TOC- Improve FMCG Distribution Channel Performance


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TOC- Improve FMCG Distribution Channel Performance

  1. 1. Research PapersTheory Of ConstraintsTo Improve Performance InFMCG Distribution ChannelA Case Study by Kuldeep Singh Malik
  2. 2. Theory Of Constraints To ImprovePerformance In FMCG Distribution ChannelPurpose - The paper presents Theory of Constraints to Improve Performance in FMCG distribution channelDesign - This paper is case study based on TOC implementation in an FMCG company in India, followed by an opinions survey of the company executives and distributors on TOC.Findings - TOC results in reduction of Inventory of distributor and retailers, an increase in their ROI, improvements in both Productivity and TLSD of the company sales force resulting in strengthening of relationship among the FMCG channel members.Originality - This paper provides original case study and insight on the benefits resulting from TOC implementationThe Theory of Constraints (the TOC) is a systems management philosophy developed by an Israeli physicist EliyahuM. Goldratt. It took over two decades research, claiming that each system has at least one constraint, challengingcurrent state of businesses practices and its been inspired from root cause analysis. In his book, “The Goal: AProcess of Ongoing Improvement”. Goldratt states that a firms goal is to make money now and in the future. Acompany will not exist if it is not making money. Any activity that does not help make money is a waste of time andresources [The Goal, Goldratt]. The Theory of Constraints is based on the premise that:-“Every real system, such as abusiness, must have within it at least one constraint. Types of Constraint are namely the market capacity, resources,suppliers, knowledge and competence. If this were not the case then the system could produce unlimited amountsof whatever it was striving for, profit in the case of a business”.1. Application Of The Principle Of TOCThe TOC applications range from Production, Distribution, Supply Chain, Financial Management, Marketing,Strategic Planning and Project Management. The implementation of TOC enables to increase sales volumeat the same time reducing the expenses of a distributor/retailer in the distribution network, reduction inthe investments and hence, improvement in the ROI. The TOC requires optimum stock allocation for alldistributors and retailers within the distribution network. The bottlenecks are tackled using automaticreplenishment method [Cyplik P., Hadaś Lukasz, Domański R., 2009]2. Literature ReviewLiterature supports for the theoretical basis of TOC exist in (1) system theory, (2) metrics, and(3) culture-based change management [Rik Berry, Lola Belle Smith]. In a literature review [Steven J. Balderstone andVictoria J. Mabinsearch] has found that majority of books and items either develop or discuss themethodology from a theoretical viewpoint and made claims like increased throughputs, reduced inventoriesand lead-times, which in turn would lead to higher sales, and improved profits, quality, and customersatisfaction. The vast majority of TOC applications were in the manufacturing sector. Most applicationsinvolve components of the overall philosophy, predominantly the operations management technique, DBR,and the constraint oriented continuous improvement, the Five Focusing Steps. Goldratt & Goldratt(2007)consider that points of sale generally operate with shortage levels of at least 20%. Kendall(2005), Goldratt &Goldratt (2007) and Schragenheim (2007) mention some ways of increasing throughput, among them thereduction of shortage percentage. Kendall (2005) and Schragenheim(2007) present some results based ontheir own experiences and information from other sources.Goldratt & Goldratt (2007) affirm that implementations of TOC distribution methodology have presentedthe following results:˜ Decrease in system stock (typically 50%);˜ Increase in sales (typically at least 20%);˜ Increase in stock turnover (typically over 100%);˜ Decrease in internal transferences between regional warehouses (typically to almost zero);˜ Decrease of obsolescence typically to less than 50%);˜ Operational Expense kept approximately the same;˜ Significant improvement in relationship between clients and suppliers.Vector Consulting Group
