A very effective case study for learning about distribution channels-how do they work?What problems may emerge ?Etc Etc

1. GINO SA: DISTRIBUTION
CHANNEL MANAGEMENT
HARVARD BUSINESS SCHOOL CASE

2. WHAT IS
GINO SA?
WHO IS DAVID
ZHOU?
WHAT PROBLEM IS
GINO FACING IN
MAKING FIEMA A
ORIGINAL
EQUIPMENT
MANUFACTURER
WHY IS JINGHUA
UNSATISFIED WITH
THIS DECISION? WHAT
DIFFICULTIES IS IT
POSING FOR GINO?

3. WHO ARE THE PLAYERS?
DAVID ZHOU
CHINA MARKETING DIRECTOR OF GINO SA
JEAN PIRRE
ASIA PACIFIC AREA MANAGER OF GINO SA

4. What is the present
Situation?

5. • A BURNER MANUFACTURING COMPANY GINO SA
• Manufactures 50 different types of burners.
• Best known for domestic burners.
• It wants to expand its market in China
• The major consumer of China wants GINO to make it an OEM and in
return it will purchase 50% of its burner requirements from GINO.
• The major distributor of GINO, Jinhua, is very unsatisfied with this
demand.

6. SOME INSIGHTS

7. BURNERS
Appliances that provide ‘controlled
flame’ for combustion appliances such
as boilers and furnaces.

8. MARKET
SEGMENTATION

9. DOMESTIC BOILERS AND WATER
HEATERS
 Boiler capacity upto 0.5 tons.
 Volume of factories ranged from 50 to 1500 tons per
annum.
 Average price of RMB 2,500 per unit.
 Market size of the segment roughly RMB 194 million.

10. COMMERCIAL BOILERS AND OTHER
INDUSTRIAL APPLICATIONS
 They fire boilers with capacity from 0.5 tons to 2 tons.
 Roughly 22,000 units in 1999.
 The average price of RMB 9,000.
 Market size was approximately RMB 198 million.

11. INDUSTRIAL BOILERS
 Average price of RMB 65,000.
 Size of segment about RMB 221 million.
 Weishaupt was the leading brand in this segment by a
wide margin in all parts of China, especially in the south.

13. Europe was the single largest burner market
in the world, followed by the united states.

14. SEARCH FOR NEW MARKETS
 In recent years, however, the traditional markets (applications such as
domestic and commercial heating and sanitary water) had become
saturated.
 In emerging markets such as Asia, the Middle East and parts of Africa,
however, the market was growing rapidly.
 There was a rising demand for all ranges of burners, especially the
domestic and commercial products.

16. COMPANY BACKGROUND
 Wide product line, covering the domestic, commercial and industrial
ranges.
 In total, Gino manufactured over 50 models of burners.
 Traditionally known in the market as providing the products of ‘Best Value’.

17. 3 competitive edges of GINO
1) In-House production capability.
2) A well established channel network
3) International exposure

19. Variation of Profit Margins with market
Type of Burner Profit Margin
Domestic <20%
Commercial 25%
Industrial 30%

20. Gino Beijing Office
 Set up in 1995
 David Zhou in charge of overall marketing issues.
 Technical manager, peter Wing, was in charge of overall technical
support to customers and distributors.

21. FINANCIAL INCENTIVES
 Typically in form of bonus for achieving a unit sales quota.
 A bonus equivalent to 2 months of salary ( RMB 8000-10,00) per month for
an experienced sales or service engineer if the annual sales budget was
met.
 Total compensation and expenses for a GINO engineer in China was easily
around 3 times the comparable figures for an Engineer in a Chinese
company.

22. THE BURNER MARKET IN CHINA

23. Before 1990
 China rich in coal resources and heavily dependent on coal as its major
source of energy.
 Boilers used in this period were mostly coal-combustion boilers, which had
no need for burners.

24. 1990-1995
 Chinese Government put more emphasis on pollution control.
 Coal combustion boilers began to be replaced by oil-combustion boilers.
 Some of the world’s major burner manufacturers began to enter the
Chinese market .

