint. The other important benefit of GES is that their plant based pick centres are being configured to handle over a 1000 line items which is more enough to handle their growth in the next 10 to 20 years. The pick centres that enable them to pick orders at this scale are in the form of large pallets and are automatically depalletised. Once all the cases are picked, they find their way into the collection area where they are automatically released in exact store order to get to their delivery trucks and not only are they in store order but they are also ordered just like they are at the shelves in the stores. So it makes it very efficient to merchandise their product at the store.

Pepsico also uses other methods of distribution such as Broker Warehouse Distribution (BWD) in which it delivers its products and services to the distributors and from there to the retailers. It also uses Vending and Food Service (VFS) which is method according to which Pepsico distributes its products to the restaurants.

NESTLE INDIA LIMITED

It is the world’s number one health and wellness company. It was established in 1866 in Switzerland. Since then it has delighted its customers worldwide. It is well known for its distribution all over the world and also in India. Its aim is to provide its customers with the tastiest and the most nutrient filled foods and beverages night and day.

It has wide spread distribution network all over India covering all the major states and cities and also most of the villages. The company has divided its distributors into two categories i.e. trade distributors and the chocolate distributors. Trade distributors deal with products such as Maggi, Nestle Dahi, etc. whereas the chocolate distributors deal with products such as chocolates, sweets, etc. Every distributor has appointed a person who goes to various outlets every few days i.e. once or twice a week based on the type of area. They take the order from the outlets and either delivers it at the very moment or may be next day.

It is assumed that any retailer has a limited amount of money to buy products for a particular day. Hence Nestle believes that sending more than one retailer would be more beneficial as the retailer shells out limited money for a single distributor and hence more distributors will get more number of orders. They have also started an operation STING under which their sales representatives go on bicycles and sell small amounts of products to outlets that are small and not much catered to like pan walas, etc.

The stocks that are manufactured at the plants and then packaged finally for shipment are delivered to the mother godowns at various places. The stocks from the mother godowns are sent to the Carry and Store Agents (C&S) where they are stored as a property of Nestle. The money for the stocks are given as guidelines given to the C&S and the Cash Distributors (CD) via invoicing. Along with the main products they also store with them give aways and support materials such as stickers and free gifts, etc.

Note: the wholesalers are not a part of the formal structure of Nestle India’s distribution network for NCR. They make bulk purchases from the distributors directly thereby leveraging on the margins.

The products and services of Nestle India Limited are first manufactured in the factory and transferred using a Transfer Challan to the Mother Godown (one for a large geographical area). From the Mother Godown the stocks are transferred to the Carry and Stock Agents (C&S) using a Transfer D.A. Till here the stocks are a company property. Then via invoicing the stocks are transferred to the Cash Distributors and finally to the Stockists. At these stages the ownership of the stock transfers from the company to the Cash Distributors and Stockists.

Transport: in order to carry perishable food and beverage items such as milk, curd, etc. the company ensures a transport system having refrigeration facilities on board. The company also has cold storage facilities at its Mother Godowns at various locations so that the goods do not get spoilt during storage even for a few hours. Hence the company ensures that the health factor remains intact.

They have dedicated Air Conditioned Vans for the transport of products like chocolates from the Mother Godown to the Cash Distributors.

The following is the transport system being used by the company:

Selection of distributors:

The various distributors are selected based on certain criteria which are as follows:

Capital investment: the distributors are selected based on the money they invest and also the money they can invest in the business in the future. It is not only based on the turnover that is necessary in the present but also in the future. This is also based on the amount of growth the company is expecting in that particular area. The amounts required may change from region to region.

Relevant experience: according to the company norms it is vital that the distributor that they choose should be having some past experience of being a distributor in the FMCG sector. The main aim here is that the company will not have to give him any training in the same field. The company also aims at selecting dedicated distributors hence it ensures that the distributor it chooses does not work for a competitor so that it only focuses in distributing products of Nestle. For example if choosing a distributor for Nestle milk products it would select a distributor who already distributes Nestle products such as Maggi so that he is dedicated towards entire range of products and not only a particular SKU.

Infrastructure: the distributor should be having the necessary infrastructure required for storing and distributing the various products such as cold storage, sales men, warehouses, transport vehicles, etc.

However there are no fixed guidelines for selecting a particular distributor. The company has the discretion to select a particular distributor based on the region or the market it is serving or planning to serve.

Incentives to the Distributors

2) scheme spread over 2-3 months: the distributors are given monetary benefits such as extra margin of 2-3 % if the sales targets set are achieved and the growth rate is high for example a 15 % growth rate means a distributor having Rs 1 lac sales will have more benefit than one having Rs 25000 sales.

