Improving market share of a company by effective sales and distribution

IMPROVING THE MARKET SHARE OF A FMCG COMPANY
BY EFFECTIVE SALES & DISTRIBUTION MANAGEMENT
VINOD GUPTA SCHOOL OF MANAGEMENT
A PROJECT REPORT
ON
Submitted In Partial fulfillment of
Master of Business Administration
Ravi Shankar (09BM8088)
GUPTA SCHOOL OF MANAGEMENT, IIT KHARAGPUR
MAY 2011
1
By
Under Guidance of
Prof. S. K. De
, IIT KHARAGPUR

2
UNDERTAKING REGARDING PLAGIARISM
I hereby declare that the research project “Improving the Market Share of a FMCG Company by
Effective Sales & Distribution Management” is genuine and original in nature and no contents
have been directly copied except where references are mentioned alongside. If any part of the
report is found copied from any source without mention, the research project may be considered
invalid.
Place: IIT Kharagpur
Date:

3
ACKNOWLEDGEMENTS
It is a great feeling expressing gratitude to my faculty advisor of the Applied Management
Research Project, Prof. S K De, VGSOM IIT Kharagpur for his continuous guidance on the
project. I thank Dr. Sushmita Mukhopadhyay for putting up her tireless efforts in coordinating
the whole process of AMRP. I am thankful to Prof. A K Tripathy, Dean VGSOM, IIT Kharagpur
for his encouragement and positive support at every front.
I also extend my sincere regards to the faculty of VGSOM for their direct and indirect support on
this project. In the end I thank all my friends and family members for making valuable
contributions and supporting me in development of the research project.
VGSOM, IIT KHARAGPUR

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INDEX
Chapter Numbers Particulars Page No.
1.0 Introduction……………………………………………… 9 - 11
2.0 Review of Related Literature…………………………….. 12 - 14
3.0 Research Methodology…………………………………… 15 - 16
3.1 Data Collection Instrument………………………………. 15 - 15
3.2 Sampling Design………………………………………….. 15 - 15
3.3 Exploratory Research…………………………………….. 15 - 15
3.4 Descriptive Research……………………………………… 15 - 16
4.0 Analysis of Data & Inferences…………………………….. 17 - 32
4.1 Findings of Exploratory Research………………………… 17 - 20
4.2 Observations from Interview with Distributor…………….. 20 - 22
4.3 Analysis of financial condition of distributor under different 22 - 28
payment terms scenario
4.4 Observations from interview with retailers……………………. 28 - 29
4.5 Analyzing the distribution channel at retailer level…………. 29 - 32
5.0 Conclusions…………………………………………………. 33 - 33
6.0 Scope for Future Work…………………....................... 34 - 34
7.0 References……………………………………………….. 35 – 36
APPENDICES
Appendix 1 Analysis of Financial position of distributor
Appendix 2 Cost Benefit Analysis of implementing goods return policy

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LIST OF TABLES
Table No. Particulars Page No.
Table 1.0 Distribution Channels of some of FMCG Companies …………… 17 - 18
in India
Table 2.0 Details of distributors in Kharagpur …………………………….. 19 - 19
Table 3.0 Parameters common to all the payment terms scenarios………… 23 - 23
Table 4.0 Cash inflow - outflow situation corresponding to scenario 1 …… 24 - 24
Table 5.0 Average net cash flow under scenario 1 at credit default of ……. 24 - 24
15% and margin of 5.5%.
Table 6.0 Average net cash flow under scenario 3 at credit default of ……. 25 - 25
15% and margin of 5.5%.
Table 7.0 Calculations of cost benefit analysis of implementing ………… 30 - 31
“goods return policy”
Table 8.0 Summary of cost benefit analysis of implementing …………… 31 - 32
“goods return policy”

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LIST OF FIGURES
Figure No. Particulars Page No.
Fig 1.0 Schematic of FMCG Distribution Channel ………………………. 11 - 11
Fig 2.0 Company wise sales turnover share of Puja Traders …………….. 20 - 20
Fig 3.0 Marketwise sales turnover of Puja Traders………………………. 21 - 21
Fig 4.0 Average cash flow with the distributor at a credit default of 15%.. 25- 25
Fig 5.0 Average cash flow with the distributor at a credit default of 10%.. 26 - 26
Fig 6.0 Average cash flow with the distributor at a credit default of 5%... 26 - 26
Fig. 7.0 Average cash flow with the distributor at a credit default of 0%... 27 - 27

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EXECUTIVE SUMMARY
Effective management of distribution network, in terms of ensuring efficient availability of
products in the market in the most accurate quantities and in cost effective way, is a key to
success of any FMCG Company.
The research project undertakes to study the distribution network of a FMCG Company with a
view to identify the loopholes and pain areas at the distributor as well as retailer level in the
distribution system which affect the achievement of higher sales volume of a product. The
project work attempts to arrive at alternative(s) thus creating win-win situation for distributor
and retailer so as to maximize the product availability in the market, thereby improving the sales
of product and hence the higher market share.
The research project comprises of two phases; exploratory and descriptive. During exploratory
phase, local retailers and local distributors were surveyed so as to study, in general, the
distribution system of various FMCG brands that are available with the retailers in the local
market.
The descriptive phase involves (i) detailed study of procurement and distribution practices of a
particular distributor (particularly representative of non-leading FMCG companies) viz. Puja
Traders (based in Malancha, Kharagpur), so as to understand the distribution management and
identify loop holes in the system and (ii) study of factors hampering the sale of product at retailer
level.
The study revealed that maintaining enough cash flows is one of the serious issues with
distributor. The distributor purchases goods from supplier on cash payment whereas sell goods to
retailers on credit of atleast15 days. In order to entice retailers for cash payments, he has to offer
discounts of upto 2-3%. This leads to a situation where the distributor always has negative cash
flows which ultimately affect the quantity of goods he purchases, inventory levels at warehouse
and also hampers the motivation level thereby causing frequent stock-outs and hence lost sales.
Taking above facts into consideration, different alternative payment terms scenarios have been
analyzed for the distributor so as to suggest one that is favorable to both the supplier as well the
distributor. It has been found that the supplier must revise the payment terms in such scenarios to

