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:
- Information about where your product should be available. That is, which are your high demand and low demand areas.
- A reliable transportation system to ensure your products reach different areas on time, consistently.
- 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.
- 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.
- 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:
- 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.
- 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
- 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.
- Or you may sell it to wholesalers, who, in turn, either sell it to retailers and/ or sell it to end users.
- 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? Let’s now look at four simple steps through which you can make your distribution management really work for you.
- 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.
- 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).
- 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
- 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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