theory-channel design decisions+ nestle case

Distribution management

---Concepts & case study---Concepts & case study

Channel of distributionA channel of distribution shall be considered to A channel of distribution shall be considered to

comprise a set of institution which performs all the comprise a set of institution which performs all the activities (functions) utilized to move a product activities (functions) utilized to move a product and its title from production to consumption.and its title from production to consumption.

M1

C2

C1

M2

M3 C3

Number of contacts=M*C=9

M1

M2

M3

Depot/Retailer

C1

C2

C3

Number of contacts M+C=3+3+6

Channel Functions and Flows

Members of the marketing channel perform a Members of the marketing channel perform a number of key functions:number of key functions:

Gather information about potential and Gather information about potential and current customers, competitors. current customers, competitors.

They place orders with manufacturers.They place orders with manufacturers. Develop and disseminate persuasive Develop and disseminate persuasive

communications to stimulate purchasing.communications to stimulate purchasing. Reach agreements on price and other terms so Reach agreements on price and other terms so

that transfer of ownership or possession can that transfer of ownership or possession can be affected.be affected.

Continued…

They acquire the funds to finance inventories at They acquire the funds to finance inventories at different levels in the marketing channel.different levels in the marketing channel.

They provide for the successive storage and They provide for the successive storage and movement of physical goods.movement of physical goods.

They assume risks connected with carrying out They assume risks connected with carrying out channel work.channel work.

They provide for buyers payment of their bills They provide for buyers payment of their bills trough banks and other financial institutions.trough banks and other financial institutions.

They oversee actual transfer of ownership from They oversee actual transfer of ownership from one organization or person to another.one organization or person to another.

Channel– design decisions. Establishing the channel objectives & constraints.Establishing the channel objectives & constraints.1 1 Customer characteristics.Customer characteristics.

(frequency of purchase)(frequency of purchase)22 Product characteristicsProduct characteristics

(perishable products, bulky products, nonstandardised (perishable products, bulky products, nonstandardised products, high unit value).products, high unit value).

33 Middleman characteristicsMiddleman characteristics(manufacturers representatives, others).(manufacturers representatives, others).

44 Competitive characteristicsCompetitive characteristics55 Company characteristics.Company characteristics.

(size of company, financial resources, product mix, (size of company, financial resources, product mix, marketing strategy)marketing strategy)

66 Environmental characteristicsEnvironmental characteristics(economic conditions, legal regulations).(economic conditions, legal regulations).

Identify the major channel alternatives

Types of intermediariesTypes of intermediaries Number of intermediariesNumber of intermediaries

(intensive distribution, exclusive (intensive distribution, exclusive distribution, selective distribution).distribution, selective distribution).

Terms & responsibilities of channel members.Terms & responsibilities of channel members.(price policy, conditions of sale, distributors (price policy, conditions of sale, distributors

territorial rights, mutual services)territorial rights, mutual services)Evaluating the major channel alternativesEvaluating the major channel alternatives Economic criteria, Control criteria, Adaptive criteria Economic criteria, Control criteria, Adaptive criteria

(selling cost vs. level of sales)(selling cost vs. level of sales)

Channel management decisionsI.I. Selecting channel membersSelecting channel membersII.II. Motivating channel members Motivating channel members

ii.ii. co-operation, partnership & distribution co-operation, partnership & distribution programming.programming.

iii.iii. level of inventory, sales quotas,providing level of inventory, sales quotas,providing services to customers effectively, proper services to customers effectively, proper accounts-receivables management.accounts-receivables management.

III.III. Evaluating channel members.Evaluating channel members.

Case analysis

NestleNestle

FMCG : Nestle

Maggi

Kit Kat

Cerelac

Nescafe

LactogenNestogen

Milo

Importance..

Peter Brabeck, CEO, Nestle S.A. says one Peter Brabeck, CEO, Nestle S.A. says one of the pillars of success is, “Product of the pillars of success is, “Product Availability: Whatever, Anywhere, Availability: Whatever, Anywhere, Anytime.”Anytime.”

In India their target is to reach all customers In India their target is to reach all customers profitably.profitably.