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allowing a credit period to the distributor for payment of the goods supplied while charging a
little extra price and also asking them to achieve higher sales targets. This will enhance the
channel motivation and would ensure that sufficient quantities of the product are available in the
market.
The study at retailer level revealed that the major factor that discourages a retailer from
purchasing sufficient quantity of a product (of non-leading FMCG Company) is whether the
supplier would take the unsold goods back or not. As reported by retailers, the purchase quantity
in such a case is only 70-80% of the actual demand of the product just because they are skeptical
of whether the quantity, if purchased more, would sell or not. Even if the retailer is offered
significantly higher margin, he/ she would purchase in lesser quantity than the actual demand of
the product. This causes stock out of product even when there is a demand and hence results in
lost sales.
In order to overcome this problem, a cost-benefit analysis of implementing the goods return
policy, has been conducted. It shows that implementing the goods return policy would cost
approximately 3-4% of the retail price which if implemented, would enhance the sale by 20%
(appx.). The policy may be implemented by reducing the margin of the retailer by 2% and
bearing the remaining cost. The policy would result in, retailer purchasing higher quantities of
product which increases the product availability and minimized the chances of lost sales.
Implementing above mentioned strategies in the distribution system would ultimately improve
the product availability at both the distributor as well as retailer level. More a product is
available lesser are the chances of lost sales and more will be the chances of sale as substitute as
a result of which the market share of the company would improve.

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CHAPTER I
INTRODUCTION
This chapter deals with introduction to distribution system for FMCG in Indian context,
importance of distribution system for the supplier and key objectives of the research.
Product distribution (or place) is one of the four elements of the marketing mix. The distribution
channel is defined as a chain of intermediaries through which the product is passed down the
chain to the next organization viz. distributor & retailer, before it finally reaches the consumer or
end-user. This process is known as the ‘distribution chain’. Each of the elements in these chains
will have their own specific needs, which the producer must take into account, along with those
of the all-important end-user. (www.wikipedia.org).
Yet the distribution chain is merely assuming a part of the supplier’s responsibility; and, if they
have any aspirations to be market-oriented, their job should really be extended to managing all
the processes involved in that chain, until the product or service arrives with the end-user. This
may involve a number of decisions on the part of the supplier:
Channel membership
Channel motivation
Monitoring and managing channels (Marketing Management, Philip Kotler)
The distribution network plays a vital role in maximizing sales and market share of any FMCG
company as a result of deeper market penetration, efficient product availability and promotion.
In case of fast moving consumer goods, the total demand for any particular product (physical
offering satisfying a particular need) in the market is constant which is met by all the competitors
which are functional in that market corresponding primarily to their efficiency of distribution
achieved through establishing policies favorable to channel members, other factors being less
important. The reason for this is that fast moving consumer goods are low involvement products
which are easily purchased by the customers interchangeably as per their convenience. Brand

10
switching is very common, that is if a product is not available in one brand, the consumer would
conveniently purchase the same product of another brand.
The penetration efficiency of distribution channel is largely governed by the distributors &
retailers. Well managed distribution channels ensure timely availability of forecasted quantities
of goods, lower inventory holding costs, minimized lost sales, high substitution sales (sale of
own product as a substitute in case competitors products are not available in the market). This
ultimately increases the total sales figure of the company and hence ensures higher market
shares.
Promotional support viz. higher retailer margins, incentives during promotional events, provision
of display racks etc. by the supplier are amongst other factors which affect the sale of a product.
Channel motivation is a concept wherein the supplier makes attempt to motivate its distribution
partners so as to tempt them to push the product into the market effectively. It is difficult enough
to motivate direct employees to provide the necessary sales and service support. Motivating the
owners and employees of the independent organizations in a distribution chain requires even
greater effort. There are many devices for achieving such motivation. Perhaps the most usual is
`incentive’: the supplier offers a better margin, to tempt the owners in the channel to push the
product rather than its competitors; or compensation is offered to the distributors’ sales
personnel, so that they are tempted to push the product.
The efficiency of distribution channel, however, is a function of company’s terms and
conditions with the distributors. Distributor favoring terms and conditions result in motivated
distributors who ultimately show it in their order management and final distribution of goods to
retailers. Also, retailers have a major role to play by promoting the product against competing
brands’ poduct.
The study, hence has been taken up to study the distribution channes of a few of companies
(HUL, ITC, Marico, Park Avenue, Agro Tech Pvt. Ltd., MTR Foods, Unibic, in the local region
(Kharagpur) with a focus on Agro Tech Pvt. Ltd., MTR Foods & Unibic (which are non leading
FMCG players) so as to study their distribution channel in detail and identify loopholes/problems
at distributor as well as retailer level that hamper the sale and suggest solution mix to improve
the product availability to the customer so as to minimize lost sale and maximize substitution
sale.

