The Dilemma
Direct distribution of consumer goods companies (including fast moving consumer goods) in India, while better in urban areas, tends to dissipate as urban becomes urban and rural. Nevertheless, these companies believe they have ensured a good reach of their products to as many customers as possible since they have some large wholesalers who buy in bulk. In an ideal world, that would seem to be the case as, in theory, wholesalers are supposed to plug the “distribution gap” left by the direct distribution of the company by servicing all the retailers (especially in the smaller towns and villages) that a company’s distributors cannot “economically service”. So, most sales teams nurture wholesalers, and bait them with great discounts for high-volume sales.
But the reality, is that most wholesalers do not have the infrastructure to service all retailers systematically. Instead, they rely on ensuring sales by passing on their received discounts. They do this by selling to a few large retailers who can buy in relative bulk, preferably in exchange for cash, and help them quickly liquidate their stocks. Thus, they turn their inventory quickly, limit credit, and avoid credit defaulters and the hassle of collections. Because of this way of wholesaler operations, the large retail market that the company hoped the wholesalers would service, is ignored; the sales they could potentially bring are mostly lost.
Further, wholesalers usually trade only fast-moving products from the company’s range of products to minimise risk. So, companies that rely on wholesaling find that over time, only 20-30 per cent of their SKUs (or product categories) contribute to 70-80 per cent of the sales. Much of the range does not get a chance to be continuously available and sold in the market.
Why are companies caught in this dilemma of depending on wholesalers? Why is direct distribution not able to reach all retailers? To understand this, one must visit some entrenched practices of this industry.
The Root of The Dilemma
Traditionally, companies manufacture products, and move inventory in the supply chain based on forecasts made a month (sometimes up to 3 months) in advance. Companies also have primary sales targets to meet every month. So all the products that are manufactured are ‘pushed’ to their distributors to achieve these sales targets (also based on forecasts).
Forecasts, at their best, are rough calculations of which consumer goods could be in demand; they are far from reliable. Actual sales are unlikely to match these forecasts. So very often, distributors end up with stocks higher than required for immediate consumption. Since they have limited working capital, this creates a working capital crunch. To release capital, distributors push stocks to retailers, some of which may sell poorly. When burdened with this unwanted stock, retailers delay the payment to distributors. This leads to higher outstanding in the market for the distributor. When their outstanding increases beyond a comfortable level, distributors enter the vicious loop of trying to free their working capital by pushing significant volumes at lower margins (by passing on part of their schemes and margins) to these retailers. The combined pressure of high outstanding and lower retention of margin creates viability issues for some distributors, forcing them to cut their costs and scale by compromising the reach and/or frequency of serving ‘smaller’ retailers.
Therefore, in almost every market, there are retailers that the distributors do not service despite the company urging them to do so. To try and meet this reach gap, companies feel that they have no option but to depend on wholesalers.
A Solution to This Dilemma
In supply chain management, this model of sales and inventory movement based on forecasting is known as the ‘push’ sales model, and, as has been described, is an ineffective model for having comprehensive reach in the retail market. The solution for companies wanting excellent direct distribution is to adopt the ‘pull’ sales method. So, what does a ‘pull’ sales model mean, and what does it entail?
In a ‘pull’ sales model, also known as a ‘replenishment’ model, companies only supply distributors with sufficient inventory to meet immediate demand, i.e., two weeks. Companies guarantee distributors a regular replenishment of products based on the actual consumption during this period. This distribution method takes the pressure off the distributors to maintain extensive inventories. By not having to maintain large inventories of products, distributors free up their capital that would be otherwise stuck in inventories. They can then use the freed-up capital to connect with all retailers in a territory – small and big, thus increasing the reach of products and overall sales for the distributors and the company.
Capital released from inventory can also be reinvested in an additional range that distributor couldn’t stock in the old system. This is possible because even when he is stocking the entire range of the company, in a pull-based replenishment system, overall inventory days of the distributor will be lower. This added reach and range means more sales for the company and the distributor.
Distributors can also pass on the benefit of maintaining small inventories and the facility of frequent replenishment to retailers. Not having to buy large lots makes it easier for small retailers to buy regularly from these distributors. They will also be open to introducing more SKUs into their store. Further, not having slow-moving inventory makes it possible for retailers to pay regularly, reducing the risk of a great market for distributors.
Summary
The first step to achieving higher reach for consumer goods companies is acknowledging their product reach problem. Secondly, they need to proactively change their distribution approach – move from a ‘push’ to a ‘pull’ system of inventory movement, and ensure availability in the retail market at lower inventory levels. Finally, obstacles that can derail this system, including poor price hygiene in the retail market, trade schemes and practice of primary sales targets, must be tackled to create a win-win situation for themselves, their distributors, their retailers and even their customers in the bargain. In short, all the stakeholders in the distribution channel stand to gain!
About the author –
Mayuresh Satpute (ISB) is a partner with Vector Consulting Group. Vector has worked on many consulting assignments to improve the “Market Reach” of large consumer goods companies & fast-moving consumer goods companies including Pidilite, Polycab, Bajaj Electricals, Kurl-on, Parag Milk Foods, and Godrej Interio, etc.
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