  3. 3. Theory Of Constraints To ImprovePerformance In FMCG Distribution ChannelThe above mentioned literature on TOC neglected the practical aspects of the theory especially in FMCGsector. The present study has covered constraints identification, sources of the constraints, the strategic,tactical and operational planning of a TOC project, the variables affecting the project outcome andcontrolling part of variables which has not been covered in the earlier studies as per the best of authorsknowledge.3. Measuring Performance Of FMCG Distribution ChannelMeasurement of performance of FMCG distribution channel can be carried out through the followingperformance indicators:˜ Throughput (T) - the rate at which money is generated through sales or interest. It is computed as revenue minus totally variable costs (TVC).˜ Inventory (I) - all money invested in things intended for sale. It includes totally variable costs such as material, plus resources used in production such as land, machines, trucks, and computers. The more conventional term, Investment, is sometimes used instead of Inventory.˜ Operating Expense (OE) - All money spent turning Investment into Throughput. It includes direct labor, rent, and labor, plus selling, general, and administrative costs.4. The Five Steps Thinking Process Presented By Eliyahu M.goldrattThe Thinking Process:The TOC is based on the Thinking Process, a mechanism to analyze systems and to identify and remove anyconstraints which act as obstacles by preventing the company from achieving its goals. Constraints are theweakest links within a system, in critical situations, are first to become sources of problems. If they are notproperly removed, they adversely affect the development of the enterprise or supply chain .Application ofthe Thinking Process functions as a connector in the supply chain makes it possible to establish robuststandards to achieve economic efficiency.The process is in the following order:Step1: Determine the systems constraintStep2: Determine how to exploit the systems constraintStep3: Sub-ordinate everything else to the aboveStep4: Elevate the systems constraintStep5: Go back to step 1, as by definition another link turned into the weakest link5. Applying The Thinking Process In FMCG Distribition SystemStep one: Determine the systems constraintEvery Chain has a weakest link – the strength of the chain as a whole is determined by the weakest link. Thefirst step in the thinking process described is to identify the system constraints [Eliyahu M. Goldratt]. It isdone by simulating what the load on the resources would be if one is able to take all of the market demandand turn it into sales orders and the same thing in the case of FMCG distribution system is to simulate whatthe load on the various retailers and distributors would be if the company were able to take all of themarket demand and turn it into orders. The monitoring mechanism mentioned in this paper requires initialstock levels establishments in the form of Stock Norms. Goldratt & Goldratt (2007) suggest that these initialVector Consulting Group
  4. 4. Theory Of Constraints To ImprovePerformance In FMCG Distribution Channellevels/Stock Norms should be set according to the following factors: average replenishment time; averagedemand within replenishment time; fluctuations of demand within replenishment time; fluctuations inreplenishment time; loss caused by shortage; customer tolerance time; cost of holding stock. Stock Norms(SN) can be set and the min-max principle can be used, as soon as the stock level falls below a predefinedminimum level, an order is placed to replenish the stock up to the maximum level. The method seeks toreduce transportation costs. We should use the sales data and should factor variables affecting demand liketrade promotion, consumer promotion and seasonality affecting demand. The TOC involves dynamicallysticking to the system defined Stock Norms to reduce the stock pressures on supply chain and cutting downof operating expenses and, at the same time, contributing to an increase in the ROI.A process of establishing stock norms:Step1: Examine and Monitor periodic sales and physical stock per SKU, per locationStep2: Determine the stock requirement to just meet the demand without carrying excess or stockshortage. Set stock norms based on this concept.Step3: Calculate the damage in terms of lost cash of both redundant inventories and lost salesStep4: Trace all potentially factors affecting demand and supply include the necessary adjustmentsuggestionsStep5: Monitor the variations from the stock norms and use the concept of Dynamic BufferManagementThese steps can be explained as below:Monitoring sales and physical stock situation:The monitoring frequency is on every day, for each SKU, at each location (warehouse/CFA or distributor orretailer).Calculating the required inventory levels and set stock norms based on the principle of TOC:It is calculated on the specific locations and in the pipeline from one location to the other. A samplecalculation can be made like keeping inventory level equal to the one day sales and ensuring timelyreplacement of the sold stock. This can be done by finding out average sales per day from monthly salessummery and if the lead time is equal to one day, then two days stock is the required stock to matchdemand and supply. This can serve as initial level or Stock Norm.