Gino casestudy

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Gino casestudy

  1. 1. Gino SA: Distribution Channel StrategyCase Analysis ReportApril 2, 2012By Sanket Sao (1192439)
  2. 2. Gino SA: Distribution Channel Strategy – Sanket SaoTable of ContentsExecutive Summary .............................................................................................................................................................3Introduction & Statement of Key Issues ......................................................................................................................4SWOT Analysis .....................................................................................................................................................................4 Strengths ..............................................................................................................................................................................4 Weaknesses.........................................................................................................................................................................4 Opportunities .....................................................................................................................................................................5 Threats ..................................................................................................................................................................................5Alternatives..............................................................................................................................................................................5 Alternative 1 – Decline Feima’s offer .....................................................................................................................5 Alternative 2 – Accept Feima’s offer for Industrial segment and other segments to Jinghua ............5 Alternative 3 – Offer discounts to Feima from Gino’s current contribution margin. ............................6Evaluation of Alternatives .................................................................................................................................................6Recommendation of Strategy ...........................................................................................................................................7Action plan and Implementation .....................................................................................................................................7Contingency Planning .........................................................................................................................................................8 Appendix 1 .........................................................................................................................................................................9 Appendix 2 .........................................................................................................................................................................9 Appendix 3 .........................................................................................................................................................................9 Appendix 4 ...................................................................................................................................................................... 10 Appendix 5 ...................................................................................................................................................................... 11 Appendix 6 ...................................................................................................................................................................... 12 2
