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Retail & Distribution Management

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  1. Retail & Distribution Management Managing Distribution Costs

  2. In this session….. • Managing sales is managing costs. • Key responsibility of sales managers involve costs. • How costs determine distribution models. • Distinguish selling and distribution costs. • Analysis of distribution costs. • Productivity checks.

  3. Key Decisions in Sales Management & Costs • Competencies of Sales People • Optimal size of sales force – workload / costs • Territory Management • Recruitment & Training • Resource Allocation • Performance Appraisal / Measurables • Feedback – ‘Speed of response’ • Managing Channel relationships • Internal Customers

  4. Responsibility of Sales Manager & Costs • Profit Centre Heads • Execution Process to achieve targets and profits • Customer relationships for long-term growth

  5. Distribution System Key Task: How do you reach your end consumers ? Strategic Questions: • Given the value proposition, who are the end consumers and therefore what are the distribution objectives ? • What channel structure will achieve these distribution objectives ? • Optimal use of network – Lowest cost. • What processes and organisational structure will sustain performance.

  6. Following the HLL Model • Distribution-led demand creation. • Old Economy paradigm – ‘Reach & Availability’. • 1 Million retail points. • 7500 distributors. • Basket of products at every price-point. • Every income and geographical segment. Other companies followed the leader. But what it meant for other FMCGs (essentially MNCs) ? A Hit on the bottomline !

  7. Outcome of following HLL Model: While HLL survived on size and variety of products / brands, others realized: Traditional Distribution system operates on the lines of a command economy i.e. 1. Determine supply target – Number of retailers 2. Push stocks whichever way to reach consumers. Revamp: • No more support from deep-pockets of MNCs for thin-margin operations. • Pressure to shore up bottomlines rather than working on topline alone. • Remove excess flab – birth of ‘Power Brands’

  8. P&G’s Golden Eye • Company focuses on Class A & B towns. • Gets out of smaller population clusters. • Except Vicks Action 500 or certain detergent sachets, P&G would not have much of distribution presence in rural areas. • Reduces number of price points and pack sizes. • Reduced manpower. • Automation. • Use of wholesale as a channel in territories that are not directly covered. • P&G touts ECR (Efficient Consumer Response Model) • ECR – Maximize consumer satisfaction by optimising the supply chain. What is happening here ? You fish where the fish is ? Maximization……Optimality

  9. P&G’s Golden Eye • Company focuses on Class A & B towns. • Gets out of smaller population clusters. • Except Vicks Action 500 or certain detergent sachets, P&G would not have much of distribution presence in rural areas. • Reduces number of price points and pack sizes. • Reduced manpower. • Automation. • Use of wholesale as a channel in territories that are not directly covered. • P&G touts ECR (Efficient Consumer Response Model) • ECR – Maximize consumer satisfaction by optimising the supply chain. What is happening here ? You fish where the fish is ? Maximization……Optimality

  10. Sales Analysis Why do sales analysis • A detailed study of sales volumes performance to detect strengths and weaknesses. • It has to be an in-depth study – summaries do not reveal. • Study of sales volume performance by towns and by villages • Sales volumes by dealers and stock-carrying points. • Sales performance by sales personnel • Sales performance by product lines Objective • Strong and weak territories. • High volume and low volume products. • Type of customers providing satisfactory results Imperative • Allocate resources – sales effort.

  11. Basic Sales Report Format

  12. Quarterly Sales Analysis – Oct./Dec. PeriodRegion / Circle / Branch / All India

  13. Sales Analysis – Oct./Dec. PeriodBy Channels

  14. Sales Analysis by Regions

  15. Sales Analysis by Sales Person

  16. Key task – Setting Distribution Objectives Distribution Objectives are normally spelt out by the number of outlets to be covered. Understandably distribution objectives are directly related to end consumer requirements. • How many and what kind of outlets do I need ? • Am I catering to a given target audience and their buyer behaviour • Do my distribution objectives match the overall marketing objectives.

  17. Anderson Consulting Group Distribution Objective Strategy Structure Process Channel Network Design Design Intermediate Warehouse Materials Management & Transport Management Policies & Facilities & Channel IT Procedures Equipment Management

  18. Achieving objectives at the lowest cost

  19. An optimal channel design • What activities and functions need to be performed – redistribution, stocking, collections etc.. • Which channel intermediaries can perform these functions – C&F, Distributors, Wholesales or a combination. • What are the service level requirements that channel intermediaries require from an organisation – credits, inventory levels, infrastructure, lead times, receipt of goods etc. • What are the service levels that an organisation will require – number of outlets covered, frequency of coverage etc.

  20. Developing physical network strategy • How many facilities – manufacturing units / depots / CFAs are needed • Which customer regions and which product lines should be served from each facility • How much inventory should be maintained in each facility Contemporary terminology: “Supply Chain Management” It involves ongoing review of Strategy, Structure, Processes in line with the distribution objectives.