Distribution Structure

Factory

C&F Agent

DistributorRedistributor

Mother

Go-down

C&F Agent

Distributor

Retailer Retailer

Large Customers

Rural retailer

Distribution Details

No. of Regional Sales Office : 6 No. of Regional Sales Office : 6

No. of towns served : 3500No. of towns served : 3500

No. of Mother Go-downs: 5No. of Mother Go-downs: 5

No. of C & F Agents: 41No. of C & F Agents: 41

No. of Distributors: 2800No. of Distributors: 2800

Management Set-Up

Area Sales Manager

Branch Manager

Distributor Salesman

Sales Officer

Corporate OfficeRegional Sales Office

Key Issues

Cost of DistributionCost of Distribution Service LevelsService Levels Bad GoodsBad Goods ObsolescenceObsolescence Managing Sales PromotionManaging Sales Promotion

Competition is between networks, not companies.Winning companies will have

better networks.

Relationship Management

Years of AssociationYears of Association

Benefits ProvidedBenefits Provided

Company resources at Company resources at

distributors disposaldistributors disposal

Product mix in OrderProduct mix in Order

1515

Credit line, AC VansCredit line, AC Vans

Maintenance Maintenance

AssistanceAssistance

Knowledge sharingKnowledge sharing

Distribution Chain

OPL – Production planning- Next three months

Inventory Control, etc.

Nestlé's Information System

ERP – BPCS ( Business Planning & Control System)ERP – BPCS ( Business Planning & Control System) C&F Agents connected by VSATs.C&F Agents connected by VSATs. No Connectivity up to Distributor levelNo Connectivity up to Distributor level

Indirect information flow through:Indirect information flow through:

Sales Officers Area Sales Mgr. Branch Manager

Corporate Office

Measuring Performance

No. of towns : 3500No. of towns : 3500

Distribution Cost as percentage of sales: 2.9Distribution Cost as percentage of sales: 2.9

Service Levels: 90 %Service Levels: 90 %

Inventory Levels: MGs – 98 days (Inventory Levels: MGs – 98 days ( by 15% by 15%

Distributors – 25 days (Distributors – 25 days ( from 60 days) from 60 days)

Distribution, especially in FMCG, is an important asset

and today’s networking technologies can help unlock

its value.

---END---

Product AProduct A Product BProduct B

ExpectedExpected Stockiest Stockiest 11

StockiesStockiest 2t 2

ExpecteExpectedd

StockiesStockiest 1t 1

StockiesStockiest 2t 2

Turnover ratioTurnover ratio

Gross profit/sales) in %Gross profit/sales) in %

Return on own capital(Net Return on own capital(Net profit/owner’s capital)profit/owner’s capital)

Ratio of own/Total Ratio of own/Total capital employed capital employed (Minimum) in %(Minimum) in %

Average stock level. Average stock level.

Av credit to retailers Av credit to retailers

Case analysis(Quality products)Over tradingOver trading

High salesHigh sales

Working capital- high debtWorking capital- high debt

Low inventoryLow inventory

Price cutting Price cutting

Unauthorized stock Unauthorized stock movement movement

Inadequate inventory policyInadequate inventory policy

Insufficient service to retailerInsufficient service to retailer

Unhealthy borrowing Unhealthy borrowing practices.practices.

Under trading

Low sales

High inventory

Not tapping the potential

Inefficiency in operation

May not make enough money to stay in the business very long.

Product AProduct A Product BProduct B

ExpectedExpected Stockiest Stockiest 11

StockiesStockiest 2t 2

ExpecteExpectedd

StockiesStockiest 1t 1

StockiesStockiest 2t 2

Turnover ratioTurnover ratio

(Sales/Working capital)(Sales/Working capital)

2525 28.428.4 24.524.5 1010 7.27.2 17.3817.38

Gross profit/sales) in %Gross profit/sales) in % 3%3% 3.093.09 3.123.12 55 55 3.993.99

Return on own capital(Net Return on own capital(Net profit/owner’s capital)profit/owner’s capital)

30%30% 10%10% 5.6%5.6% 30%30% 4.23%4.23% 10%10%

Ratio of own/Total Ratio of own/Total capital employed capital employed (Minimum) in %(Minimum) in %

20%20% 38.4638.46 19.5719.57 2020 28.828.8 18.618.6

Average stock level. (Av Average stock level. (Av Inventory *90/sales) in Inventory *90/sales) in daysdays

10 days10 days 4.44.4 9.79.7 2020 28.428.4 19.7519.75

Av credit to retailers (in Av credit to retailers (in days)days)

5 days5 days 3.83.8 8.968.96 1515 14.814.8 8.098.09