(TOC simply advocates never carry excessstock and never be out of stock: do everything right)Calculate the damage in terms of lost cash of both redundant inventories and lost salesTrace all potential factors affecting demand and supply and include the necessary adjustmentsuggestions:Trace all potentially factors affecting demand and supply for each product per SKU, per location,per day, and have considerations for lead time in the supply chain then, include the necessaryadjustment suggestions.Monitor the variations from the stock norms and use the concept of Dynamic Buffer Management:It needs to be done for each SKU, at each location, every day and use the concept of DynamicBuffer Management (DBM), according to this stock buffers should be divided into three areas, equal at first,called green, yellow and red areas. Depending on the dynamic behavior of on-handstock, DBM establishessome criteria to adjust the replenishment level [(Simatupangetal 2004,Goldratt & Goldratt, 2007].AccordingVector Consulting Group
  5. 5. Theory Of Constraints To ImprovePerformance In FMCG Distribution Channelto Yuan (2003) Mostly; on-hand stock would besignificantly less than the replenishment level. At the sametime, it is expected that it would be above a certain level, the limit below which would be considered as“almost losing sales”. Thus, the three zones of replenishment level can be defined as [Goldratt & Goldratt,2007]: ˜ Green: when on-hand stock is close to the theoretical maximum; ˜ Yellow: the middle level, where the normal on-hand stock should be; ˜ Red: when there is risk of impossibility to deliver all the demand.If during a period equal to replenishing time, the on-hand stock level invaded too far into the red area, thetarget should be increased. If during a period equal to the replenishing time, the on-handstock level isalways in the green area, the target level should be reduced. Such reduction or increase, unless in case ofspecial reason, should be done subtracting or adding to replenishment level an amount equivalent to awhole area, that is, a third (33%) of the target level. [Goldratt &Goldratt, 2007].A monitoring mechanismenables a company in Synchronization of all transaction quantities and transaction frequencies throughoutthe entire supply chain and it involves a shift from push to pull.Step two: Decide how to exploit the system’s constraint(s)Roll out methodology of TOC at a retail outlet/distributor point is as follows:Firstly, include the principle of TOC in the Mission of the company. Secondly, design and implement trainingcampaign for the top, middle and lower management on TOC: making strategic, tactical and operationalplan. Thirdly, arrange a separate training campaign for CFA, distributors, Sales force and retailers. Fourthly,create strategies for winning the confidence of retailers /distributors in TOC by explaining the ROI benefitsresulting from TOC implementation, Set stock norms, roll out and execute the formulated plans and finally,go back to step 1, if execution of plans is not strictly as per the principle of TOC. The approach to implementTOC at a distributor and retail has many similarities with exceptions that a distributor is being controlledand governed by the company policies according to an agreement between the two. The retailers have tobe taken in to full confidence as they are not bound to follow company policy. They can be highly influencedand mostly driven by relationship management with the company.Exploitation of constraints can be done as follows:Firstly, provide a buffer to protect stock outs. There may be three situations with respect to the comparisonof physical stock compared to the norms in any location and the first situation can be stocks being equal tonorms (zero deviations from norms), stock less than the norms (negative value deviations from the norms)and stock more than the norms (positive value deviation from the norms). The negative value deviationmeans non availability of the right quantity of stock at right location in the supply chain and the positivevalue deviation means excess quantity of stock at a location in the supply chain. The solution to thedeviations in the norms or constraint is Dynamic Buffer Management (DBM).It is an algorithm developed toadjust Inventory Norms on a daily basis. Secondly, Ensure that DBM only does what it has to. The DBM helpsin exploiting constraints by adjusting every daily closing stock by incorporating inventory level to control Thereal time deviations against TOC stock norms resulting from fluctuation of demand and it compares therequired inventory level (the norm), the available inventory at hand. It is an automated process to calculaterequired inventory levels as per the TOC norms per SKU, per location, per day basis. It requires shorter leadtimes and creates inventory reports which automatically escalate over and under stock to the concernedusers. Thirdly, redesign using existing resources. The daily norm of inventory of an SKU at a location say,retail outlet, can be calculated by finding out average sales per day, considering replenishment lead timeminimum (same day order placed of stock followed the same day delivery) .Since demand fluctuations dohappen, to respond to it a dynamic system is placed and it keep on adjusting the replenishment quantitiesas per deviations from norms. We can say this approach is Dynamic because all inventory levels (buffers) atVector Consulting Group
