Design of Distribution Network

The paper explains that when a company sells its products and services in a rural market, the most important decisions it to make the distribution network design.

A company which operates in developed areas has to carefully consider its distribution network design & companies operating in rural emerging market face particular challenges because of the low population density and bad transportation infrastructure.

Because of the low population density companies have to face escalating inventory holding and transportation costs because they are made to stock and manage sales points in thousands of villages to be able to meet expectations for availability.

This paper focuses on distribution network design for fast moving consumer durable (FMCG) products like food products and cosmetics, and for consumer durables like consumer electronics. An important point is that, the distribution network must be tailored to meet the needs of the business and its customers irrespective of type of product or service of the company.

FMCG: Hub-and-Spoke Model

Fast response time is demanded by FMCG products’ consumers; that is, when a consumer decides to either eat a chocolate or wash their laundry with Nirma detergent, the consumer expects their desired product to be available immediately for purchase. A company which enters into a rural emerging market with FMCG products should make the product available at the local village level.

Distribution networks that carry local inventories are suitable for products with high demand, especially if transportation is a large fraction of total cost. These networks incur higher inventory cost but lower transportation cost and provide a faster response time.

Some of the companies choose to stock many small village shops with their products. For example, Hindustan Unilever Limited (HUL)’s products are available in 6.3 million retail outlets in India, and HUL’s competitor Nirma claims that its products are available in 2 million retail outlets.

Colgate took this approach while determining how to best reach small villages in rural India with

its oral care products. The company had experimented with stocking retailers in very small villages, but found that its traditional sales force-driven model was not economically feasible in geographically dispersed villages with low levels of demand. Colgate decided to hire local entrepreneurial youth to distribute its products in villages and at weekly markets called haats. The youth bought Colgate products with cash from a local distributor, and then biked within a 10 kilometer radius selling the products to villagers. Although Colgate payed the youth a small stipend, they received less margin than a professional sales person would have and they reduced Colgate‟s inventory costs

Other FMCG companies have had success with the hub-and-spoke (with the spokes being local entrepreneurs). Coca-Cola has employed the hub-and-spoke model in multiple rural emerging markets. “Manual Distribution Centers” were set up in Africa. In this “an independent person was given the rights to distribute Coca-Cola products within a defined radius”. These examples show that the hub-and-spoke model works well for FMCG products as it covers the transportation infrastructure issues that are associated with distributing products in rural emerging markets.

CHALLENGE: DISTRIBUTION NETWORK LOGISTICS

The paper then talks about the next challenges lying in creating an effective distribution network on the ground. The first issue which the company may face is that the logistics capabilities required by the company may not currently exist in the market. To add to the problem, the company may also face problem to keep its costs low for the low prices that rural customers need.

If the organization previously had ensured demand in the market, it can make a custom distribution network with relatively low risk. Eveready which makes of batteries, did this in India. To reach deep into rural markets, Eveready procured 1,000 vans and 44 warehouses and began distributing to 600,000 retail outlets. As Eveready has 80 percent market share in flashlights in India, the large expenditures required to make distribution system could be made with good assurance that there will be customers when an Eveready van went to a small village.

But, if a company does not have a product and brand which previously has good pull from the market, it is risky to create an expensive custom distribution network . As Marketing consulting firm in India, remarks, large companies are “incurring huge costs” to distribute their products into rural areas of India and they are finding it challenging to “design a distribution model that is cost effective.

Pharmaceutical industry is a good example of the problem of creating a distribution system from existing distributors and logistics companies. There is increasing demand for medical products in rural India, the industry has not been able to meet this as their distribution network is inefficient and made up of private clearing and forwarding agents and small retailers.

The paper gives the reasons for the pharmaceutical industry’s problems in India:

The main problems are highly fragmented nature of the distribution network, limited advancement in regulatory reforms, and presence of strong resistance from lobbies of traders involved in the supply chain of pharmaceutical products.

An example given in the paper is pharmaceutical company Cipla’s attempt to break out of the existing distribution network and deliver its asthma medicine directly to homes of customers failed as the trader’s lobby started boycotting Cipla and stopped stocking its drugs in retailers. Cipla was forced to stop its distribution network innovation and give in to the trader’s lobby.

The paper further explains way to keep costs low and increase success chances, the entering company should as much as possible piggyback on top of successful distribution networks which either have already been made by companies or that already established in the local society. Piggybacking has been identified in the academic literature as a good alternative to building a new distribution network.