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The distribution channel in case of FMCG comprises of
Fig. 1.0 Schematic of FMCG Distribution Channel
Following are the objectives taken up in this study, so as to arrive at a robust distribution
management solution for any particular non-leading FMCG company:
Objectives of Study:
1. To study and understand the operation of local distribution channels in case of FMCG’s.
2. To study and identify major issues/loopholes in the distribution channel which affect
availability of product to customer.
3. Propose a solution mix which minimize lost sales and increase substitution sales of a
product as a result of improved product availability.
Distribution
Centre 1
Distribution
Centre 2
FMCG Company (Supplier)
Redist.
Stockist 1
Redist.
Stockist 2
Redist.
Stockist 3
Redist.
Stockist 4
Retailer Market 1 Retailer Market 2 Retailer Market 3 Retailer Market 4

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CHAPTER II
REVIEW OF RELATED LITERATURE
This chapter will provide an overview of some of the relevant research works that have been
done in the past.
Gavirneni et al. (1999) and Cachon and Fisher (2000) studied and quantified the value of sharing
sales information to overcome demand distortion due to order batching, and Chen et al. (2000)
analyzed the effects of the forecasting process on information sharing.
Rajiv Mehta et.al (2001) emphasized the role of sales managers at all levels in channel
management so as to achieve optimum performance of the market channels and hence higher
sales and market share.
Lee et al. (2000) addressed the bullwhip effect and considered the value of information sharing
under a known autoregressive demand process.
Julius Chu et.al (2003) modeled the situation as a Bayesian game, and found that, in equilibrium,
whether the retailer reveals or withholds the information depends on two things—the cost of
revealing the information and the nature of market demand signal that the retailer receives. If the
cost of sharing the information is sufficiently large, then the retailer will withhold the
information from the vendor regardless of the type of signal that is received. If the cost of
sharing the information is small, then the retailer will reveal the information to the vendor if a
high demand is signaled, but will withhold it from the vendor if a low demand is signaled. In
general, reducing the cost of sharing information and increasing the profit margin of either the
retailer or the vendor (or reducing the cost of the vendor or retailer) will facilitate information
sharing.
Kaipia et. al (2003) examines the options open to the grocery retailing industry that will enable it
to attack the problem of stockouts in managing increased number of SKUs, through outsourcing.
A new process innovation, vendor managed category management, is proposed. A potential
application is presented by means of one real-life case, in which a distributor offers the retailers
full management of one category that includes assortment forming and logistical functions.

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S. Bhardwaj (2006) had discussed in detail the types of marketing channels, roles/onus of
channel members and major issues being faced by distributors viz. selling goods to retailers at
their own risk, requirement of financials for procuring and maintaining inventory.
L. Whicker et.al (2006) investigated, through the use of an industrial case study, how analysis of
both time and cost can be combined to provide a more accurate view of supply chain
performance which can lead to better informed decision making. The subsequent analysis
provided an insight into the relationship between time and cost in supply chain processes and
demonstrated how product costs accumulate in the supply chain.
Armstrong et.al (2006) had elaborated use of combined forecasting techniques viz. judgmental
and quantitative or statistical methods based on given situations. They suggested that use of
combined forecast models results in more accurate forecasting. Integration is effective when
judgments are collected in a systematic manner and then used as inputs to the quantitative
models, rather than simply used as adjustments to the outputs.
Aixa Citron et.al (2009) described a multiple criteria mixed-integer linear program used for
designing the best possible supply chain distribution network for a consumer goods company.
The model determines the optimal configuration of the manufacturing plants, distributors and
customers in the distribution network. The model selects the best option for each
customer/distributor based on several criteria: profit, lead time, power, credit performance, and
distributors’ reputation. The model is validated with real data from a consumer goods company
to show its functionality.
Haan et.al (2009) characterizations of lean (what, when needed but perfect) and agile (first, fast
and best) show the paradigmatic differences between the two. When applied in a case study in
Poland on a distributor of lifestyle oriented fast moving consumer goods, established after the
transition, it appeared that these characterizations enabled a proper description and analysis.
During the volatile period (1996–2002) an agile approach provided the flexibility and
competitiveness needed. However, when the market matured the overly expensive agility caused
last minute crisis. Then a lean approach enabled the optimization of processes needed to supply

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customer in a more reliable way. Both approaches stress different aspects but have quite a few
tools in common.
Pradeep Narain, Sanjeev Kumar Jha and Soumitra Devi (2008) provided insights into the
evolution of distribution network of Hindustan Unilever Limited, its strategies of distribution
management and presence of its distribution network across nation.
Kumar Vaibhov (2009) presented the overview of FMCG industry and analyses of FMCG sector
in the country with a focus on studying the sales and distribution network management and
analysis of demand and supply of Proctor & Gamble.
Michaelraj et. al (2009) proposed two models which ranks the retailer on the basis of their
demand and payment policies and accordingly establish replenishment policy so as to minimize
the balance payment and maximize the sale of a particular distributor. The models proposed if
followed by the distributors could reduce the closure of business due to the ﬁnancial burden,
which is frequent in the present scenario.

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CHAPTER III
RESEARCH METHODOLOGY
This chapter discusses the methodology adopted for conducting the research. Types of surveys,
Design of data collection instrument, pre-testing of data collection instrument, sampling
approach and types of research adopted.
3.1 Data Collection Instruments
Personal In-depth interview technique had been used as a data collection instrument. In this,
personal interview were conducted with people involved in different functions of the distribution
to have an in-depth understanding of operations of distributor as well as retailer.
3.2 Sampling Design
A convenience sampling approach had been adopted for surveying. Retailers and distributors
(respondents) had been chosen from the nearby local markets for the study.
As, the first objective of research was to identify a distributor who represents non-leading FMCG
brands so as to further study that particular channel in detail, the research problem has been
divided into two phases: 1. Exploratory and 2. Descriptive.
3.3 Exploratory Research
The research had primary as well as secondary data collection phases so as to study and
understand the management of distribution channels in FMCG industry in general and also to
explore the distribution channels established by reputed FMCG firms in India.
Initial phases of primary research had been exploratory in nature to understand retail and
distribution channel in the local market, availability of various FMCG brands in local market, the
flow of goods from distributors to retail shops and distributor practices and their margins.
3.4 Descriptive Research
This part of research has further been divided into two phases.