  6. 6. Theory Of Constraints To ImprovePerformance In FMCG Distribution Channelall levels in the supply chain are being adjusted dynamically according to actual fluctuations in supply anddemand. This applies to both physical inventories as well as products in the pipeline between one locationand the other. Deviations on both sides positive and negative in the form of excess inventory or out of stocksituation, it is an identified constraint as it results in the company or the supply chain link to achieve lessROI as The customers, not finding the product in the retail outlets in this case have no choice except toswitch to the competitors. On the other hand, the positive deviations in the form of excess stock lead toreduction in throughput and ROI and it also increases operating expenses and reduces the system efficiency.Step three: Subordinate everything else to the above decisionThe standard operation procedure of TOC has to follow in the system. The entire process of carrying outbusiness in the FMCG system needs to be in synchronization with fulfilment of the norms. The distributorshave to change their attitude if they are habitual of fulfilling only ascertain minimum order size becauseDBM advocates compulsory replenishment as per the norms and the position of current stock out of thethree zones, red, amber and green. A mindset of pushing the stock pressure at retail by using quantitybased discount schemes need to be replaced by giving full benefit of a trade offer right from purchase offirst piece onwards. It means using pull strategy rather than push.Step four: Reinforce the constraintThis step requires elevating the constraint. A distributor can do it by redesigning frequency ofreplenishment, restructuring the beat plans and the route plans .Similarly a plant can elevate the constraintby changing technology and production capacity that enables quick response to changing customersdemands. It means doing anything and everything in tune with the compliance of TOC norms. Implementinga suitable reward system/punishment system according to the situation can help in reinforcing theconstraints in a big way.Step five: if in the previous step, a constraint has been broken go back to step one, but donot allow inertiato become the system’s constrainContinuous improving require avoiding inertia by moving from the current state to next stage in acoordinated manner, though initial teething problems do occur. Any improvement though very small, canmake the company or the channel to be contented with the current level of achievements, but the principleof TOC clearly says that whatever may the current state of any system, at least minimum one constraints doalways exist that brings down efficiency of the entire system., Therefore, it is continuous process ofidentifying constraints and monitoring and exploiting them to the advantage of the system. Inertia can bebroken by setting higher benchmarks on Key Performance Indicators.6. The Case Study6.1 Background Of The CompanyThe company discussed in the case is approx 200 Mn USD FMCG businesses with market leader position inpersonal care and Air Care category with a distributors network of over 1000 in India.6.2 Strategic Selection Of The Constraints: What To Change?The current of situation in the company as a whole had certain bottlenecks with negative impacts on theperformance of the entire system. These bottlenecks were problematic in nature and limiting keyperformance indicators (KPIs) of the organizations in all areas and specifically its distribution channel andVector Consulting Group
  7. 7. Theory Of Constraints To ImprovePerformance In FMCG Distribution Channelsales force performance.The identified constraintsConstraints Source of constraints˜ Material constraints.˜ High stock pressures on one category.˜ Management constraint.˜ Policy of keeping 15 days stock at distributors.˜ Market constraint.˜ Market demand is less than the supply.˜ Measure constraint-sales.˜ Excess focus on primary sales.˜ Measure constraint-sales force performance.˜ Sale force evaluation only sales value based.6.3 To What To Change To˜ High dependency on sales one particular category is a business risk which needed to be changed by reducing the stock pressures on this identified category (Aerosols).˜ High stock pressures on distributors due to managerial policy resulted in lowering down the ROI of the distributors that needed to be changed to a better replenishment system.˜ The practice of focusing on only primary sales needed to be changed to the secondary sales &off- Take oriented replenishment practices.˜ Stock outs at retail points needed to be controlled by monitoring stock at retail point periodically.