Piggybacking is defined in the paper as a non-equity arrangement wherein one producer markets the products of another producer. The first producer – the carrier in this case – performs as a distributor in marketing the products of the second producer – the rider. The fact that the rider‟s products are being distributed by another producer may bring important benefits to the rider as compared with using a regular distributor

The rider chooses to piggyback to take advantage of the distribution system of carrier and local knowledge, while the carrier joins in the relationship to add on to the product of the rider or service to its portfolio. The paper gives the example of Whirlpool piggybacking on Sony’s distribution network which happened in Japan in the 1970s, a partnership which helped in increasing Whirlpoo’s sales.

More recently, in India the Energy and Resource Institute (TERI) found out that piggybacking their solar light distribution on “existing infrastructure and entrepreneurial networks” lowered the cost of their supply chain.

The key factors for a piggybacking relationship should be:

The carrier should have good distribution system that reaches deep into rural areas

The carrier should have long-term interest in making the rider piggyback on its distribution system.

3. The carrier should have a model that is effective for the type of product the rider is providing

In the same way as Whirlpool did with Sony in Japan, an entering company can also make a partnership with a corporation that has an existing distribution network in the target geography.

A good example of this in an emerging market is the partnership between Sara Lee and Godrej in India. In 1995,Looking to find an entry into the enter the India market, Sara Lee had a partnership with local conglomerate Godrej to market and distribute its products. There is another example of a s corporate piggybacking relationship in the form of Proctor & Gamble and Indian consumer goods company Marico Industries., Proctor & Gamble created a “distribution alliance” looking to distribute, detergent, deodorant and diapers in rural parts of India in 1999 with the help of Marico in order to make use the Distribution system of the Indian Company.

Below figures show additional explanation of Channels-

PAPER-2 Marketing of Agricultural Products

By FAO(Food and Agricultural Organization) Rural Radio report,2006

Agricultural products Marketing has two important points related to it. The first one is related with the physical process which brings products from producers to consumers; the first stages of this process is the collection, followed by packaging, transport, processing, storage and agricultural products’ retail sale which is at the end.

The report puts a a lot of concentration on the price an mechanism of the market which decides the prices of the products produced after agricultural processes and also the way in which

producers can get reasonable prices for their produce.

Pricing mechanism and demand and supply

Prices of Agricultural depend upon a lot of factors which finally depend on the conditions of demand and supply.

Supply depends on the total present amount of a particular product and includes –

depending on the particular product – local production, and the production in neighbouring countries as and also the world production in the case of products which are exported. It also depends on the requirements of producers for ready cash:the more is the requirement of cash at harvest-time, the more will be the chances of inclinination to accept low prices. If they decide to stockpile instead of selling the products immediately, market prices have high chances of going up .

Demand has origin from the final users or consumers and its supply is done by dealers or intermediaries. Demand at End user is influenced by product quality and price. Consumers will be buying more goods if the price is low, but they may be willing to pay a higher price (it depends on their income) if the quality of products is good.

The dealer, who act as intermediaries between the producer and the customer, make their profit from the difference between the price at which product is purchased from producers and that at which they sell the products to consumers. In order To complete this, they tend to seek out production areas that have easy access and also require low costs of transport, and those where crops are present in abundance. If crops are in more abundance in neighboring countries, traders will go to that place to collect the available products at a much lower cost.

Distant production area which is often combined with poor road and railway infrastructure are major factors that drive prices of the producer down.

If infrastructure is bad, part of the money that the dealer could pay to the

producer will be used to pay for transport; therefore, the dealer will tend to bring down the price

offered to the producer in order to make up for the higher costs of transport. Another factor that

can influences prices is the presence of competition among dealers.

If there are many dealers present who want to buy the available products, producer prices will tend to rise. Also , if there is only one dealer and many producers or abundant production, a modest price will be offered.

Finally, prices also vary depending on the seasons. During the harvest time, prices are generally low, while they rise at the time when sowing time is close. The capacity of producers to stockpile the products produced by them can help to minimise the seasonal variations by putting on the market only amount of production which is enough to maintain to maintain a set price.

So, It is very important for producers to know about 3Ws-which are-when, where, and what amount of produce to sell, while bearing the market price in mind. In best situations, they should be in a position to get the best output out of the present pricesin the market. To do so, access to information must be provided on markets and prices prevailing.