The Unsung Heroes – Distribution Systems

It’s almost every day that we eat a biscuit, or buy a packet of chips, or probably some instant noodles from our nearest retail store. But, have we ever thought about how that packet of chocolate-laced cookie ever reached there? How is it that we enter a supermarket, and find a range of chips/nachos/popcorns lined up for our baskets?

As a country, India may be a troubled one. But as a country which has a multitude of brands vying for that space in a retail store, India is among the best. Numerous brands & sub-brands enter the industry – with an aim that their products occupy that small space in the consumers’ shelves in the kitchen, or drawers by their bedside. It is an aim to be the favourite snack of every Indian.

Before diving deep, a quick check. These companies which have their products lined up in retail stores, are part of the FMCG (Fast Moving Consumer Goods) industry. This industry consists of all kinds of products who have a short buy in period, and these products are fast moving – from the store shelf to the customer shelf. Hence, retail stores form a major part of the distribution.

Now, distribution is the process of taking the product from the point of production (factories & manufacturers) to the point of consumption (retail, shops & stores). Coming back to the issue at hand, how do these major FMCG brands do it? How is Nestle’s Maggi available at the smallest of stores across the country? How is it possible that ITC’s Savlon is found at the smallest of a medic?

Nestle, HUL, ITC – the Kings of FMCG in India

These guys have an intensive distribution in place, where their main focus is on making the product available to the consumer. And they have a lot of intermediaries in their channels. By intermediaries, I mean distributors. These make sure that the product reaches the end consumer as many times as possible.

This brings me to the main agenda of this article – why are these distributors so important?

  • They act as a bridge between the company & the retailers/stockists. Large FMCG companies will find it tough to handle each & every store which stocks their products. They also cannot directly reach out to the consumers. Here, distributors come into the picture who form a liaison between both of them, and makes the task easy.
  • Distributors manage the finances of the retailers. For a company as large as Unilever, it will be very difficult for them to handle the credits & the finances, margin-related issues with the retailers. Then there is the credit system, which looms large in India. Instead of ITC directly dealing with the credit finances of the retailers, they give this responsibility to their distributors, who manage these.
  • Distributors give a wide reach to a company’s products – making the product available for a large base of consumers. This helps in an increased retail penetration.
  • Sometimes, distributors can also forecast market needs for the company, which would reduce overstocking & excess inventory-related issues. This also ensures that the product is sufficiently stocked in as per the consumer demand.
Some quick pointers
  • Breaking the bulk: Now, companies produce goods in large volumes, due to a single factor known as “economies of scale”. Producing high quantities is cost-effective for companies. But, in countries like India, there is a huge need to separate the large volumes into smaller ones, as the consumer often demands small packs, and goods in small quantities. This is where distributors play a huge role – they “break” large volumes into small ones.
    As an example, suppose ITC produces 1000 units of its famous Dark Fantasy, & sends it out to its distributor. Now this distributor, divides these 1000 into 100 blocks of 10 units each. These 100 blocks are sent out to the various partner retailers, from where the consumers can even buy a single unit of the same.
    Tip: Breaking the volumes into smaller units, also help in increasing the accessibility for the consumer, as also the transportation is easy & efficient for smaller packs, and low units.
  • Let’s take a hypermarket, such as Big Bazaar. When a customer enters the store, he/she comes across a wide range of brands, sub-brands, & products to choose its offerings from. If he needs a sanitizer, then there are Lifebuoy, Savlon, Dettol and more offerings. If she needs a toothpaste, then there is Colgate, Closeup, Pepsodent, Sensodyne and more.
    This is not just the sheer beauty of India being home to large number of brands, but also the magnificence of how the distribution system is set up across India.
  • Distributors help in managing the inventory of the companies. They act as a “via through” which helps the company reach out to their customers.
  • Distributors speed up the process by which a product reaches the end consumer. Or, in other words, they make sure that the product – from the factory to the consumer – reaches in a quick amount of time (lead time). In 2015, ITC made it a company objective to reduce the lead time to 1 day, down from 3-3.5 weeks.
  • There is a good amount of distance between the point of production & the point of consumption of a product. Distributors help reduce the distance between them, making the goods available & accessible to consumer. Consumers have to be reached cost effectively. Reaching out to them by the company would be costly.

Case in point:

Let’s assume that Marico has a manufacturing plant in Manesar, Gurgaon. This is the point of production for its biscuits. Now, it has to cater to the consumer who is in Chhapra, a rural village in the state of Bihar. It is the distribution system of Marico which would ensure that the product:

  1. Reaches the consumer in Chhapra, at a small retail outlet, or a kirana store (mom & pop stores).
  2. Reaches the end consumer in time, by speeding up the distribution process, thereby taking note of the lead time in which, the products reach the consumers.

Now that we have learnt the importance of distributors, we do realize how is it possible to get a biscuit as small as a Parle-G, in the rarest of all corners in India.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s