Better distribution of your products results in greater profits for you –
this is stating the obvious. But, how does one make distribution
management effective and efficient? Pundits have come up with various
options. Some of these are complex, and most of these will yield limited
returns to you. This article focuses on four simple but proven steps
through which you can manage your distribution better.
However, before we get to these steps, let’s take a quick look at what we
mean by ‘distribution’, the different channels through which distribution
management is done, and what their inherent weaknesses are. An understanding
of the pitfalls of traditional distribution channels, as also retail
management options exercised by any manufacturer, whether, of consumer
goods, auto parts, pharmaceuticals, etc., will make it clear how and why the
four steps outlined later on would work for you.
What is ‘Distribution’?
‘Distribution’ means spreading your product in the marketplace in such a way
that your potential customers can buy it without any hassles. That is, there
is little or no wait time for them if they wish to procure your product,
that they don’t have to trek many kilometers to lay their hands on it. This
is critical for you as the manufacturer of your product as well – if your
distribution management is robust, you don’t give your potential customer an
excuse to buy your competitors’ products. It is not difficult to convince
anyone about the need to have a clear vision of why having a sound
distribution management strategy is vital for your survival in the market.
Implementing one that works for you, however, is not as easy as one might
imagine. Let’s look deeper into this.
You need to have good control over the following aspects to ensure that
your distribution management is robust:
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Information about where your product should be available. That is, which
are your high demand and low demand areas.
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A reliable transportation system to ensure your products reach different
areas on time, consistently.
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The ability to track your products. Your retailers should get the right
quantity of your product at the right time. If it reaches him early, he
will have to waste precious space storing it; too late, means a
disappointed customer, and a potential new customer to your
competition.
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Packing your products in such a manner that they reach your wholesalers
or retailers without damages or broken bits. Make it easy for them to sell
your product.
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Retrieving the unsold units from the retailer so that you can re-direct
them to other retailers who need your product for selling.
Distribution, thus, plays a vital role in ensuring the success of a
manufacturing company. If you can sell your product faster and cheaper than
your competition, you can hope to survive tough market conditions.
Channels of Distribution
How do you get your product (or service, for that matter) to your end
customer? This is what is meant by a ‘distribution channel’. Or, conversely,
you can think of it as the route through which the money moves from the end
consumer to the original vendor, or manufacturer.
There are various ways by which you can distribute your products or
services to your end user:
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You can distribute directly to your end customer. Such as Amazon, which
sells Kindles directly to their end users. (Amazon uses its own logistics
to distribute their products to the end user.) Or you may appoint a
distributor for an area, who then distributes the product to all the
retailers in that area.
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You may sell through a chain of retailers- either company owned or
dedicated partners, who then sells it to your end customer. Birkenstock
sandals, for example, which can be bought only through their authorized
retailers. Or Dell or HP computers. Jockey has both company owned stores
in and franchisees in their channel
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You may go in for the more traditional set up – manufacturer,
distributor, retailer, and finally, the end consumer - as followed by the
wine and adult beverage industry, for example. Meaning, you sell to your
area distributors, who, in turn, sell it to their retailers. End users buy
your product from these retailers.
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Or you may sell it to wholesalers, who, in turn, either sell it to
retailers and/ or sell it to end users.
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You may also opt for a mix of these above models.
Distribution management channels can be broadly classified into two
categories: Direct and Indirect. When a company invests in its own
distribution channel, it is known as Direct Distribution. Amazon selling
Kindles directly to its customers, or companies appointing area distributors
are examples of direct distribution channels. When a company sells its
products to a wholesaler or a large retailer (usually at a volume-based
price), who then sells it to the end users - it is an example of Indirect
Distribution. It goes without saying that direct distribution is superior to
indirect distribution, as it yields better margins for the company, and
companies have much more control over how their products are marketed,
etc.
Then, why don’t companies do only direct distribution? The answer is simple
– attempting to cover their entire market just by direct distribution is not
a practical solution, as companies believe that 80% of a company’s sales
come from 20% of the country (this is known as the Pareto Principle). And
this 20% is considered to be mainly the urban centres within India – the
metropolitan cities, and to a lesser extent the bigger towns. Even though
companies are aware that rural segment presents a significant and untapped
market, most companies do not think that it is worth the investment that
would be required to cover this largely scattered market using direct
distribution. Instead, companies hope that the wholesaler network will
assure an acceptable level of coverage of such regions. Hence, the adoption
of a mixed model of distribution. But given the advantages of direct
distribution, companies continually make an attempt to improve it if they
can. However, direct distribution as it is currently practiced by most
companies is not without its own set of challenges.