The benefits can also be in kind such as free gifts on achieving targets. It is always kept in mind that even with such rewards he gets monetary benefit for example by selling it.

3) Certificates: distributors achieving targets are also given certificates of acknowledgment which they may frame in their shops as a certificate from a company like Nestle is valued by everyone.

Motivation of Channel Partners – “Proud to be Nestle”

The company keeps on coming up with schemes to give rewards to the distributors for achieving targets and also to build good and long term relations with its distributors. One such scheme that became successful was “Proud to be Nestle – Super awards for super achievers!” launched on March 30, 2002. They are all open for the following:

Area Sales Managers

Sales Officers

Cash Distributors

Pallet Salesmen (these are the officials that work under the sales officers in order to enable him to handle a wider area of distribution.)

Distributor Salesmen (these are sales men who work under the distributors are hence paid indirectly by the company)

Merchandisers

How does it work?

Step 1: the following are the criteria that need to be fulfilled:

The targets need to fulfilled to the 100% for the quarter III

RDBN turnover growth should be at least 10% in the last year Quarter II.

Duration should be:

Invoicing: 01/04/2011 – 29/06/2011

RD: 02/03/2011 – 23/06/2011

Step 2: all the ASMs that fulfill the above criteria are then ranked on the basis of an index number.

INDEX = % RD turnover growth * absolute value increase

Step 3: now prizes are awarded to the top ASMs.

The winning team comprises of:

All Sales Officers in the ASM team

2 top ranked Cash Distributors in each Sales Officer Zone

(Index = %RD growth * absolute turnover increase)

Two distributor salesmen in each of the top two Cash Distributors

The sales officers on the basis of the quality of merchandising achieved select a merchandiser to be awarded.

The awards are mentioned in the table below:

RDBM T/O growth achieved

SO

CD

PS

DS

Merchandisers

20% +

5500

3500

2300

2000

1200

15-19.99%

4500

2500

1800

1500

1100

10-14.99%

3500

1800

1300

1000

1000

The ASM teams are ranked at the top win certificates and trophies.

Evaluation

When a distributor gets selected he is evaluated based on his sales targets but he does not lose business from the company until he under performs for a long period of time. Also the targets vary based on the region where he is located because each area may have a different sales projected.

DISTRIBUTION IN PRACTICE (DIP) TRAINING

For the distributor and the Carry & Forward Agents there are training programs offered by the companies to the give them the in depth knowledge of the business aspects. Following are the training programs

Quality System

Good Warehousing Practices (GWP)

Good Distribution Practices.

Major aspects of the program include:

Stacking as per norms:

First In First Out (FIFO) method is used for Inventory management. The pallets are arranged in an orderly manner that too away from the walls so that they do not get spoilt or damaged. Also there is enough space between the pallets to move around freely.

Good Warehousing Practices

Security

Fire Fighting: special precautions are taken to prevent damage by fire and also appropriate measures are taken to fight fire.

Control of Pests

Cleanliness/Tidiness

Temperature record and maintenance at the Air Conditioned Godowns

Proper ventilation

All the taxes and licenses are given as per the government norms

Transportation: availability of reliable sources of transportation to and from the godowns or warehouses.

Proper Loading / unloading: proper loading and unloading of the pallets take place. It is either automated or the labour is given proper training and instructions to handle them with care.

Remittance: the remittance is deposited on a timely basis.

The warehouses have a record of all the Sales Tax given and the exemption certificates

Accounting

The record of Receipts and the data of dispatches are maintained in registers for refrence whenever required. In case of shortages they are handled seperately. The Carry & Stock Agents are responsible for handling the Sales tax and the Octroi. A different registered is maintained for the freely distributed material. All the expenses that take place are handled by the Carry & Stock Agents which are then paid back to them by the company.

Handling of Bad Goods:

The good and the bad or spoilt goods are separated from each other and are accordingly marked salable or not salable.

Temperature control: there are special provisions for Air Conditioned warehouses for products like milk products and chocolates and also vehicles that have a facility for cold storage.

CONCLUSION

As seen above that the consumer goods in India usually use a distribution network that has few number of intermediaries in between as these are fast moving goods and need some middlemen to make it possible to reach far away locations in minimum time possible. For a company like HUL the products are not perishable and a delay by one or two days can be tolerated. But when it comes to a company like PepsiCo and Nestle they have certain perishable food and beverage items that need to be transported quickly and safely. Hence this means food and beverage firms have their warehouses located nearby so that transport doesn’t take much time or they may even use faster modes of transport such as railway, etc. but for a company like HUL the warehouses may be a little far away with slower modes of transport. Hence according to the needs of the firm and the type of products or services a distribution network is well chosen to be competitive and better serve the customers. The main aim always is to deliver the products safely in the minimum cost possible.