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3.4.1 Phase I
Having understood the scale and operation of FMCG distribution channel in the local market,
further research had been to study in detail one local distribution channel of selected FMCG
companies in terms of its replenishment policies viz. payment and delivery terms with
distributors, inventory policies, logistic modes, lead times of replenishment, lost sales and causes
for lost sales and effectiveness of supply demand match being maintained at distributor’s end.
The instrument of data collection for above mentioned purpose had been chosen as personal in-
depth open ended structured interview. This particular instrument had been chosen as the
objective of research was to explore as much as possible, the process of distribution, pain areas
for distributors and identify loopholes in the distribution system. The questionnaire would be
analyzed primarily for those parameters which will ultimately improve product availability and
hence market share of the selected FMCG Company. A detailed interview was conducted with
distributor so as to unfold the facts with respect to issues affecting product availability.
3.4.2 Phase II
The second phase of the research had been to study and understand various factors/ issues that
affect the availability of product to customer at retailer level. The information had been collected
by conducting personal in-depth interviews with a few retailers operating in the nearby local
market.
The data/information collected had been analyzed so as to arrive at a solution mix which would
benefit all the channel partners, improve product availability in the market thereby minimizing
chances of lost sales and maximizing substitution sales ultimately resulting in improvement in
the market share of the company.

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CHAPTER IV
INFERENCES AND ANALYSIS OF DATA
This chapter provides details of the data that had been collected during the exploratory and
descriptive phases of the research and analysis of the same so as to arrive at a solution mix for
the problem.
4.1 Findings of Exploratory Research
The exploratory part of the research was focused on to collect information on distribution
channel management (national as well as local) of a few leading FMCG companies in the
country. The detail had been collected on various parameters such as product range of the
company, product categories being supplied by the company, nation distribution network and
local distribution network set up by the company to distribute its product assortment. The details
such as the payment terms and replenishment policies, mode of transport used for distribution,
supply demand match and channel motivation etc. were also collected. These details had been
collected with a view to understand different types of channel management practices and systems
being used by various FMCG companies in the country. The table below briefly presents the
same:
Company
Name
Agro Tech Marico ITC- FMCG Hindustan
Unilever-
FMCG
Product
Range
Sundrop oil &
peanut butter, ACT
II, Snack Break,
Rath etc.
Sweekar,
Saffola,
Parachute,
Mediker, Hair
& Care, Revive
Ashirvaad,
Sunfeast, Bingo,
Vivel, Fiama DI
Wills
Brooke Bond,
Kissan, Knorr,
Annapurna,
Fair & Lovely,
Pond's,
Sunsilk, Clinic
plus,
Pepsodent
Product
Categories
Foods Personal Care,
Foods
Personal Care,
Foods, Stationery,
Personal Care,
Skin Care,

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Lifestyle Foods, Home
Care
National
Distribution
3500 towns, 265,000
retailers, Direct
selling agreements
with Reliance Retail,
Food Bazaar, Aditya
Birla D-Mart etc.
882 Direct
distributors, 153
super
distributors,
catering to
2,393 small
stockists and
4523 van
markets
2.0 million retail
outlets, 1.0 Lakh
markets
4,000
redistribution
stockists,
covering 6.3
million retail
outlets,
reaching to
more than 700
millions
Local
Distribution
1 distributor 2 Distributors 2 distributors 1 distributor
Payment &
Delivery
Policies with
distributors
Immediate Cash Immediate Cash Immediate Cash On credit
Supply
Demand
Match
Low Medium High High
Channel
Motivation
Low Low High High
Table 1.0 Distribution Channels of some of FMCG Companies in India
Further in the exploratory part of the research, a number of distributors were identified taking
help of retailers located in the nearby IIT Khragpur market and interviewing them rudimentarily
(distributors) so as to locate them and fix an appointment for further discussion on subject of
study.

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The local distributors of HUL, Agro Tech, MTR Foods, UNIBIC, ITC and Marico have been
interviewed so as to understand the practices being followed and the replenishment policies on
which the distribution system operates, modes of logistics used, size of their market. The details
that had been collected are given as under:
Distributor
Name
Puja Traders G.R Enterprise Basak
Enterprise
Dutta
Decorator
Kar
Enterprise
Company Agro Tech
Private
Limited, MTR
Foods, Unibic
Hindustan
Unilever
Park Avenue ITC Marico
Contact
Person
Sushil Kumar
Goel
Gautam Kumar
Bhunia
Naresh Gauri Shankar Kar Babu
Address Malancha,
Near Axis
Bank.
Gol Bazaar,
Main Market
Road
Inda Market Gole Bazaar Malancha
Distribution IIT, Gole
Bazaar, Gate
Bazaar, Prem
Bazaar,
Kalaikunda
IIT, Gole
Bazaar, Gate
Bazaar, Prem
Bazaar,
Kalaikunda
Jhargram,
Kharagpur,
Midinipore
IIT, Gole
Bazaar,
Malancha, Prem
Bazaar
Monthly
Sales
15 Lakhs
(appx.)
- 3 Lakhs
(appx.)
- 6 Lakhs
(appx.)
Modes of
Transport
Mopet Pick up van Mopet Pick up van Mopet
Table 2.0 Details of distributors in Kharagpur
Based on preliminary survey and discussion with different distributors, ‘Puja Traders’ – the local
distributor of ‘Agro Tech Private Limited, MTR Foods and Unibic’, being one of the largest
distributor supplying goods to almost all the local markets, was selected so as to further the
research with an objective of studying the practices such as replenishment policies, payment
terms with supplier and retailer, inventory management, frequency of reordering, frequency of