  3. 3. Gino SA: Distribution Channel Strategy – Sanket SaoExecutive SummaryGino SA manufactures burners and sells in market via distributor’s channel. Three distributors areresponsible for selling 95% of Gino’s burners in China and hence acquired a major bargainingpower. The distributors have been assigned regions and have to sell only in their specified regions.Feima, a leading boiler, offered Gino for direct sales to get additional discounts of atleast 10% andin return would give purchase 100% of domestic burners, and 50% of commercial and Industrialburners from Gino. Gino is really excited about this offer as it meets its long term objective of OEMaccounts and Industrial segment penetration. Currently, Feima meets its burner requirement throughJinghua, leading distributor of Gino, and hence Jinghua is opposed to this offer. Losing one out ofthree distributers means direct hit on sales and hence Gino has to take this decision very carefully. IfZhou, Marketing manager of Gino SA, decided to accept Feima’s OEM business and deliverburners directly to Feima, Gino is very likely to lose one of its main distributors in China, andultimately harm future sales. It could also have a negative impact on other 2 distributers. If Zhoudoesn’t accept Feima’s offer, Gino will lose the potential opportunity to create an OEM business inChina and potential sales, primarily in Industrial segment. Moreover, it will have to succumb todemands of distributers again, hurting sales in all segments including lucrative Industrial segment.To solve this problem, we found several alternatives and evaluated them not only to resolve thecurrent issue but to address other concerns such as distributor’s bargain power, Industrial segmentpenetration, and acquiring OEM accounts. Alternative 2, which suggest signing OEM contract withFeima in industrial segment and offering discounts on other segment via Jinghua, is the bestalternative and it also meets Gino’s long term goals. 3
  4. 4. Gino SA: Distribution Channel Strategy – Sanket SaoIntroduction & Statement of Key IssuesGino SA, one of the world’s largest manufacturers and exporters of burners, faced a dilemma aboutits distribution channel to Feima. Whether to acquire OEM contract of Feima and disappoint itsexisting distributor or to forgone extra revenue from sales was a difficult choice Gino has to make.The decision was bound to have larger impact on Gino sales in China. Gino has to make sure anydecision should address following Key issues or Concerns. A) Resolve the existing conflict in apossible win-win situation for both parties. B) Control the distributers bargaining power C)Penetrate into high growing Industrial segment of burners D) Revenue and high profitabilitySWOT AnalysisStrengthsGino SA is a market leader in Domestic burner segment and almost impossible for any competitorto challenge on domestic segment. It also enjoys in-house production capability for lengthy productline mix (about 50 models), and hence offers low margins. The cost advantage in comparison to itscompetitors is about 10-20% and hence Gino build its reputation for offering best value to itscustomers. Gino also enjoys strong market share is largest European market and hence financiallystable. The emerging markets like China were growing rapidly and Gino had strong distributerrelationship in China, a major advantage in burner market.WeaknessesGino’s primary weakness was its poor market penetration in Industrial segment. It was difficult forGino to shift priorities of distributers that directly impact sales in industrial segment because itdoesn’t have direct sales force and has to depend on distributers for sales. This leads to increasing ofdistributer’s bargaining power. Gino’s recent strategy to get more OEM accounts and penetrate inIndustrial segment were in direct conflict with distributer’s goals and distributer’s increase inbargaining power means it was difficult to achieve Gino’s goals in near future. Other major concernfor Gino is it has to depend on distributer for its sales and services. 4
