FMCG
sector shifts focus to direct supply, aims to operate with zero-day inventory
FMCG companies plans to
operate with a ‘zero-day inventory’ by ‘reducing distance between its
distribution centres and retail stores that the company reaches directly.
The role of dealers and distributors is changing first. FMCG
companies need them for local knowledge, logistics and credit collection. Plus,
they would take the products to geographies where companies can’t reach direct
in a commercially viable manner. This would further expand reach for FMCG
sector.
The FMCG sector is
adapting the “leanest possible” distribution model to directly “tailor-serve
retail outlets” across the country in less than a day as part of the sector’s
plan to multiply sales and expand retail reach. Currently, the process takes
between one and three weeks.
At
present, Britannia Industries
directly reaches to 1.7 million retails stores of the 4.8 million outlets where
Britannia products are sold. There are about 11 million retail outlets in
India, of which around 8 million sell biscuits. In the new direct distribution
model, the entire supply chain is controlled by Britannia. Every day, around
20,000 people who are on Britannia’s direct payroll, visit retail stores,
analyse local demands, suggest required tweaks in product placements based on
the company’s in-house analytics and take orders on their mobile phones through
an app. The orders are then delivered directly by Britannia from the nearest
distribution centre within a day.
Traditionally,
Britannia stocks products at its distribution centres. Products first go to its
exclusive wholesale dealers, then distributors and direct retailers. The entire
process takes anything from one week to three weeks, depending on the distance
between the retail outlet and the factory. Britannia wants to reduce this to
less than a day. The new system is mapped real-time. It also reduces
operational cost for dealers and distributors as they would not need to stock
products.
According to a McKinsey and Co. report on the future
of retail supply chains, companies can reduce costs by about 20% at the
distribution centre level, while optimal deployment of inventory can reduce
working capital by about 10%.
ITC has
one of the most extensive distribution networks in India. Its products are
available at 4.3 million of the estimated eight million retail stores in India.
Of this, about 2 million are under ITC’s direct distribution network. ITC will
replicate the new factory-to-retail point distribution in phases, and
eventually bring all the 2 million retail points under the new structure.
Traditionally,
ITC, like all packaged goods companies in India, stocks products at its
distribution centres. Products first go to its exclusive wholesale dealers,
then distributors and direct retailers. In some areas, mostly in rural India,
the big retailers supply products to smaller retail outlets. The entire process
takes anything from one week to three weeks, depending on the distance between
the retail outlet and the factory.ITC wants to reduce that to a day.
ITC
is also in the process of automating all its 62 warehouses and its 1,550
wholesale dealers. The distribution network includes over 1,550 wholesale
dealers and a force of 25,000-plus sales people who are IT-enabled and empowered with hand-held devices, which ensure that every member of the sales
team has access to real-time actionable information on business imperatives and
performance. The supply chain mechanism is determined by analytics based on
real-time feeds and insights for over 1,000 stock keeping units (SKUs). This enables informed decision-making and helps determine inputs, while ensuring an
efficient distribution based on store-level demand.
Marico had an enterprise resource planning (ERP) system from
SAP AG, which it upgraded to SAP HANA to consolidate data, partly on the cloud.
But the company also had to deal with unstructured data. Hence, the data from
portable document formats (PDFs) and raw tables were copied from the existing
system’s database into SAP HANA. Now it is possible to pull all that data and
store it on the cloud, resulting in lower storage costs.
Marico
also uses Tableau, a product from business analytics firm Tableau Software,
which helps it analyse a large amount of data on retail behaviour, sales and
marketing, inventory movement and procurement of key inputs, and get detailed
insights into the company’s performance in a visual format. The company also
uses sharepoint-based collaboration portals, ETL (extract-transform-load)
tools, and R software.
Business
analytics, digital and automation is helping to transform the core operations,
improve the consumer insights and innovation processes as well as help in
taking better decisions. All data,
including the outlet format and pin code, is fed into the software. The model
then runs an algorithm and presents a hypothesis that needs to be tested on the
ground. One such test would be to match the sales forecast against actual
sales.
Marico
is also going beyond traditional trend series analysis of data by taking into
account “all your sales marketing spends, maybe other events which are being
held like promotions or maybe some other activities like certain specific
festivals, or even certain price increases”. “All these can be inputted to get
an output and a forecasting accuracy that will result in better service and
faster movement of goods.
Automated Machines at Distributors
Technology is a large part of Asian Paints'
distribution success. According to a distribution strategy case study of Asian
Paints, the company provided automated machines that mixed paint colors at the distributors
to allow customers and consumers more range in color and more options. These
machines use technology to produce colors that otherwise are unavailable,
resulting in a wider range of selection.
Re-tooling FMCG sales and
distribution for viable coverage
Driving
retail universe coverage remains a priority for FMCG firms. Several firms are
driving aggressive outlet addition agendas across regions. Even firms
considered the gold standard in direct distribution (Hindustan Unilever: 3.2
million, ITC: 2 million, Colgate: 1.5 million, Marico: 0.9 million) are driving
coverage initiatives in their distribution system. Reaching outlets directly
and reducing wholesale dependence has three critical benefits:
·
Improving
outlet sell-in
·
Increasing outlet throughput by range expansion
·
Building a platform for growth – ability to succeed
in new product/category entries
This becomes critical for firms with a modest direct
distribution. Tata Strategic’s research shows that cost-to-serve viability is
one of the biggest challenges faced by firms in driving retail expansion. The
outlets added by any coverage expansion drive typically have throughputs much
lower than existing outlets. Hiring additional salesmen to service these new
outlets increases the distributor’s cost-to-serve. This will negatively impact
their return on investment (RoI) leading to escalating pressure from
distributors to provide subsidies.
Sales leadership of most FMCG firms interviewed during a recent
Tata Strategic study said their salesmen cover an average of 40 outlets a day
on a weekly coverage frequency, around 240 outlets a month. Over several
decades, this coverage norm of 40 calls per day for a distributor-salesman has
remained unchanged despite changes in the outlet density, information
technology and means of transportation.
Decreasing the non-productive calls of a salesman: The average
productive calls of an FMCG salesman are 55-60%. Not all outlets place an order
every week. Analysing this order behaviour can be used to intelligently
re-structure the outlet visit frequency without affecting sales. The ordering
pattern of outlets across the four weeks in a month varies significantly
depending on outlet type. For instance, at an outlet placing 3-4 orders in a
month, these orders are not evenly distributed across weeks and a few orders
are just top-up orders to replenish sold-off inventory from the outlet. An
alternative order-taking mechanism can be deployed for such orders at select
set of outlets. The bandwidth thus released can be used to cover up to 50% more
outlets per salesman.
Using both these levers, firms can achieve a coverage increase
of up to 120% without hiring additional salesmen. Since the new outlets added
are likely to have throughputs lower than existing outlets, the retail sales upside
would be up to 70%.
Thus, by re-structuring their current sales process, firms can
break the pattern and utilise the same salesman to cover additional outlets.
Reducing the non-productive activities of a salesman will enable him to cover up
to 70% more outlets per day. Simultaneously, analysing outlets’ order pattern
to change visit frequency to fortnightly for a select set of outlets will
enable the salesman to cover up to 50% more outlets in the month. Tata
Strategic’s research shows that firms can thus achieve up to 2.2 times of
existing coverage without additional salesmen thus driving a retail sales
upside of up to 70% viably.
Latin Manharlal Group
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