Selection of the Distributor

This is a Guest Post by Kandarp Patel who works with a leading FMCG brand in the Sales and Marketing function. This post is in continuation to the previous post.

As we have seen, distributor is very important part of the whole FMCG distribution channel so we need to observe extra care while appointing a distributor. Distributor is appointed with a long term vision in a territory, in a segment and/or in a product range. Right selection of the distributor is very important to achieve the objective of achieving market leadership in the territory. Process of appointing a distributor should be rigorous and objective. Figure shows the process flow of generally accepted distributor appointment process.

Distributor Selection Process

Each step mentioned in the figure involves extensive detailing and field work. It also requires an experienced person for evaluation of alternative parties.
Alternative parties are evaluated and judged based on following broad criteria.
Criteria
Financial capacity
A distributor should be financially strong enough depending upon the market potential as well as your product range. Finance is most important criteria because of following reasons.

  • Distributor is going to stock the required products in bulk quantity from the manufacturer. This requires huge shell out in terms of money.
  • Distributor will provide credit (no. of credit days based on the requirement) to the retailer and institutions.

Distributor should be able to invest in infrastructure, new products, and new initiatives of the company without expecting immediate returns.

Prior Experience
Prior experience of the distributor in FMCG distribution will help in followings.

  • Distributor will take less time in understanding the functioning of various members of the channel.
  • Less time to build good rapport with retailers/institutions.

Infrastructure
Infrastructure required like manpower, redistribution vehicle, godown space should be available of required quality and quantity.
Market reputation
Market reputation of the distributor in terms of relationship with retailers will help in efficiency of his work.
Market knowledge
Distributor’s knowledge of the prevailing market conditions, retailers’ attitudes, competitors’ products etc. will help in getting good hold on the market. Also important is distributor’s interest in knowing day-to-day information & happenings of the market.
Synergy
If distributor also has some other good FMCG product distribution with him, it helps in getting more retail space for your product. That brings synergy in retail penetration.
Technology
Use of various new technologies like SMS, computing, internet in various aspects of the distribution process will help in getting better efficiency in communication, operations etc.
Attitude
Distributor should possess basic managerial skills and should have a positive attitude. He should be willing to experiment with new products and take risks.
Social profile
Age and education level of the distributor are important. Young distributor will have many more years as active life which gives us stability for long term in that territory. Also, well educated distributor will be more adaptive to the changing environment, technology etc.
Future plans
As appointment of the distributor is longer term, it’s important to know the future plans of the distributor for his business.

These criteria give general idea of important factors for judging. Each criterion is evaluated based on detail work and judged based on requirements.

The Education Puzzle

This is a Guest Post by Ashutosh Tosaria. Ashutosh spends his time solving the puzzles that the education sector is muddled with. In his spare time, he works with an organisation which supports initiatives which seek to strengthen the elementary education sector in India.

Every child in school, getting quality education. The simple statement packs in itself many questions and confusions, some of which I would try to highlight here.
Let’s look at the supply chain of schooling. As is true with supply chains elsewhere, school education also lends itself to a demand and supply side relationship. Between the demand and supply are a host of actors, institutions that provide education or support provision of education. All of this is governed by rules (both said and unsaid) and choices, which shape processes and the quality of the service on offer.
The demand for education comes from children and parents. Civil society too can be counted with these two but for the moment lets just focus on the real beneficiaries or rather the first tier benefeciaries- children and parents. Often, this demand is made amidst serious information asymmetry. How good a school is, what is it that my child is doing in the school, why is education important at all? These are some questions that help a parent decide if he/she wants to send the child to a school. Choice of school is slowly becoming a reality for parents in rural India, thanks to the spurt in low cost private schools that dot the landscape. On one hand we have the government schooling system which offers (almost) free education (there are certain costs incurred by parents) and on the other a private school that charges a fee and is mostly staffed with unqualified teachers. No doubt that the government school system is often found crumbling but the choice of a private school is made based on notions because kosher information is missing.
Now lets look at the supply side, which is dotted with autonomous, under funded private schools and reasonably well funded but non responsive government schools. The latter is situated in an byzantine education support system that fails to be the watchdog, leave aside being a support system. The constraints for a private school are related to unavailability/costs of funds, unviability of sustaining the business at human salaries (for employees) and absence of academic support. The quality of education in such private schools is no where close to comfortable levels. A lot of these schools are unrecognized and offer the owners a good opportunity to rob the parent and squeeze the teachers to make whatever ‘profit’ that is possible. The government school system does not offer much respite. Their are pockets of excellence in villages and districts but delivering quality in learning is still a long way away for most. Unionization of teachers, vested interests of education babus (from cluster to state level) and indifference of the elected representatives makes it difficult to hold anyone accountable. One could go on and on about what doesn’t work or what does but we would leave that for a later day and jump to the important constituent of this chain- the teacher.
A teacher connects the child to the world as well as connects the school to its audience (parents and children). Drawing the idea of a keystone in a distribution system (from another post i saw here), a teacher in many ways is the keystone in the system. She anchors many the classroom and manages the expectations and demands of various stakeholders of the education system. strong anchors go a long way in keeping things nicely coupled and ensuring robust flow of services.
What is needed to ensure a secure and efficient supply chain?
– Informed participation (the recipient knows the quality and the provider is responsive)
– Transparency (resources and contraints are identifiable, practices are questionable, solutions are possible)
– Responsibility (the buck should stop where it’s supposed to)