distribution (supply) to retailers, credit period extended to retailers, credit (if any) from supplier
etc. The data was collected so as to identify major issues/ factors
the product availability in the market
4.2 Observations from the interview with
Puja Traders is a distributor of AgroTech Pvt. Ltd, MTR Foods and Unibic and is located in
Malancha. The owner of the business is Mr. Sushil Kumar Goel
25 years. He hails from northern India (New Delhi). The product range being distributed
Traders is Sundrop oil, popcorn
turnover of his distribution business is
from 3 – 8% depending upon product types and the supplier
IIT Kharagpur and Gate Bazaar, Prembazaar, Kalaikunda (whole Kharagpur region to be more
precise).
Out of total sales, 20% share is from MTR foods, 70% from Agro Tech and re
Unibic and of the total turnover, 30% is derived from Gol bazaar market, 15% from IIT market,
20% from Gate bazaar and remaining from other
share of companies in total sale and share of different
below.
Fig. 2.0 Company wise sales turnover share of Puja Traders
MTR Foods
20%
Share of Sales Turnover Company
ted so as to identify major issues/ factors at distributor level
in the market.
nterview with the distributor
distributor of AgroTech Pvt. Ltd, MTR Foods and Unibic and is located in
The owner of the business is Mr. Sushil Kumar Goel. He is in this business since last
northern India (New Delhi). The product range being distributed
Sundrop oil, popcorns, Unibic cookies, snacks, MTR foods jam, pickles etc.
turnover of his distribution business is between Rs. 10-15 lakhs, out of which his margin varies
depending upon product types and the supplier. The markets served are Golbazaar,
f total sales, 20% share is from MTR foods, 70% from Agro Tech and re
20% from Gate bazaar and remaining from other retail shops in Jhargram and Med
share of companies in total sale and share of different markets are presented in fig. 2 and fig. 3
Company wise sales turnover share of Puja Traders
Agro Tech
70%
MTR Foods
Unibic
10%
Share of Sales Turnover Company-wise (%)
20
at distributor level that affect
distributor of AgroTech Pvt. Ltd, MTR Foods and Unibic and is located in
. He is in this business since last
northern India (New Delhi). The product range being distributed by Puja
, Unibic cookies, snacks, MTR foods jam, pickles etc. Monthly
15 lakhs, out of which his margin varies
. The markets served are Golbazaar,
f total sales, 20% share is from MTR foods, 70% from Agro Tech and remaining 10% from
retail shops in Jhargram and Medinipur. The
markets are presented in fig. 2 and fig. 3

Fig. 3.0 Marketwise sales turnover of Puja Traders
The average period for which the stock lasts in distributor’s warehouse is 4
reordering frequency for all items is one week except Unibic items whose re
two weeks. The rent paid by distributor for the warehouse is nominal i.e. Rs. 3000 only
x 100’ warehouse.
The mode of distributing goods to retailers
distribution is borne by the distributor only.
The distributor supplies goods to Big Bazaar on purchase order basis. The quantities are asked
form supplier (manufacturer)
Bazaar.
Order processing time of supplier (
usually both at distributor as well as
The distributor dispatches goods to retail outlets routinely and th
decided by him based on his past experience. Distributor find
to record and maintain past sales data.
Money rotation is a big constraint for the distributor as he has to pay immediate cash to the
supplier for taking delivery of goods while the payment terms
days. Moreover, the credit is difficult to recover and there is alw
money blocked with the retailers for long periods.
Gate Bazaar
20%
Marketwise sales turnover of Puja Traders
The average period for which the stock lasts in distributor’s warehouse is 4
reordering frequency for all items is one week except Unibic items whose re
two weeks. The rent paid by distributor for the warehouse is nominal i.e. Rs. 3000 only
The mode of distributing goods to retailers is pick-up van (capacity – 100 cartons). The cost of
distribution is borne by the distributor only.
supplier (manufacturer) and delivered against what is mentioned in purchase order of Big
supplier (manufacturer) is 3-4 days. There exists a demand supply gap
usually both at distributor as well as supplier end.
istributor dispatches goods to retail outlets routinely and the quantities of dispatch are
decided by him based on his past experience. Distributor finds it cumbersome and cost incurring
to record and maintain past sales data.
for taking delivery of goods while the payment terms on retailer end are credit of 15
days. Moreover, the credit is difficult to recover and there is always a significant amount of
locked with the retailers for long periods. This results in low cash
Gole Bazaar
30%
IIT Market
15%Gate Bazaar
20%
Others
35%
Marketwise Sales (%)
21
The average period for which the stock lasts in distributor’s warehouse is 4-5 days. The
reordering frequency for all items is one week except Unibic items whose re-order frequency is
two weeks. The rent paid by distributor for the warehouse is nominal i.e. Rs. 3000 only, for a 50’
100 cartons). The cost of
ntioned in purchase order of Big
4 days. There exists a demand supply gap
e quantities of dispatch are
it cumbersome and cost incurring
retailer end are credit of 15
ays a significant amount of
in low cash flow available with
Gole Bazaar
IIT Market