25. 1995-1998
Several New Applications of burners emerged-
 Absorption Chillers
 Car Painting Booths
 Ovens
 Furnaces

26. Position of Gino in the
Chinese MarketGino
in the Chinese Market

27. Gino became the price leader in domestic
range market.
Its market share surged to nearly 14%
from less than 1%
Growth in commercial range was impressive
As well.

28. Weishaupt dominated the market
Performance in Industrial Range disappointing
It claimed a market share of
Less than 3%

29. Movement of Burners through channels
to end users

31. Heavy Reliance on Distributors
• True for most burner manufacturers

32. Distributors are very
sensitive to any
signal of a
manufacturer’s
moving to sell direct
to OEM customers.

33. ISSUES IN DIRECT SELLING TO
OEM CUSTOMERS
• Providing service and spare parts.
• Pricing issues

34. Much tougher screening process in buying
was adopted by OEM customers compared to
end users

35. FACTORS THAT INFLUNCE BUYING
OF BURNERS

36. • In burners of large output capacity price is less important.
• Brand Image and reputation play a more significant role.
• The reverse is true for burners of low output capacity

37. • In commercial range, greater attention to technical
compatibility and reliability is paid than to price.
• Supply of spares, price and after-sales service were
also considered important.

38. •For industrial burners, reliability (as indicated by
reputation and service) was more important
than price.
•Availibility of stock was another important
consideration in this segment.
•Design institutes played important roles.

39. Gino’s Distribution network in China

40. 3 Distributors in China
Wayip Trading Co.- (Guangzhou)
FUNG’s Co.-( Shanghai)
Jinghua Mechanical Engineering Company –(Beijing)

41. Background of
the Distributors

42. JINGHUA
• Besides handling Gino’s burner business, Jinghua also made
and sold boilers.
• Although the profit margin on boilers was far less than that
on burners, both products produced about the same
revenue.

43. FUNG
• The main product line of FUNG’s was still textile machinery, which
accounted for over 90% of annual turnover.
• The company placed great emphasis on burners, however, because
the textile industry was widely regarded as a ‘sunset industry’.

44. WAYIP
• Wayip was the only company whose business was 100% Gino
burners.
• However, it had been looking for other HVAC products for a long time.

45. Each of the distributors was assigned
exclusive rights to some provinces and
signed a contract with Gino stating that
selling burners in other distributor’s
territory was prohibited.

47. DISTRIBUTORS’ FUNCTIONS

48. 1) CREDIT FUNCTION
• Once an order was placed, Gino opened a pro-forma invoice to
confirm it.
• The Distributor then opened a letter of credit (L/C) through its bank
(the opening bank) to Gino’s bank( the negotiation bank).
• The purpose of the L/C was to eliminate the credit risk for the
manufacture, because payment was made by the distributor’s bank as
soon as the goods were shipped.

49. STOCK FUNCTION
• The distributors were ordered to make a 3 months order forecast to
Gino.
• Final actual order amount was supposed to vary by no more than 10%
of the forecast.

50. • The typical order cycle time was 40 to 45 days for domestic and
commercial burners and 60 days for industrial burners.
• Once the burners arrived in China, distributors made the
arrangements for local transportation and warehouse stock.
• The distributors needed to anticipate the volume of backlog and the
time of delivery carefully, in order to avoid either stock-outs or over-
stocking.

51. GINO WAREHOUSE IN SHANGHAI??
• Zhou had been asked by Pierre about the possibility of setting up a
Gino warehouse in Shanghai.
• Estimated investment=RMB 200,000
• Monthly operation cost=RMB 30,000
• Capacity-1200 units
• Inventory value=RMB 5 million

52. SALES AND SERVICE FUNCTION
• Distributors performed customer interface interaction.

53. EMERGING ISSUES

54. • TO BECOME A LEADER IN THE INDUSTRIAL MARKET.

55. Goals for Gino China for
the upcoming 3 years

56. 1) Achieve annual
combined sales volume
of 15000 units.

57. 2) Achieve annual sales
of industrial burners of
over 200 units.

