Abstract
Sachin Khandelwal, a seasoned sales professional, was hired by Swosti Foods India Private Limited (Swosti Foods/Swosti) as general manager (sales) in June 2015. Sachin had over 15 years of sales and distribution experience in the fast-moving consumer goods (FMCG) sector in India. He had started as a frontline sales person and reached the position of regional manager because of his hard work and insights about the way distribution system worked in India. He had previously worked in two of the well-known multinational corporations, which had good systems and processes in place.
Swosti Foods had very well-established sales processes, norms and procedures, set up by involving a very reputed consultancy firm after a lot of research and analysis. However, the implementation of those policies and norms had not been effective. The top management of Swosti Foods wanted to improve the implementation of monitoring and control systems for the distribution network, so that the consumers could reliably get the entire range of Swosti products at their nearest retail outlets, at standard prices, as per their demand.
In the first two months of joining as general manager, Sachin visited the top 10 markets of Swosti Foods to interact with the sales team and the channel partners. He realized that the distributors were dealing with multiple products and companies, and some of the large distributors even had their own manufacturing set-up. Like most FMCG distributors across product categories in India, they also operated on a pure capital turnover mentality that made them resort to overtrading. If they could get better return on their capital from a different line of business, they would not really be loyal to the Swosti products, and many a times, this led to undertrading. However, the distributors were eager to do business with Swosti and were largely doing a reasonable job.
Sachin assessed that the sales team of Swosti was good intentioned and worked reasonably hard in the market, but lacked the desired control over the distributors. He was not sure if the lack of control was due to their professional incapability or oversight or even deliberate.
The retailers were quite happy with the consumer demand for Swosti products, but many of them also faced the problem with the product pricing and regular supply. Sachin concluded that he needed to put more stringent monitoring and control mechanisms in place for the distributors of Swosti Foods. He decided that his next objective would be to figure out the weak areas and help the branch sales team with specific education and instructions on policy implementation aspects.
Sachin received the distributor performance and financial reports from the branches for the quarter that ended September 2015, by 15 October 2015. He found quite a few discrepancies in the working capital turnover ratios, operating expenses and so on from the norms that indicated the possibility of undertrading and overtrading, which compromised the distribution objectives of Swosti Foods. However, two particular instances caught his attention the most. One was Haribabu Sales Corporation (HSC) located at Satara district in the state of Maharashtra, and the other was Kantibhai Shantibhai and Sons (KSS), based out of Ahmedabad, Gujarat.
Sachin knew that the top management, the sales force and the channel partners of Swosti Foods were watching him closely. He had taken enough time to understand the market, and now it was time to take action and deliver results. He felt that transforming the businesses of HSC and KSS would be a good starting point for him to establish his leadership among the sales team and the distribution channel. If required, he was ready to take harsh measures also.
The Company Background
An entrepreneur from Anand in Gujarat set up Swosti Foods in 1987. Initially, the company made baked items like cakes, biscuits and some common baked snacks. It started its manufacturing and distribution operation from Gujarat. Over time, it expanded its distribution to the adjoining states of Maharashtra, Rajasthan, Haryana and Madhya Pradesh. The company spent considerable amount of money in brand building using the television, hoardings, radio and wall paintings. It had many popular brands that were prominent in their respective product categories, in all the states it operated in. The company added the edible oil portfolio in 2002 and leveraged its distribution network to market the oil portfolio, which included sunflower, groundnut, vegetable and soybean oils. The retail shops where these two product lines sold were mostly common. However, there were many big outlets that were exclusively dealing with only one of the two business lines, even if located in the same market. Hence, some distributors used a common sales and delivery team, while others used different set of sales and delivery team to manage the two different product lines, depending on the specific market dynamics, work force and logistics conditions. As a matter of policy, Swosti offered distributorship of both the lines together.
The head office of the company was located in Ahmedabad, and it had two manufacturing units, one in Anand, Gujarat, and the other in Aurangabad, Maharashtra. The company posted a sales turnover of the 1.2 billion Indian rupees (INR) in 2010, which grew to 2.5 billion INR in the year 2014. It had 150 distributors, and its products were available in over 90 thousand retail outlets. Exhibit 1 gives a brief record of financial performance of Swosti Foods from 2010 to 2014.
Sales tax was a state subject in India; hence, there were different sales tax rates applicable in different states. Interstate sales attracted an additional central sales tax of 4 per cent, apart from the sales tax of the state from which sale was made; hence, it was best to set up a branch operation in a particular state. Swosti Foods had sales offices in each of the different states it operated in. The area sales manager (ASM) was in charge of these offices, and sales executives (SE) and accounts team reported to him.
Swosti was planning to expand its presence in the states of Punjab, Himachal Pradesh and Uttar Pradesh in the year 2016. The company was in talks with banks for the loans to expand its manufacturing facilities also. Hence, managing the operating efficiency of the company was important, with sales operation’s efficiency being one of the most critical.