22
the distributor, ultimately affecting the reorder frequency and re-order quantity and hence the
stock levels being maintained to meet the market demand.
In order to entice retailers to make payments immediately in cash, the distributor offers discounts
ranging from 0.5 to 2.0%.
Feedback: As reported by distributor, the expenses of operating the distribution business have
gone up but the margins offered by manufacturers have not increased and payment terms also are
not favorable. This is encouraging distributors to shift away from this business of distribution to
some other ones.
4.3 Analysis of Financial Condition of Distributor under different payment terms scenarios
It may be inferred from the responses during the interview that one of major pain area for the
distributor is very low or negative cash flow with which it is very difficult for him to continue
the business. Hence a scenario analysis for the distributor had been conducted so as to ensure the
positive cash flow to the distributor and increase in sales of the FMCG Company. The financial
condition of distribution has been analyzed under four different payment terms scenarios (given
below) while assuming his position at four credit default levels (unpaid credit after the due credit
period) viz. 15%, 10%, 5% and 0%, and four margin levels (range of distribution margins) viz.
5.5%, 6.5%, 7.5% and 8.5%.
The payment scenarios are:
1. Purchase by cash payment and sell on credit of 15 days.
2. Purchase by cash payment and sell on cash receipt, at a discount of 2%.
3. Purchase as well as sell on credit of 15 days.
4. Purchase on credit of 15 days but at 2% higher cost, sell on credit of 15 days.
The data presented below show the analysis of payment terms of supplier with distributor and its
impact on distributor, under different scenarios. Table below represents sample information from
the distributor which would be used to calculate the net cash flow left with the distributor under
these different scenarios. Scenario 1 & 2 are the existing scenarios of the distributors whereas
scenario 3 & 4 would be the scenario when the payment terms are revised. All the four scenarios
have been analyzed so as to calculate the average cash flow available (calculated over a period of

23
3 years) with the distributor. The calculations, for the purpose of understanding how average
cash flows values were derived, are shown in table 3.0 through 6.0.
Monthly order amount to manufacturer (Rs. Lakhs) 12.5 12.5 12.5 12.5
Ordering cycle (weeks) 1 1 1 1
No. of orders per month 4 4 4 4
Each order's average amount (Rs. Lakhs) 3.125 3.125 3.125 3.125
Retailer's cost (as percentage of price) 0.89 0.89 0.89 0.89
Distributor's cost (as percentage of price) 0.835 0.825 0.815 0.805
Average margin of distributor (%) 5.5% 6.5% 7.5% 8.5%
Distributor's each cycle's sales turnover (Rs. Lakhs) 3.33 3.37 3.41 3.45
Table 3.0 Parameters common to all the payment terms scenarios.
The table 4.0 shown below presents a sample calculation of cash inflow, outflow and net margin
under scenario 1 at 15% credit default level and margin of 5.5%. The calculations for other levels
and credit default, margins and payment scenario have also been done similarly. The
interpretation of analysis of different payment term scenarios at given credit default levels and
margin levels, are presented in bar charts below.

24
Table 4.0 Cash inflow - outflow situation corresponding to scenario 1
The calculations below show the average cash-flow available with the distributor under scenario
1 and scenario 3. Table 5.0 shows the calculation of 3 year average net cash-flow with the
distributor whereas table 6.0 shows cash flow situation of the distributor under payment terms
scenario 3.
Table 5.0 Average net cash flow under scenario 1 at credit default of 15% and margin of 5.5%.

Table 6.0 Average net cash flow under scenario 3 at credit default of 15% and margin of 5.5%.
The scenario and sensitivity analysis of financial condition of the distributor has been elucidated
below in the form of bar charts. The charts under figure 4.0 through 7.0
cash flow available with the distributor at
different payment term scenarios.
Fig. 4.0 Average cash flow with the distributor at a credit default of 15%.
Average net cash flow under scenario 3 at credit default of 15% and margin of 5.5%.
sensitivity analysis of financial condition of the distributor has been elucidated
e form of bar charts. The charts under figure 4.0 through 7.0 present the average
cash flow available with the distributor at given levels of credit defaults
different payment term scenarios.
Average cash flow with the distributor at a credit default of 15%.
25
Average net cash flow under scenario 3 at credit default of 15% and margin of 5.5%.
sensitivity analysis of financial condition of the distributor has been elucidated
present the average net
given levels of credit defaults and margins under

Fig.5.0 Average c
Fig. 6.0 Average cash flow with the
-0.4000
-0.2000
0.0000
0.2000
0.4000
3-yrsAvg.CashFlow(Rs.
Lakhs)
Scenario 1
-0.1000
0.0000
0.1000
0.2000
0.3000
3-yrsAvg.CashFlow(Rs.
Lakhs)
Scenario 1
5.5 6.5 7.5
Margin (%)
Cash flows at default of 10%
Scenario 1 Scenario 2 Scenario 3 Scenario 4
5.5 6.5 7.5 8.5
Margin (%)
Cash flows at default of 5%
Scenario 1 Scenario 2 Scenario 3 Scenario 4
26
credit default of 10%.
distributor at a credit default of 5%.
8.5
Scenario 4
8.5
Scenario 4