˜ Fast moving SKU stock shortages in the peak season was a constraint that was to be changed to more reliable and responsive system of replenishment˜ Low ROI of distributors and retailers needed to be converted to a better figure to strengthen the distribution channel.˜ Low productivity, TLSD and bills productivity of the salesmen needed to be improved by fulfilling all the orders booked by them by addressing the stock shortages.6.4 The TOC ApplicationsThe steps of TOC application in the company are the followings:Step 1. Strategic plan formulation:˜ Formation of a new mission statement to incorporate TOC as a new philosophy as mentioned below: “The company will be among the two largest players in Asia And this shall be achieved by Accelerating the growth by building operational excellence Through the principles of Theory of Constraints”.˜ Formation of a new vision called Viable Vision based on TOC.˜ Designing an organizational structure of TOC.Step 2. Tactical plan formulation.Step 3. Operational plan formulationVector Consulting Group
  8. 8. Theory Of Constraints To ImprovePerformance In FMCG Distribution ChannelStep 4. Train the trainers programs:˜ Train the trainers programs-Supply chain: Training imparted to all the 31CFAs of the company in India i.e. 9CFAs of the Northern India, 6 of the Eastern India, 8 of the West and 8 CFAs of the South India.˜ Train the trainers programs-Distributors: Training imparted to all the 980 distributors of the company in India.˜ Train the trainers programs-Field force: Training imparted to all the 470 Sales officers, and 1698 salesmen of the company.Step 5. A survey of the concerns/opinions of the related entities on TOC objectives, implications andresults in order get full support and clarification of the same. Refer figure 1and figure2.Step 6. TOC rollout in the target beats as per the operational plan of the area.Step 7. Continuous feedback and control.6.5 The SurveyAs per the step 5 mentioned above, a survey conducted on the distributors of the north and the sales forceof the north India, the following were the findings:˜ The results of the survey on distributors with percentage respondents responding favorably to an opinion:The details of the finding of the survey are given in table1.Almost all of the distributors have concern that TOC leads to a risk of the unknowns and all of them areconcerned about the complexity created in replenishment. The rest of the opinions are also supported by therespondents.˜ The results of the survey on company executives with percentage respondents responding favorably to an opinion:The details of the finding of the survey are given in table2.Majority of the respondents feel that TOC might lead to Loss of control over system as a result of a nevertried and tested concept and the majority also feels that initial loss of Primary and Secondary sales might bea factor that could hit the companys market share in short runs. The other opinions are also favored by therespondents.6.6 The Variables In The TOC Project Of The CompanyThe variables specific to the companys TOC project are listed below:˜ The initial loss of sales due to changeover of the system.˜ The loss of man days as a result of the sales force being trained of the job.˜ Resistance to change of the concerned entities.˜ Training at the mass level covering approximately one thousand distributors and salesmen.˜ Buying back of existing excess stock of retailers to start from scratch or else awaiting for the stock to get sold.˜ Monitoring the physical stock at retail by the sales force for each outlet to adhere to TOC guidelines.˜ Managing of the ever increasing database by the less equipped sales force.˜ Fulfilling of single piece orders by the distributors.Vector Consulting Group
  9. 9. Theory Of Constraints To ImprovePerformance In FMCG Distribution Channel˜ Training of the all retailers in their outlets by the company sales force on TOC without any formal arrangements suitable for training.˜ To counter the seasonality of the demand of the products and factor the same in the operations of the TOC at distributors and retail.6.7 The Control Of The VariablesThe variables specific to the companys TOC project were controlled in the following manner:The top management support on the loss of sales:The top management supported and allowed the initial loss of sales due to changeover of the system andcleaning the excess stock piled up in the supply Chain.The top management support on the loss of man days due to training:The loss ofman days as a result of the sales force training on TOC was taken as long run investment toaccomplish the Viable Vision by the top management.Managing the resistance to change of the concerned entities:The distributors were shown that the potential increase of operating cost due to more frequentreplenishment could be easily compensated by an increase in sales volume, due to better shelf spaceavailability and cost reductions enabled by a more regular order pattern as a result of TOC .Not only this,but there will also be decrease in total investment