Distribution Management: The Challenges in Direct Distribution
Companies establish distributors to service all the retailers in their area.
These retailers in turn, ensure that your product is available to the end
user. All fine on paper. Probe a bit deeper, and you will unearth a plethora
of challenges, some of them originating from the company’s end itself.
Companies have monthly and quarterly targets. To meet them, they often
resort to pushing their products to their distributors (most often near the
month or quarter end) - the carrot for the distributors being the discounts
offered by the company. But very often, these distributors do not have too
much of working capital, and in order to release working capital, they push
the surplus products to their retailers. And, when the retailers are forced
to stock more than what they need, they react by delaying their payments to
the distributors. The result? Higher outstanding in the market for the
distributors. When this reaches the threshold level, the distributors adopt
the same tactic as the parent company – volume-based discounts (to the
retailers) to flush out stocks. The resultant situation of high outstanding
and lower retention of margin creates viability issues for some
distributors, forcing them to cut their costs and scale by compromising the
reach and/or frequency of serving “smaller” retailers in their
territory.
The Challenges in Indirect Distribution
Very often the wholesaler mode of distribution is used by companies with the
hope that they will sell to retailers in areas where the company has no
direct reach. So, the model is “the Company – Wholesaler – Retailer” or
“Company – Wholesaler – End user”. The main challenge here is that companies
don’t have any control over the wholesaler. What they do with the company’s
product after they purchase them is not visible to the company. They tend to
be passive sellers, even when they service retailers. They decide which
products they will stock, which retailers they will cater to, and at what
price they will sell their products. Companies that depend significantly for
distribution on wholesalers may end up trying to please their wholesalers
through huge volume discounts, etc. creating price parity issues in their
direct distribution channels and cannibalization of sales from their
distributors! (Solutions to this problem through the establishment of a
sub-stockist, etc. result in their own set of problems, and that is not the
focus of this article. Suffice it to say, that these methods very often do
not work.)
How then to Make Your Distribution Work for You?
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No Pushing Please, Only Pulling Allowed Sales Managers are acutely aware
of the problems of ‘push sales’ (i.e. pushing your product to the
distributors based on inherently inaccurate forecasts and under pressure
to meet monthly and/ or quarterly targets). But they continue to adhere to
this out of fear that if the distributor has capital to spare at his end,
he might spend it on products from their competitor. It is also easier for
them to sell in bulk rather than keep track of actual consumption, and
supply as per needs, that is, sales based on pull. However, moving to
‘pull’ mode of inventory distribution which ensures that the inventory
levels in the entire supply chain is lean, right from suppliers to
retailers is a win-win equation for all concerned.
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Collaborating is Better than Combating When companies don’t see
distributor challenges as their own, they get into a combative
relationship with their distributors. Pass on your target pressures to
your distributor by encouraging them to buy in bulk. But this is sheer
short-sightedness and will come back to bite the companies themselves.
Instead, come up with mechanisms through which they can really do the job
they are meant to do in a more effective and efficient manner – i.e.,
increase the retailers they can service (both big and small).
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Don’t Go towards Discounts – Have a Go-to-Market Strategy Instead Don’t
force your distributors to be penny wise and pound foolish. That is, force
them to focus only on the short-term benefits, while ignoring the big
picture. When you offer discounts and tempt your distributors to buy in
bulk from you to avail discounts or schemes, you too are adopting this
approach. GTM is a strategy for reaching out to every potential and
relevant retailer in the country, regardless of size. This is based on the
premise that wherever there is a likely footfall, there is a potential to
sell and the brand should be available for every potential sale. So, help
distributors to help you better by allowing them to have enough liquidity
to be able to afford to service all retailers in their area frequently,
both big and small. Focus on supplying in small stocks frequently, helping
them get better inventory turns and consequently better ROI. Supporting
distributors in better retailer management can lead to better a
distribution management process for you. Company management can put in
place enablers to increase the number of retailers that are enrolled with
respective distributors
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Don’t choke the channel, instead leverage data When the entire supply
chain is operating smoothly on a pull mode where each node only supplies
as per consumption at the next node, it is possible to track the movement
of goods even without any IT infrastructure at the retail points. So,
companies can focus on what is really selling, whether it is at a big
outlet in Bangalore or a small retail store in the by lanes of a village.
As you probably see, this information can be key in distribution
management and retailer management. With this data access, company can
take the actions to ensure that all emerging problems of retailers are
handled in a timely fashion. These actions at retail points will ensure a
continuous and increasing sales for the distributors and consequently for
the company.
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