Swosti Foods had gained very good reputation in the market, both among the business partners and the analysts as a very well-managed company with modern and forward-looking management practices. The channel partners knew that Swosti products had a steady demand throughout the year and could be a reliable source of steady income. The distributors perceived that the company allowed them access to a large number of retail outlets where they could sell their other product lines also. Similarly, the retailers benefitted from the additional consumer footfall that Swosti products generated for them. Hence, the channel partners wanted to have good long-term business relations with Swosti Foods. There were many pending applications for distributorship from many well-known as well as new distributors, and the Swosti management team engaged with them as part of their corporate communication strategy.
Distribution Network
Swosti Foods followed a typical FMCG model of intensive distribution. The produce from factory was sent to the carrying and forwarding agents (C&FA) located in the different states. These C&FAs essentially stocked the materials in their warehouses and supplied the materials to the distributors on the basis of written order and advance cheque of the distributors, after being approved by the competent authority in the sales team of Swosti. The C&FAs worked on behalf of the principal and hence did not acquire the title of the goods. They banked the cheque, raised the invoices of Swosti Foods, delivered the materials, made any defective stock return/replacements and kept records of all material and financial transactions. They provided the necessary information from their computer systems to the sales team as and when required. They received some fixed rentals and throughput-based commission for providing the necessary services as specified in their contracts.
Swosti ASM had around four to seven SEs reporting to him, the number depended on the size of the market. The ASM was responsible for the sales and collection in the entire state, while the SEs were responsible for their own territories, which included a few districts, which typically had three to six distributors.
Select Financial Indicators of Swosti Foods (All Figures in Million INR)
The distributors had their own sales team called distributor sales representatives (DSR), who serviced the retail and wholesale markets as per the defined company norms and practices. The SEs visited the markets regularly with the DSR, supervised the entire distributor operations and had a say in the discount structure to be implemented in the market and the DSR’s beat plan. In addition, they had access to all the financial- and stock-related data of the distributors, which they were required to verify every quarter. Thus, SEs enjoyed considerable direct and indirect control over the retail distribution operation of the distributor.
The market serviced by the Swosti distributors could be classified as wholesale markets and retail markets. Some distributors located in industrial districts, such as Ahmedabad, Satara, Aurangabad and so on, had additional institutional sales potential also. The retail universe in India required coverage of vast geographic spread. The business of more than 60 per cent of the retailers in any territory was so small that direct distribution to those outlets was not commercially viable. There were even some smaller markets located in remote areas, which were not commercially viable to service. Thus, most of the small retailers and those located in remote places picked up stocks from the wholesalers, typically located in the wholesale markets.
The wholesalers were essentially big retailers who not only sold to the retail customers, but also supplied to the retailers and small shop owners, who came to their outlets located in wholesale markets to buy. These wholesalers bought in bulk from the distributors, had the ability to pay upfront and hence enjoyed greater discounts than that enjoyed by smaller retailers. They were also known to pass on most of their discounts to the retailers who bought substantial amounts of materials from them on a regular basis. Wholesale markets were essentially a collection of a large number of wholesalers, where good discounts were available. There was intense competition in the wholesale markets; hence, the wholesalers were keen on retaining customers. Since they could negotiate higher discounts based on their turnover, they were ready to operate on wafer-thin margins. The distributors were also quite keen to supply to wholesale markets, as their sales operating costs were lesser, even though they had to part with greater discounts. The distributors who were able to get the support of wholesale markets could show higher sales than expected and thereby negotiate additional quantity-linked discounts from Swosti ASM. Wholesale market operations were very dynamic, had high turnover and high-risk, and required very high focus from the distributor.
The retailer’s business was considerably different from wholesalers. Their turnover was lesser, but they sold to the end users at a reasonable margin. They had a fixed catchment area and more or less a regular customer base that went to competing retail outlets only if their demand was not met. Thus, retailers preferred distributors who serviced them regularly and were transparent in their dealings. Although they were not very sensitive to margins per se, they did not want the other retailers in their vicinity getting products at a better rate from the wholesale markets and resorting to undercutting in the retail market. Many a time, this used to be a major cause of conflict between the distributor and retailers, which sometimes even leads to loss of high potential and good selling retailers. The distributors were quite keen to supply to retail markets even if their sales operating costs were higher and they had to provide the normal credit as mandated by the Swosti management, since they had to part with considerably lesser discounts than what was required in the wholesale markets. The distributors who were able to get the support of retail markets depended less on wholesale market, had lesser channel conflict and reasonably better margins, even if they did not get exceptionally high sales and the associated higher discounts from the principals.
Institutional sales potential of a distributor’s territory was dependent on the number, size of the institutions, nature of their products and worker base. Institutions typically operated on rate contract, which was negotiated by a professional purchase team, for durations of one or two years. Hence, the distributors had low margins and needed to offer considerable credit also. These were inherently uncertain businesses, but once bagged, they were a considerable source of assured and time-bound businesses and were easy to fulfil, which would otherwise go to competitors or wholesale markets. Swosti treated this business as additional sales of distributor and not incorporated in the specific customer-wise targets; hence, it did not have any separate policy for promoting or even measuring the institutional sales. Thus, the distributors had to operate within the overall norms of Swosti.