  5. 5. Gino SA: Distribution Channel Strategy – Sanket SaoOpportunitiesThe emerging markets such as China have lot of potential for growth and profit margin wasgenerally higher in such markets. Also, Industrial segment is expected to grow at 20% annually fornext 5 years. Gino can capitalize in these opportunities and convert itself into major player. OEM’swere ready to purchase directly from manufacture rather than distributor to get better prices.ThreatsChina has large presence of local burner manufactures and some of them have strong political hold.They pose the threat primarily in government projects. Other major threat can be loosing any of thedistributors, which will directly impact the sales.The detailed SWOT analysis can be found in Appendix 1.AlternativesAlternative 1 – Decline Feima’s offerAs mentioned in SWOT, losing any of the distributors would be a major threat for Gino. It can alsoimpact its current dominant position in domestic burner segment too. Hence this alternative wouldbe a conservative approach to maintain the good relationship with distributor and retain the currentcompetitive advantage. As per our financial analysis (Appendix4), this alternative would lead to netrevenue of $8 million and a contribution margin of $1.5 million for Gino. However, with thisalternative Feima’s relationship with Gino and Jinghua can get impacted and Feima can go toGino’s competitors. Gino will also possess a heavy opportunity cost for industrial segment.Moreover, the bargaining power of distributor will be difficult to control. The detailed financialanalysis can be found in Appendix 4, while pros and cons can be found in Appendix 5Alternative 2 – Accept Feima’s offer for Industrial segment and other segments to JinghuaFeima wants to get into OEM contract with Gino mainly for reduction in prices. With thisalternative, Gino should sign OEM contract with Fiema for industrial segment only with 10%additional margin in Industrial segment, and push Jinghua for 10% discount to Feima’s commercialand domestic burners. Jinghua can compensate the 10% discounts from additional sales of domestic 5
  6. 6. Gino SA: Distribution Channel Strategy – Sanket Saoand commercial burners Feima. As per financial analysis in Appendix 4, Jinghua can still achieveprofitability of $1.16 million with 10% discounts on domestic and commercial and losing industrialsegment sales of Feima. The warehouse will be built by Gino for these additional 33 industrialburners to Feima. The service contracts can be given to existing distributors. This alternative is alsoconsistent with Gino’s goals of OEM accounts and market penetration in Industrial segment. Thedetailed financial analysis can be found in Appendix 4, while pros and cons can be found inAppendix 5. The Pro-forma income statement with this alternative is shown in Appendix 6.Alternative 3 – Offer discounts to Feima from Gino’s current contribution margin.Feima is already happy with Jinghua’s service and offered Gino OEM contract to get 10%additional discounts. Gino can offer these discounts to Feima via distributor Jinghua. However,offering discount to one OEM, which is one among other 20, will open a Pandora ’s Box whereother distributor’s OEM accounts will ask for same margin and eventually the margins of entireindustry will be affected. The detailed financial analysis can be found in Appendix 4, while pros andcons can be found in Appendix 5.Evaluation of AlternativesNaturally, resolving the current problem should be a priority, followed by increasing revenue andprofitability for Gino as well as for Jinghua. According to our financial analysis (Appendix 4),alternative 2 yields contribution revenue of $2 million as compared to alternative 1 & alternative 3of $1.5 million and $1.2 million respectively. Hence in decision matrix (appendix 3), alternative 2ranks highest in profitability, It is also a win-win situation for all the parties. Since Gino will haveits own sales force for Industrial segment with this alternative, the bargaining power of distributerswill be reduced. Alternative 3 targets the bargaining power and also address the current problem butis not good with respect to other primer factors. Overall, alternative 2 is best decision. 6