leading to increase in ROI.Training in the biggest mass level:The sales administration and the HR department of the company analyzed the training need. The on the jobtraining and lecture methods were arranged along with the roles plays and mock practices on how toconvince the distributors and the retailers by serving them as their business consultants to increase theirROI and reduce stock pressures on them.The management support on the strategic taking back of the stock:The old excess stock of the retailers was taken back with the consent of the management to adhere to theTOC norms to cut down the waiting period of the stock to get sold taking normal time.Monitoring the physical stock at retail eased out by a better beat card:The sales force was equipped with a suitable beat card to make easy stock record, monitor and update atretail points.Database Management by the sales force:The sales force was trained on how to handle the ever increasing database of retail data entries at eachmarket visit.Fulfilling of single piece orders by the distributors:The distributors outsourced three Wheelers instead of running their in-house vehicles to cut down theoperating cost.Good Planning and execution of retail training:Training of the all retailers in their outlets was carried out by rationalizing the beats as per the TOCobjectives and relationship marketing was used to consult /convince the concerned distributors andretailers by the company sales force without using any formal arrangements suitable for training.Vector Consulting Group
  10. 10. Theory Of Constraints To ImprovePerformance In FMCG Distribution ChannelThe stock norms and the dynamic buffer zones managed the seasonal variations:The seasonality element of the demand of the products was factored in and incorporated by the dynamicbuffer management system.6.8 ResultsThe implementation of TOC is carried out to overcome the problems of Material constraints, Managementconstraints, Market constraints, Measure constraint-sales and Measure constraint sales force performance.However other achievements are as below:u Inventory level of distributors reduced drastically and ROI of distributor increased to approximately threefold.v Productivity per sales man almost doubled, average TLSD per sales man, per day, per beat doubled and an increase in TLSD shows that the company started selling range of products rather than selling only focused products.w The improvement in ROI of the distributors led to increments in salaries of salesmen, increasing motivation of salesmen.x The tertiary sale became driving force for secondary and primary sales. The push system prevailing earlier now changed to pull system and the direction of stock pull set from customer to retailers, from retailers to distributor, and from distributor to the company.y Retailers performance indicators also exhibited remarkable improvements. The opportunity lost in terms of not selling items because of not carrying full range of items of the company was a constraint and now changed in terms of opportunity to increase sales. ROI of retailers increased. Sales of retailers and distributors increased, resulting in strengthening the relationship between various links in the companys sales of retailers and distributors system.7. ConclusionThe case study on the Theory of constraints applicable to the FMCG companies is carried out by employingthe five focusing steps, the constraints management, TOC based replenishment, the current reality tree andthe survey methodology. The present study has covered constraints identification, sources of theconstraints, the strategic, tactical and operational planning of a TOC project, the variables affecting theproject outcome and controlling part of variables at distributor and retail levels. The broad application ofthe present study is in the FMCG channel sales and the sales force performance management. The outcomeof the study is consistent with the earlier research in the TOC based distribution, replenishment andinventory management/.However;the other applications such as sales force performance managementusing TOC is an interesting and encouraging area of research relating FMCG sector.ReferenceBalintfy J.L (1964), On a Basic Class of Multi-Item Inventory Problems, Management Science, vol.10.Cyplik P., Hadaś Lukasz, Domański R (2009), “Implementation of the theory of constraints in the area of stock management withinthe supply chain - a case study.” Log Forumvol5/issue3/no6Eliyahu M. Goldratt (1990), “The Haystack Syndrome: Sifting Information Out of the Data Ocean.” Great Barrington:North River Press.Eliyahu M. Goldratt (1990), “What is thing called the Theory of Constraints, and how should it be implemented.”Croton-on-Hudson: North River Press.Eliyahu M. Goldratt (1997). Critical Chain. Great Barrington: North River Press.Vector Consulting Group
