Page 25 - DMGT507_SALES AND PROMOTIONS MANAGEMENT

Unit 1: Introduction to Sales Management

Notes
Given that the two prongs of FMCG distribution are cost and availability, P&G is likely to
get a significant cost advantage, without losing out on availability, by cutting down on
reach.
Apart from reducing costs by knocking down direct coverage, how does P&G hope to
achieve significant cost saving in its supply chain? That’s where P&G has started
rationalising its distributors network. The intent: cut down the number of its distributors
to about one-tenth of the current size. In Madhya Pradesh, for instance, P&G will now have
just one distributor, who will operate like a super-stockist. “So if 5 distributors were
handling 6 crore of business, now that entire business will be consolidated under one
distributor,“ says a sales manager with Marico, who has been closely monitoring the new
P&G system.

Earlier, since each distributor was working with small volumes, it wasn’t economical for
P&G to replenish them frequently. As a result, the average inventories lying with the
distributor would be significantly high, forcing them to tread on the company’s margins.

That is a dangerous loop for any distribution system; typically, channel design in any
FMCG system is driven by distributor’s economics. The key issue is: How effectively can
you leverage your distribution? “For most companies, managing distributor inventory is
not seen as critical to channel design. Primary sales is where companies hand off”, explains
a senior consultant. “So as long as the company has sold enough to the distributor, it is not
interested”, said he.
Now, a distributor evaluates a company on how it is faring largely on return of investment
(ROI). Simply put, ROI, in a working capital intensive business, is the number of rotations
(or the number of times that the distributor can turnover his investment in stocks)
multiplied by the margin per rotation.

The consequences of ignoring distributor ROI can be disastrous. Take the recent example
of a leading FMCG company which attempted to benchmark its distributor economics
with Hindustan Lever. The findings were startling.
The distributor margin for the company was 6 per cent while it was 5 per cent for Levers.
Distributor stock levels for this company was an average of 4 weeks, while for Lever it is
2 weeks. Assuming that the distributors gave no credit to the market, the company’s
distributor ended up rotating his stock 13 times (52 weeks over 4 weeks) as against a Lever
distributor who rotated his stock 26 times.
Now, given that the distributor aimed to hit a return of 30 per cent (the risk-free rate of
return was 30 per cent if the distributor invested in the money market), the margin that
had to be kept aside to achieve the above ROI was 2.5 per cent. The corresponding figure
for a Lever distributor was 1.2 per cent.
This effectively meant that the amount of money that the company distributor could
spend on distribution (buying vans, investing in sales people, etc.) was 3.5 per cent, while
for the Lever distributor it was 1.2 per cent.
The writing on the wall was clear: despite its lower distributor margins, Lever was
successful in getting higher distribution. So, even though the FMCG company in question
spent 14 crore more by way of higher margins, it ended up with poorer distribution. The
reason: it fundamentally did not manage distributor ROI.
The result can be disastrous. Even in healthy FMCG distribution systems, poor ROI usually
results in distributor dropouts of around 10 per cent. The result? It leaves a vacuum in
distribution, leading to obvious share losses.

Contd...

LOVELY PROFESSIONAL UNIVERSITY 19