58. 3)Optimise the distribution
channels, including
developing more distributors
to cover the areas currently
not serviced and giving
distributors more marketing
and technical support.

59. 4) Develop a minimum of
2 OEM accounts and 2
end user key accounts
within 2 years.

60. 5) Improve service and
spare supply.

61. 6) Build the
IMAGE

62. DISTRIBUTOR BEHAVIOUR
RECENT PROBLEMS

63. DEMAND FOR BETTER TERMS
Distributors began to bargain more and more fiercely for better prices
and lower quotas.

64. STOLEN SALES

65. • There were more complaints from distributors that other Gino
distributers were “poaching” sales from them
• The price discounts in these cases were usually much higher than the
agreed maximum level of 25%.

66. RELUCTANCE TO STOCK INDUSTRIAL
BURNERS
• Due to high cost of industrial burners and the difficulty in forecasting
demand accurately.
• Zhou estimated that sales of at least 50 units were lost every year.

67. CURRENT
PROBLEM

68. FEIMA- A leading boiler factory in Northern China

69. • The company made over 1200 sets of 1,200 sets of boilers in various
sizes in 1999.
• In 1999, Feima bought from Jinghua 350 sets of domestic burners, 50
sets of commercial burners and 3 sets of industrial burners.
• The rest were purchased from Gino’s competitors, such as Weishaupt
(its main supplier) and Baltur.

70. FEIMA’S PROPOSAL
• FEIMA approached Gino and asked to make it an OEM.
• The aim was better prices- It wanted at least 10% greater discount
than from Jinghua.
• In return, it promised to purchase at least 50% of its commercial and
industrial burners and all its domestic burners from Gino.

71. Zhou liked the idea because-

72. BUT….

73. Jinghua was adamantly opposed for 2 reasons
• It strongly believed that Gino should not develop distributors’
Existing customers as OEM accounts.
• The practice would set a very bad example, which could destroy their
confidence in co-operating with Gino.
Jinghua was also lobbying Gino’s other 2 distributors to back up its
stand!!

74. Extra profit that can be generated-
• Initial revenue-
Type of Burner Price (Per
Piece) in RND
Quantity Discount Amount (In
RND)
Domestic 2500 350 20% 700000
Commercial 9000 50 25% 337500
Industrial 65000 3 30% 136500
1174000

75. Final revenue (as per the offer)-
Type of Burner
Type of Burner Price (Per
Piece) in RND
Quantity Discount Amount (In
RND)
Domestic 2500 1055 (20+10)% 1846250
Commercial 9000 81 (25+10)% 473850
Industrial 65000 35 (30+10)% 136500
3685100

76. EXTRA REVENUE THAT
COULD BE GENERATED= 2511100 RND

77. Total turnover of Gino in China
Type of Burner Price (Per
Piece) in RND
Quantity Discount Amount (In
RND)
Domestic 2500 10,887 20% 21774000
Commercial 9000 1877 25% 12669750
Industrial 65000 137 30% 6233500
40677250

78. The increase in revenue is 6% of the general
turnover of Gino China.

79. Revenue Generated by Ginghua-
Type of Burner Price (Per
Piece) in RND
Quantity Discount Amount (In
RND)
Domestic 2500 4354 20% 8708000
Commercial 9000 876 25% 5913000
Industrial 65000 37 30% 1683500
16304500

80. Fraction of revenue generated by
Ginghua=40.08%

81. CONCLUSIONS
• So, If Gino makes Fiema an OEM, turnover may increase by an
amount which is 6% of the present turnover.
• But Ginghua is highly unsatisfied with this decision.
• Ginghua accounts for 40% for the revenue of GINO in the China
region.

82. Certainly, there is scope of profit in the bargain,
but, there is also a risk of a much greater loss.
Hence, it is advisable not to indulge in this deal.
TAKE AWAY FROM THE CASE

83. DISCLAIMER
Created by Ankur Agrawal, IIT Kanpur, during an
internship by Prof. Sameer Mathur, IIM Lucknow.
www.IIMInternship.com