  21. Logistic Needs Logistics is related to all the activities related to distribution of goods. What will be required to move goods ? • Land – for smooth conduct of operations. • Water, Energy, Storage spaces, stocking systems. • Transport equipments – trucks, trolleys etc. • Communications – Telephones, Telexes, Computers etc. • Manpower – Managerial, Supervisory, Workmen. • Pollution Control, Temperature controls, Humidity controls. A Company needs to review logistics and spend considerable time in planning and coordinating of this activity.

  22. Definitions of Physical Distribution “The term Physical Distribution Management is employed in manufacturing and commerce to describe the broad range of activities concerned with the efficient movement of finished products from the end of production line to the consumer and in some cases, includes the movement of raw materials from the sources of supply to the beginning of the production line.” Activities: 1. Freight 2. Warehousing 3. Material Handling 4. Protective Packing 5. Inventory Control 6. Selection of site for various activities 7. Marketing 8. Forecasting

  23. The task of distribution The task of distribution is concerned with the exchange process and gears itself to matching the demand and supply within a given periphery. Challenge: “Demand-side customization and Supply-side Commoditization.” Achieve this at an optimal cost.

  24. Selling & Distribution Costs Selling & Distribution costs broadly represent marketing cost. Selling Costs seek to create and stimulate demand….. Distribution costs are towards reaching the customer

  25. Why to analyse Distribution Costs • To determine costs of sales of different products – review profitability by products or by brands. • In turn fix-up optimum sales level. • To control costs of effort – 80:20 rule and “fish where the fish is” • Help in guiding marketing policy / strategy both for long-term and short-term

  26. Allocation of Distribution Costs Distribution Costs are substantial…. Distribution Costs are common and difficult to apportion. Should it be apportioned on the basis of share ? Should it be equally split ? Sharing with other FMCG products: • What should be the basis – Negotiation. • Win:Win to be worked out

  27. Allocation of Distribution Costs Distribution Costs are substantial…. Distribution Costs are common and difficult to apportion. Should it be apportioned on the basis of share ? Should it be equally split ? Sharing with other FMCG products: • What should be the basis – Negotiation. • Win:Win to be worked out

  28. Analysis of Distribution Costs The basis of analysis of distribution costs: • Desires of Management – What is the priority ? What is the overall strategy ? If profit is to be maximised – direct sales effort to most profitable products. Various ways of analysis: • Product or product lines • Individual customers or groups of customers • Channels of distribution • Salesmen • Geographical territories

  29. Freight Rate Fixation There are two types of transport costs • Standing Costs • Operating Costs

  30. What influences freight rates • Nature of commodity • Demand and supply • Competitive conditions in the transport industry • State regulations Organisations have to make a choice: • Option of a negotiated yearly contract rate • Operate on market prices on transaction to transaction basis. Like personal travel, return-trips have to be determined – certain locations will require two-way transport costs.

  31. Inventory Costs Three types of Inventory • Ordering Costs – Cost of stationery, postage, telegrams etc in placing an order. • Cost of Materials – Purchase Price + Transport + Insurance + Taxes. • Carrying Costs – Space Cost + Storage Cost + Insurance + Theft / Pilferages + Wastages and Loss etc. One of the key responsibilities of Sales Managers is to control inventory costs. Turnover 100 Crores Monthly TO 8 Crores Cost of 7 days stocks 2 Crores Interest @ 12 % Rs. 24 Lacs Opportunity Cost @ 25 % Rs. 50 Lacs

  32. Control System for Efficiency Logistics efficiencies are critical as huge costs can be saved. Therefore efficiency at every level to be improved These are are interdependent and inter-related….. • Operating Efficiency – e.g. Fuel consumptions. • Financial Efficiency – operating profit to gross earnings • Service Level Efficiency – number of direct service vs total service • Marketing Efficiency – market share and rate of growth • Personnel Efficiency – People performance • Organisational Efficiency – Adherence to schedule

  33. Output of logistic system

  34. Productivity Aspects Right Delivery Ratio = No. of Deliveries on time Total No. of deliveries/year Route Potential Ratio = Tons carried per route Tons capacity per route Accidents Ratio = No. of accidents / year No. of trips operated / year Service Ratio = No. of consignments booked/year No. of consignments planned/year

  35. Productivity Aspects Vehicle Utilisation Ratio = Vehicle Kilometers actually run/day Vehicle Kilometers planned per day Breakage Ratio = No. of consignments damaged in traisit Total number of consignments Operating Expenses = Total Operating Expenses Ratio Total Earnings Net Profit Ratio = Net Profit Total Earnings Promptness Ratio = No. of prompt deliveries/year Total No. of deliveries/year

  36. Summary Distribution costs need to be examined in each area of distribution: • Transportation • Warehousing • Inventory Material Handling • Information Technology Distribution is a source of cost – admittedly a necessary cost but a cost nevertheless.