Fig. 7.0 Average cash flow with the distributor at a credit default of 0%.
It may be noticed in figure 4.0
cash flow with the distributor under scenario 1 is highly negative at
However, the average cash flow dramatically improves to slightly negative and then positive one
as the default levels go down to 5% and 0% and margin l
fact, the average cash flows
situation at all the margin levels.
Nevertheless, having zero credit defaulters is not a practical situation. Hence, Scenario
always a painful situation for the distributor.
positive, it is not feasible on all the sales that distributor makes to retailers.
in the payment terms with the supplier would be ma
the distributor.
The alternatives available to the distributor
difficult to negotiate as it does not offer any take
period allowed. Distributors could negotiate for the scenario 4, as
positive cash flows with distributor as a result of credit period that is allowed by the supplier at
.0 and 5.0 that at credit default levels of 15% and 10%
cash flow with the distributor under scenario 1 is highly negative at
as the default levels go down to 5% and 0% and margin levels increase from 5.5% to 8.5%. In
with the distributor are positive enough under no
situation at all the margin levels.
Nevertheless, having zero credit defaulters is not a practical situation. Hence, Scenario
always a painful situation for the distributor. Though average cash flows under
is not feasible on all the sales that distributor makes to retailers.
in the payment terms with the supplier would be mandatory so as to improve the performance of
available to the distributor are scenario 3 and scenario 4 but scenario 3 is
difficult to negotiate as it does not offer any take-away to the supplier in exchange of the credit
s could negotiate for the scenario 4, as it would result in
distributor as a result of credit period that is allowed by the supplier at
27
at credit default levels of 15% and 10% the average
cash flow with the distributor under scenario 1 is highly negative at all the margin levels.
evels increase from 5.5% to 8.5%. In
itive enough under no credit default
Nevertheless, having zero credit defaulters is not a practical situation. Hence, Scenario 1 is
Though average cash flows under Scenario 2 are
is not feasible on all the sales that distributor makes to retailers. Therefore, a revision
ndatory so as to improve the performance of
are scenario 3 and scenario 4 but scenario 3 is
away to the supplier in exchange of the credit
it would result in enough
distributor as a result of credit period that is allowed by the supplier at

28
the cost of some extra margin. The credit period from the supplier eliminates the initial financial
assistance required for the working capital management during the retailer’s credit period. The
revised payment terms improve the financial condition of the distributor such that they could
comfortably continue their business and remain in market. Higher cash flow would enable
him/her place sufficient quantities of items in each order thereby optimizing his cost of ordering
and also would enable him make sufficient quantities of items available to the retailer as and
when required.
4.4 Observations from interviews with retailers
Personal interviews were conducted
• Promotional support is extended to retailer in the form of higher margins, provision of
display panels/racks & return of damaged/unsold goods.
• Cadbury, Nestle, Frito-Lay, PepsiCo, Coca Cola, Wrigley etc. provide display panels.
• Suppliers offer fixed incentives to retailers for their support during promotional events.
• Suppliers of medium-end brands shed higher margins to retailer as compared to those of
established brands (leaders).
• Supplier of established brands actively takes returns of damaged/expired goods.
• They focus on display also by providing retailers with display panels/ racks and insisting
on keeping only their brands in those panels.
• As reported by retailers, the displayed items sell better and hence higher stocks are kept
for these items.
• Medium end brand suppliers do not focus on display, it is upon the discretion of the
retailer to arrange display of items in a way he/she deems fit.
• Retailers themselves promote items on which they get higher margins.
• They also are reluctant in taking back the damaged/expired goods hence causing loss to
retailer and loose good will. (e.g. Sundrop oil takes return while Unibic does not). As a

29
consequence of this, retailers are hesitant in purchasing goods in sufficient quantities.
They usually purchase goods in quantity equivalent to 70-80% of the actual demand.
• On an average 5-15% of unsold (damaged/expired) goods are returned to supplier in case
there exists a goods return policy.
• Stock out is usual and under such circumstances, retailer purchases items from open
wholesale market – Gol Bazaar, at same margin. Transportation cost, however, is added.
• Where utility is a criterion for the consumer, retailer promotes items of greater utility and
with higher margins. (e.g. Bisk farm – Coco malai 300g – Rs. 20/- sells better to
families seeking utility, cheaper toilet cleaners also appeals better to these families).
• In case of stock-out between two successive replenishments from the distributor, the
retailer purchases items from open market (Gol Bazaar).
• Credit period varies from 1 week to 4 weeks. Payments to distributors are made in
installments.
4.5 Analyzing the distribution channel at retailer level
It has been inferred from the observations of the interviews with retailers that non-leading
FMCG players do offer relatively higher margins to retailers so that retailers accept their product
and promote them to end customer as well. These non-leading FMCG players however, do not
focus on return of unsold/damaged goods which, as reported by retailers, are equally important
parameters affecting the sale of the product. If a particular supplier does not take return of unsold
expired/damaged goods, the retailer does not purchase enough quantity of the product fearing
excess quantity would go unsold and get wasted thus causing loss. The retailer, in general,
purchases only about 70-80% of the actual demand of the product. This shows that absence of
goods return policy affects the product availability and hence cause situation of lost sales.
On an average 5-15% of unsold damaged/expired goods are returned to the supplier in case there
exists a goods return policy.
In order to assess whether implementing the goods return policy would benefit the retailer as
well as supplier or not, the cost benefit analysis had been conducted. The following assumptions
have been taken in the analysis:

30
• The supplier sells 50% of returned goods as scrap and recycles the remaining goods.
• The cost incurred in selling goods as scrap is 70% of cost of goods to the distributor and
cost incurred when goods are recycled is 15% of cost of goods to the distributor.
The details of cost-benefit analysis are presented as under:
The table below shows calculations under cost benefit analysis when 15% goods are returned to
the supplier. The cost benefit analysis had been done for an average of 7.5% goods returned out
of which 50% are recycled at an average cost of 15% of supplier’s price and remaining 50% are
sold as scrap at an average cost of 30% of supplier’s price that is at a cost of 70% of supplier’s
price.
No return of Goods
Purchase quantity of retailer as a percentage of total demand 0.8
Amount of goods distributed in a month 1.25
Retailer's Margin 0.2
Monthly sale of retailer 1.5625
Net profit of retailer 0.3125
Cost to supplier 0.72
Supplier's sale in a month 1.125
Return of goods
Purchase quantity of retailer as percentage of total demand >=1
Amount of goods distributed in a month 1.5625
Retailer's Margin 0.2
Monthly sale of retailer 1.953125
Net profit of retailer 0.390625
supplier’s price (as a fraction of retail price) 0.72
Supplier's sale in a month 1.40625
Increase in supplier's sale because of return policy 0.28125
Percentage increase in sale of supplier 0.25
Increase in net profit amount of the retailer 0.078125
Cost of return policy

31
Percentage of goods returned 0.15
Amount of goods returned (cost to supplier) 0.248162
Back transportation cost as a percentage of cost of goods 0.015
cost of scrapped goods 0.7
cost of recycling goods 0.2
Transportation cost 0.003722
Assumption: 50% of goods recycled, 50% of goods sold as
scrap
Scrap cost 0.086857
Recycle cost 0.024816
Total return cost 0.115395
Cost as a percentage of retailer's sale 0.059082
Benefit to supplier 0.165855
Table 7.0 Calculations of cost benefit analysis of implementing “goods return policy”
Return of goods
(%) Particulars
Rs.
Lakhs
5% Increase in net profit of retailer 0.078
Increase in revenue of supplier 0.281
Cost of Return (recycle + scrapping) 0.033
Net Benefit to supplier 0.249
Cost of Return as percentage of retailer's sale 0.017

32
GRAND AVERAGE VALUES
Increase in net profit of retailer 0.078
Table 8.0 Summary of cost benefit analysis of implementing “goods return policy”
It may be noticed that the average cost of implementing the goods return policy would be 3.6%
of the total sales of the product. Therefore, this policy may be implemented by sharing the cost
equally with the retailer. This would result in a reduction of approximately 2% in the retailer’s
margin but stands justified as this causes an increase in sale benefiting both the retailer as well as
the supplier.
Thus, from the analysis we did at distributor as well as retailer level in the distribution channel
reveal that revision in payment terms with the distributor and implementing the goods return
policy would motivate both the channel members to stock enough volumes of the product with
them. The higher stock levels increase the availability of the product in the market which
ultimately minimizes the chances of lost sales and improve chances of substitution sales.

33
CHAPTER V
CONCLUSIONS
This chapter provides the overall conclusions of the study based on the analysis done in the
previous chapter.
The analysis at distributor and retailer levels in the distribution channel of the FMCG Company
suggests that following modifications/revisions are required to be made in the distribution
channel so as to improve the sale of the product.
Revise payment terms with the distributor to ‘scenario 3’ of payment terms.
Implement goods return policy by sharing the cost of the strategy with the retailer.
As the cash flows of the distributor improve, he/she would order and stock enough quantities of
product with him to meet the market demand. Also, if the supplier encourages the retailer to
return the unsold expired/damaged goods, the retailer would not hesitate in stocking sufficient
levels of the product with him. As a result, the availability of the product in the market increases
which leads minimized lost sales and maximized substitution sales. This helps in achieving the
higher market share to the company.

34
CHAPTER VI
SCOPE FOR FUTURE WORK
The scope of the study was limited to only improving the availability of the product in the
market. However, there are many other factors such as efficient demand forecasting, information
sharing, efficient replenishment policies, promotional support to enhance the brand recall etc.
which affect sale of the product. Hence a research could be taken up in any of the above-
mentioned areas wherein more insights could be developed so as to identify what factors and to
what extent these factors are important determinants of sale of the FMCG product. A more
precise future research project could be to assess how important is the “display support” for
achieving higher sales of the product.

35
CHAPTER VII
REFERENCES
• S. Bhardwaj. Distribution and channel management. Indian Institute of Technology,
Chennai. 2006.
• J. Scott Armstrong, Kesten C. Green. Demand forecasting - Evidence based methods.
Chapter of forecoming book - Strategic Marketing Management – A Business Process
Approach. 2006.
• Uta Jutter, Martin Christopher, Susan Baker. Demand chain management - integrating
marketing and supply chain. Industrial Marketing Management 36 (2007) 377 – 392.
• Prahlad Krishnamurthy. Marico’s distribution network. FMCG & Retail Marketing Blog.
2007. http://fmcg- marketing. Blogspot.com/2007/12/maricos-distribution-network.html.
• Pradeep Narain, Sanjeev Kumar Jha, Soumitra Devi. A study on distribution management
of HUL. XLRI Jamshedpur. 2008.
• Danuta Kisperska Moron, Job De Haan. Improving supply chain performance to satisfy
final customers. International Journal of Economics. 2009.
• Kumar Vaibhov. Study on sales and distribution management of Proctor & Gamble.
IIMT Greater Noida. 2009.
• L.A. Michaelraj, P. Shahabudeen. Replenishment policies for sustainable business
development in a continuous credit based vendor managed inventory distribution system.
Computers & Industrial Engineering 56 (2009) 260–266.
• Agro Tech Private Limited – website: www.atfoods.com
• Unibic – website – www.unibic.com
• MTR Foods – website – www.mtrfoods.com
• Marico Limited – website - www.marico.com
• Park Avenue – website – www.parkavenue.co.in

36
• ITC Limited - website – www.itcportal.com
• HUL – website – www.hul.co.in
• www.wikipedia.org

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