  7. 7. Gino SA: Distribution Channel Strategy – Sanket SaoRecommendation of StrategyAs seen from decision matrix, we recommend alternative 2 to acquire Feima’s OEM account forindustrial segment and push Jinghua for 10% reduction in domestic and commercial margin forFeima. In today’s business environment, it’s very important for any business to take decisionconsistent with its strategy and with long term objectives. This alternative is completely aligned toGino’s long term strategy and achieves its target of 200 industrial burner sales. Appendix 4 showsJinghua can compensate 10% discount by additional sales of 705 domestic and 32 commercialburners at a mere loss of 3 industrial burners. The warehouse will also house industrial burnerinventory to reduce the inventory cycle time for other distributors orders, giving a strongcompetitive advantage to Gino. The Sales and services contract can be outsourced to distributorwith appropriate SLA contracts. The final price (120,575RMB) is set to be 48.4% above transferprice (65,000 RMB) plus a markup of 25%. The forecast for sales for 3 years is shown in Appendix2, while Pro-forma income statement in Appendix 6.Action plan and ImplementationBefore the global distributors meeting, Gino need to convince Jinghua about this offer highlightingits increase in profitability. The contract between Jinghua and Gino gives right to Gino to enter intoOEM deal, and hence Jinghua has to understand this. During the same period, Gino should keepFUNG’s and Wayip into confidence with this action plan. FUNG’s and Wayip will also benefit astheir high inventory cycle time for industrial burners can be reduced from Gino’s warehouse. Thewarehouse to house the inventory would also built a good competitive advantage as compared toother competitors.Immediately after the meeting, Gino should start working on preparing the terms of contract withFeima as OEM account for Industrial burners. The terms of the contract should include the promisedsale of burners. It would take approximately 1 month for legal formalities and to sign the contract.By 2000 april end, Gino should start building a warehouse. It can take approximately 3 months to 7
  8. 8. Gino SA: Distribution Channel Strategy – Sanket Saoprepare a fully functional warehouse and hence, the delivery date of Industrial burners to Feimashould be reviewed while signing the contract. The warehouse should be located in northern regionof China because of close proximity to Feima. The delivery of industrial burners should start fromAugust 2000. From July 2000 to August 2000, a service and maintenance contract should be givento Jinghua highlighting all the SLA guidelines and frequent feedback should be collected fromFeima about service quality & product quality. Satisfaction of Feima is very important for Ginobecause it can further build on industrial burners segment and improve its industrial burnersdemand. By December 2000, Gino can start building its sales force in China for further industrialburners OEM contracts.Contingency Planning 1. Jinghua not agreeing to the plan: Jinghua, despite increase in profits will be worried about its long term sales in industrial sector and hence can disagree with Gino. Gino can sign a memorandum of understanding with Jinghua that Gino will not acquire any other industrial burner OEM contract for 2 years. This will delay its sales force planning as well. 2. FUNG’s and Wayip’s concern about loss of future industrial sales: This can be a potential threat to FUNG’s and Wayip’s future sales in industrial sector. Gino should convey its intent to penetrate in industrial segment. They already have lost around 50 sales and hence this action has been taken. 3. Feima not able to deliver on its promise: The contract should have a clause that protects the special investment of warehouse for Feima and its future sales force. Other OEM contracts should be also be encouraged to split the warehouse cost in high number of units. 4. Other OEM’s of distributer ask for same margin: Any discounts in Industrial segment should be compensated by increase in volume of industrial burners. 8