  11. 11. Theory Of Constraints To ImprovePerformance In FMCG Distribution ChannelEliyahu M. Goldratt (2004)., “The Goal: A Process of Ongoing Improvement”. North Riverpress.Eliyahu M. Goldratt. (1994). “Its not luck.” Great Barrington: North River Press.Eliyahu M. Goldratt., Schragenheim, E & PTAK, C (2000)., “Necessary but not sufficient.”Great Barrington: North River Press.Holmberg, S (2000). , “A system perspective on supply chain measurement.” InternationalJournal of Physical Distribution & Logistics Management, v. 30, p. 847-868.James F. Cox, Michael Shea Spencer (1997), The constraints management handbook, CRC press seriesKendal, G.I (2005). “Viable Vision: transforming total sales into net profits.” Boca Raton: Ross Publishing.Mabin, V.J.; Balderstone S.J (2003). “The performance of the theory of constraints methodology: Analysis and discussion ofsuccessful TOC applications”. International Journal of Operations & Production Management, v. 23, n. 6. Publishing, 2005.Rik Berry, Lola Belle Smith (2005), “Conceptual foundations for The Theory of Constraints” ,Human Systems Management, IOSPress, Volume 24.Simatupangetal T.M., Wright A.C., Sridharan R (2004),”Applying the Theory of Constraints to Supply Chain Collaboration, SupplyChain Management”, an International Journal Volume 9.Vickie Mabin and Steven Balderstone (1999), “the World of Theory of Constraints,” Lucie Press.Annexure:Table 1(A survey on distributors with percentage respondents responding to an opinion) Distributors Responses S.N. The Opinion Supporting the Rejecting the Total Opinion (%) Opinion (%) (%) 1 TOC would lead to risk of the unknowns 100 0 100 2 TOC Data would be complex to manage 80 20 100 especially at retail 3 TOC would lead to increase in the cost of 90 10 100 manpower in training and hiring competent distributor funded salesmen 4 Retailers may not be regularly cooperative on 95 05 100 TOC initiatives 5 TOC would lead to diseconomies of order size as 77 23 100 smaller and quicker replacements would have to be made 6 TOC would lead to more operating expenses 88 12 100 7 TOC would lead to increased logistics cost 94 06 100 8 Increased frequency of stock replenishment in 100 00 100 TOC would make the easy process more complexVector Consulting Group
  12. 12. Theory Of Constraints To ImprovePerformance In FMCG Distribution ChannelTable 2(A survey on company executives with percentage respondents responding to an opinion) Distributors Responses S.N. The Opinion Supporting the Rejecting the Total Opinion (%) Opinion (%) (%) 1 TOC would lead to risk of the unknowns 60 40 100 2 Competition stock pressure would be increasing 59 41 100 at retail seeing lesser stock of the company available at a given point of time 3 TOC would lead to increase in the cost of 55 45 100 manpower in training and hiring competent manpower at higher cost to company to lead TOC project a success 4 Infrastructure inadequacy at different points in 62 38 100 the supply chain and non –computerization at several distributors would create problems 5 Cost of training on TOC would be high and 58 42 100 substantial loss of man-days could be costly 6 Theinitial Loss of Primary and Secondary sales 80 20 100 might be a factor that could hit the companys market share in short runs 7 TOC would lead to increase in logistics cost 66 34 100 8 TOC might lead to Loss of control over system as 89 11 100 a result of a never tried and tested conceptTable 3(Performance indicators before and after TOC implementation) S.N. Performance Indicators Before TOC After TOC %Change in implementation implementation performance Indicators 1 Inventory of distributor(in number 15 2 (-) 87 of days) 2 ROI of distributor(% per annum) 13 38 192 3 Productivity Per sales man (%) 41 88 115 4 TLSD per sales man 44 72 64Vector Consulting Group
  13. 13. Theory Of Constraints To ImprovePerformance In FMCG Distribution ChannelTable 4(Product category wise contribution before and after TOC) S.N. Product catagory % Contribution to the total sales before % Contribution to the total sales after TOC implementation TOC implementation 1 Mat 16 17 2 Aerosols 42 28 3 Refills 26 22 4 Coils 7 14 5 Air Care 5 10 6 Toiletries 4 9 Total 100 100Table 5(Distribution Network Stability Indicators before and after TOC implementation) DISTRIBUTION NETWORK STABILITY INDICATORS HEAD QUARTERS (HQ) BEFORE TOC IMPLEMENTATION DISTRIBUTORS STATUS IN FIVE YEARS BEFORE TOC IMPLEMENTATION IN FIVE YEARS AFTER TOC IMPLEMENTATIONNo DBTR No of DBTR % DBTR DBTR % Attrition No DBTR No of DBTR % DBTR DBTR % Attrition billed billed Change Nos billed billed Change Nos 980 909 92 101 10.31 1080 1033 96 47 4.35 Kuldeep Singh Malik is Head of Research at Vector Consulting Group. Vector Consulting Group ( is the leader of ‘Theory of Constraints’ consulting in India. Vector has been working closely with some of the well known retail chains, FMCG, fashion products, custom manufacturing industry and auto after market companies to improve their overall profitability through supply chain effectiveness. Kuldeep Singh Malik can be reached at kuldeep@vectorconsulting.inVector Consulting Group