Ideally, the sales team of Swosti wanted a good balance between the sales from the wholesale market and the retail market, and the institutional business was not really the focus as it was uncertain in nature. The company wanted a good development of the retail business, as their final consumers were happier with regular, reliable supply of products at standard prices. The wholesale market could create problems of price, supply and service levels, but was instrumental in cost effectively reaching to the universe of smaller retailers who could not be directly served by Swosti distributors at the current levels of operation. However, these were also important markets, which would be driving growth in near future. There were some instances of illegal movement of the materials from one distributor’s market to another, which normally involved the wholesale markets. The sales team was expected to be careful about this and prevent it.
The distribution network of Swosti had grown steadily, increasing the retail footprint in each of the states, which drove the steady sales growth for the company. The targets of ASM, SEs and distributors were drawn up after carefully analyzing market potential, the distribution landscape, competitive environment and trends. There was however always an ambitious growth plan, so that everyone in the distribution channel had to stretch and cooperate to achieve their individual and collective targets. The company had set norms for managing the distributors, and adhering to those norms was important for the SEs as well as ASMs.
Distributor’s Business and Its Management
Distributors were appointed based on their financial soundness, ability and willingness to invest in the necessary human and non-human distribution infrastructure, stocks and so on. The management skills, experience in distribution and the absence of any directly competing product lines were other main considerations in distributor appointment. Swosti was not quite fussy in case the distributor had other non-competing product lines like toiletries and so on as it helped the distributor grow the business of Swosti also.
To monitor the distributors, the stock position, sales rate, damaged goods, use of promotional material and their placement, retailers feedback was periodically collected by the sales team of Swosti and analyzed. Normally, the SEs visited the market with each of the DSRs in his territory at least once a month, so that the company had some level of direct contact with the retailers. However, it was not practically possible to have a very close tab on the market on a daily basis.
ASMs had the responsibility of analyzing the financial data of the distributors, which gave clues about any malpractices or deviation from the standard operating practices of Swosti. Exhibit 2 gives the financial standards for the distributors. In case of any deviations, he was expected to check it with the concerned SE or visit the distributor himself to check and take remedial action. The ASM was required to have at least one day of market working with each of the distributors in his state in every month. The objective was to prevent and correct any such practices by the distributor that could potentially harm the operations and reputation of Swosti Foods with the channel partners or consumers.
Desirable Standards of Distributor Performance on Annual Basis
The performance and support of distributors were critical to the business results of SE, ASM, general manager and Swosti Foods. Similarly, the Swosti product portfolio helped the distributors to increase their reach and penetration in the market, which led to higher profits from Swosti product lines and other non-competing product lines, if they had. Thus, there was considerable interdependence and goal alignment among the intermediaries, which fostered high degree of cooperation and coordination among the channel members. However, it also entailed a healthy dose of continuous negotiation between the Swosti team and the distributors in terms of target, discounts, territory coverage and so on. Sometimes the sales person could not get the results from some distributor and made up by allowing additional discounts and promotional support for increased sales performance from other distributors. Since the market conditions and competitive actions were not completely within control of the sales team, the results were sacrosanct, and such flexibility was required in the system to deliver on the preset sales targets.
The ASMs had some flexibility in offering quantity-based discounts to the distributors, but no relaxation in payment norms was allowed. Hence, the key to good long-term sales management was to ensure that the image of the company was maintained, which was to be achieved through adherence to norms, regular market working and appropriate balance between the retail and wholesale business. In essence, they had to ensure that all the distributors were utilizing their resources at the optimum level.
Concerns of Sachin
Sachin was aware that some distributors had the tendency to extend their business beyond their resources, while some did not utilize their resources adequately. Sometimes the distributors were not focused adequately on Swosti business, which could create problem for themselves and Swosti Foods in the long run. The overtrading distributors tried to get more sales than their capital would allow, and for that, they resorted to heavy price cutting, unauthorized stock movement, inadequate inventory cover, insufficient and irregular service to retailers, unhealthy borrowing practices and so on. Similarly, undertrading distributor meant that either the sales were too low or the stock levels were too high, which indicated inefficient operations and underutilization of the sales potential of the company’s products. There were serious doubts about the viability of such businesses, which, if not managed in time, could lead to closure of distributor, all the associated disturbances in the channel, loss of sales and inconveniences to the consumers. Overall, the overtrading distributors followed a high-risk method of doing business, while undertrading distributor did not get optimum returns for the business. He needed to control them.
Quarterly Statements (July–September 2015) in INR ’0000
** Not available.
Exhibit 3 gives the financial report of HSC and KSS. These statements gave a fairly good idea to Sachin about their businesses with Swosti as well as others. However, there could be some market-specific situations that would only be known to those who understand the nuances of their markets. Hence, Sachin decided to discuss the ground realities with the concerned ASM, before taking up the remedial actions. He was quite sure that undertrading and overtrading had to be monitored strictly and controlled. He also needed to check if such situation arose from the complicity or incompetence of the sales force.