  9. 9. Gino SA: Distribution Channel Strategy – Sanket SaoAppendix 1Strengths Weaknesses - Good distributor-manufacturer - Less market penetration in industrial relationship. segment - Good range of products in product line - Growing power of distributors. - Financially stable - Dependency on distributor for sales and - In-House production capabilities services. - Strong hold in large European markets - Distributor unable to manage Industry - Reputation of manufacturing best value segment demand. products for customers. - Less scope of growth in European - Also known for its strong brand market. influenced by people, leading edge - Gino’s new strategy goals of OEM technology, and distribution channel. accounts and penetration in industrial - Cost advantage of 10-20% lower segment are in direct conflict with margin. distributors goals.Opportunities Threats - Strong emerging such as China can - Losing any of the distributors is a major increase its revenue and profitability. threat as it directly impacts sales. - High growth in industrial segment – - Presence of large local manufacturer about 20% annually for next 5 years. having strong political connections in area.Appendix 2 Forecasting of Number of Units Industry Growth Addn Feima Proj. Dec 2000 Current (2%,5%,20%) Sales Sales 2001 2002 Domestic 10887 11105 705 11810 12047 12288Commercial 1877 1971 32 2003 2104 2210 Industrial 137 165 33 198 238 286Appendix 3 Resolve Jinghua’s Revenue and Industrial Bargaining Problem Profitability Segment power of Total Penetration Distributors (0.35) (0.3) (0.25) (0.10)Alternative 1 1 1 2 1 1.35Alternative 2 3 3 3 2 2.9Alternative 3 2 2 1 3 1.85 9
  10. 10. Gino SA: Distribution Channel Strategy – Sanket SaoAppendix 4Ginos financial Analysis for alternative: Alternative 1 Domestic Comercial Industrial Industrial direct sell TotalUnits Sold by all distributer 10887 1877 137Transfer price(RMB) ¥2,500 ¥9,000 ¥65,000Revenue from burners (RMB) ¥27,217,500.00 ¥16,893,000.00 ¥8,905,000.00 ¥53,015,500.00Revenue from Spares in USD (80/20 split) ¥6,804,375.00 ¥4,223,250.00 ¥2,226,250.00 ¥13,253,875.00Net Revenue of Gino in RMB ¥ 34,021,875.00 ¥ 21,116,250.00 ¥ 11,131,250.00 ¥ 66,269,375.00Net Revenue of Gino in USD $ 4,099,021.08 $ 2,544,126.51 $ 1,341,114.46 $ 7,984,262.05Total Contribution Margin (20%;25%,30%) $819,804.22 $508,825.30 $268,222.89 $1,596,852.41 Alternative 2 Domestic Comercial Industrial Industrial direct sell TotalPrice Per unit for Gino Burners ¥ 2,500.00 ¥ 9,000.00 ¥ 65,000.00 ¥ 120,575.00Forecasted units (from appendix) 11810 2003 165 36Revenue from Burners ¥ 29,525,000.00 ¥ 18,027,000.00 ¥ 10,725,000.00 ¥ 4,340,700.00 ¥ 58,277,000.00Revenue from Spares(80/20 split) ¥ 7,381,250.00 ¥ 4,506,750.00 ¥ 2,681,250.00 ¥ 1,085,175.00 ¥ 14,569,250.00Net Revenue in RMB ¥ 36,906,250.00 ¥ 22,533,750.00 ¥ 13,406,250.00 ¥ 5,425,875.00 ¥ 78,272,125.00Net Revenue in USD $ 4,446,536.14 $ 2,714,909.64 $ 1,615,210.84 $ 653,719.88 $ 9,430,376.51Total Contribution Margin(20%;25%;30%;30%) in USD $ 889,307.23 $ 678,727.41 $ 484,563.25 $ 196,115.96 $ 2,248,713.86Cost of setting up warehouse (30000*12/8.3) $ 43,373.49Other cost of shipping, insurance etc.(48.4% of CM) $ 94,920.13Outsourcing cost of Sales and services(5% of SP) $ 14,096.39Net Contribution $ 889,307.23 $ 678,727.41 $ 484,563.25 $ 43,725.96 $ 2,096,323.85 Alternative 3 Domestic Comercial Industrial Industrial direct sell TotalPrice Per unit for Gino Burners ¥ 2,500.00 ¥ 9,000.00 ¥ 65,000.00Forecasted units (from appendix) 11810 2003 198Revenue from Burners ¥ 29,525,000.00 ¥ 18,027,000.00 ¥ 12,870,000.00 ¥ 60,422,000.00Revenue from Spares(80/20 split) ¥ 7,381,250.00 ¥ 4,506,750.00 ¥ 3,217,500.00 ¥ 15,105,500.00Net Revenue in RMB ¥ 36,906,250.00 ¥ 22,533,750.00 ¥ 16,087,500.00 ¥ 75,527,500.00Net Revenue in USD $ 4,446,536.14 $ 2,714,909.64 $ 1,938,253.01 $ 9,099,698.80Total Contribution Margin(10%;15%;20%) in USD $ 444,653.61 $ 407,236.45 $ 387,650.60 $ 1,239,540.66Jinghuas financial Analysis for each alternative Alternative 1 Domestic(2500RMB/8.3*1.484) Comercial(9000RMB/8.3*1.484) Industrial(65000 RMB/8.3*1.484) TotalJinghuas Cost to Acquire (Qx2500x1.484/8.3) $1,946,185.54 $1,409,621.20 $430,002.41 $3,785,809.16Jinghua Revenue(5% public,95% Contracts) $2,522,256.46 $1,826,869.08 $557,283.12 $4,906,408.67jinghuas profits $576,070.92 $417,247.88 $127,280.71 $1,120,599.51Segmentation share of profit 51% 37% 11% Alternative 2 Domestic(2500RMB/8.3*1.484) Comercial(9000RMB/8.3*1.484) Industrial(65000 RMB/8.3*1.484) TotalJinghuas Cost to Acquire (Qx2500x1.484/8.3) $2,261,312.05 $1,461,114.22 $395,137.35 $4,117,563.61Jinghua Revenue(5% public,95% Contracts) $2,930,660.41 $1,893,604.03 $512,098.00 $5,336,362.44Discounts to Feima(10% x 1055, 81) $47,157.23 $8,783.13jinghuas profits $622,191.14 $423,706.68 $116,960.66 $1,162,858.47Segmentation share of profit 54% 36% 10% Alternative 3 Domestic(2500RMB/8.3*1.484) Comercial(9000RMB/8.3*1.484) Industrial(65000 RMB/8.3*1.484) TotalJinghuas Cost to Acquire (Qx2500x1.484/8.3) $1,946,185.54 $1,409,621.20 $430,002.41 $3,785,809.16Jinghua Revenue(5% public,95% Contracts) $2,226,436.26 $1,612,606.66 $491,922.76 $4,330,965.68jinghuas profits $280,250.72 $202,985.45 $61,920.35 $545,156.52Segmentation share of profit 51% 37% 11% 10
  11. 11. Gino SA: Distribution Channel Strategy – Sanket SaoAppendix 5 Alternative EvaluationAlternative 1Pros Cons - Strengthen distributor-manufacturing - Forgone revenue from potential sales in relationship domestic and commercial from Feima. - Maintain its leadership position in - Opportunity cost in lucrative Industrial domestic segment. segment - Conflict with strategy of adding more OEM accounts. - Increase in distributor powerAlternative 2Pros Cons - Alternative completely inline with - Convincing distributor can be challenge management strategy goals. despite high profits for year1 - Will acquire OEM accounts - - Will penetrate into high growing Industrial segment - Increase in overall sales & profitability - Warehouse will resolve in Inventory Cycle time problems for other distributors - Increase in distributors profit - Meeting company’s target of selling 200 Industrial burners.Alternative 3Pros Cons - Will satisfy both the parties - Can open a Pandora ’s Box where other - Can work further on distributer- distributor’s OEM accounts will also Manufacture relationship ask for same margin - Alternative not aligned to Gino’s strategy - Distributors will be difficult to convince for reduction in margin - Distributors power will further increase - Marketing and other expenses needs to be streamlined - Can impact the entire profit margin of industry 11
  12. 12. Gino SA: Distribution Channel Strategy – Sanket SaoAppendix 6 GINO SA Income Statement At the end of December 2000Revenue Domestic Comercial Industrial Industrial direct sell TotalPrice Per unit for Gino Burners ¥ 2,500.00 ¥ 9,000.00 65000 ¥ 120,575.00Revenue from Burners ¥ 29,525,000.00 ¥ 18,027,000.00 ¥ 10,725,000.00 ¥ 3,978,975.00 ¥ 58,277,000.00Revenue from Spares(80/20 split) ¥ 7,381,250.00 ¥ 4,506,750.00 ¥ 2,681,250.00 ¥ 994,743.75 ¥ 14,569,250.00Net Revenue ¥ 36,906,250.00 ¥ 22,533,750.00 ¥ 13,406,250.00 ¥ 4,973,718.75 ¥ 77,819,968.75Total Contribution Margin(20%;25%;30%;30%) in USD $ 889,307.23 $ 678,727.41 $ 484,563.25 $ 179,772.97 $ 2,232,370.86Cost of Goods SoldFixed Manufacturing Cost per unit (15%,17.5%,21%,21%) ¥ 375.00 ¥ 1,575.00 ¥ 13,650.00 ¥ 13,650.00Fixed Bonded Warehouse Cost Per unit(20000/33) ¥ - ¥ - ¥ - ¥ 6,060.61Total Fixed Cost Per unit ¥ 375.00 ¥ 1,575.00 ¥ 13,650.00 ¥ 19,710.61Variable manufacturing Cost per unit (20%,25%,30%,30%) ¥ 2,000.00 ¥ 6,750.00 ¥ 45,500.00 ¥ 45,500.00Variable Bonded Warehouse Cost Per unit (30000*12/33) ¥ - ¥ - ¥ - ¥ 10,909.09Other Variable costs (48.4% for shipping, insurance etc) ¥ 31,460.00Variable Sales and Service Cost ¥ - ¥ - ¥ 12,057.50Total Variable Cost Per Unit ¥ 2,000.00 ¥ 6,750.00 ¥ 45,500.00 ¥ 99,926.59Total Cost Per unit ¥ 2,375.00 ¥ 8,325.00 ¥ 59,150.00 ¥ 119,637.20Total Cost ¥ 28,048,750.00 ¥ 16,674,975.00 ¥ 9,759,750.00 ¥ 3,948,027.50 ¥ 58,431,502.50Gross Income ¥ 8,857,500.00 ¥ 5,858,775.00 ¥ 3,646,500.00 ¥ 1,025,691.25 ¥ 19,388,466.25Gross Income (1USD=8.3¥) $1,067,168.67 $705,876.51 $439,337.35 $123,577.26 $2,335,959.79 Assumptions: 1. The Profit Margin is assumed as 25% of Contribution Margin to compute Variable & fixed cost. 2. The initial investment or Sunk cost of RMB200,000 has been considered as fixed cost to evaluate this year’s performance. 3. The Sales and Service contract has been assigned to existing distributer and paid approximately 5% of product cost. 12
  13. 13. Gino SA: Distribution Channel Strategy – Sanket Sao 13

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