Distributor: Key to success in FMCG Distribution

This is a Guest Post by Kandarp Patel who works with a leading FMCG brand in the Sales and Marketing function.

In architecture jargon, keystone is the one which locks the other stones into their positions. That makes it structurally very important. If we apply the analogy to FMCG distribution channel, the Distributor is the keystone. He is called by various nomenclatures like Distributor, redistributors, dealer, wholesale dealer etc…but broadly defined and generally acceptable definition of the distributor is ‘A person or a firm who links the manufacturer/marketing company with the retailers.’ He is the one who purchases from the manufacturing company in bulk quantity and re-distribute it in small quantities to retailers. Let’s look at the position of the distributor in the whole distribution channel first and then define the role played by the distributor.

Role of Distributor: FMCG distributor generally has exclusive rights of distributing all products or a set of products in a defined geographical territory. In the given territory, he will be responsible for the redistribution of the products, retail penetration and market coverage. Sometimes, distributor is also appointed to serve a particular clientele base like hotels, canteens, restaurants etc. Traditionally a distributor is treated like a trader in the distribution channel. But now many organizations have started seeing distributors playing much bigger role. Following are some of the functions a distributor plays in modern FMCG channel.

• Basic role of distributor is to purchase/stock products in bulk from the manufacture and sell/distribute them to retailers in smaller quantity.
• Distributor takes orders from the retailers and institutions and ensures timely and quality delivery of products.
• Distributor maintains stock of the products to absorb the supply fluctuation from manufacturer.
• Distributor provides required financing for allowing credit to the retail market.
• Distributor is the person who will provide ground level data on demand estimation for the products.
• Distributor expands the retail universe (by opening new outlets) as well as the retail penetration of various products.
• Distributor takes up field level marketing activities like H2H promotions, inshop promotions etc.
• Distributor helps in minimizing consumer complaints and resolving them.

This basically clarifies the broad role of the distributor in modern FMCG channel. We will see the functions and daily routine of a typical distributor in the next part to finally derive the criteria for selection of a good FMCG distributor.

DNE Blog: Insights from the Livestock Roundtable

Last week, the Centre for Insurance and Risk Management, IFMR, convened a roundtable on Livestock risk that was attended by all the major stakeholders to talk about the various issues and challenges faced by them in bringing effective risk management solutions to livestock owners. The participants involved all the major insurance companies, NGO like PRADAN, apex institutions like NABARD and NDDB, co-operatives like Amul and DRDA, MFI like SKS Microfinance and international organizations like World Bank, ILO and ILRI among others.

Here are the key highlights of the discussions at the roundtable:

  • Lack of dependable information on insured livestock
  • Highly specialized service providers catering to a limited range of services
  • Limited bandwidth of MFIs to offer livestock registration/healthcare services to its clients
  • Difficulty in uniquely identifying livestock and complications in the process
  • Need to build awareness on terms and conditions of the insurance coverage and benefits of livestock insurance
  • Need to evolve models based on community involvement or TPA

Read the details of the event and the insights of DNE at the DNE section of the IFMR Blog .

Milk Quality Testing and Payments

There are different “states” through which a milk collection activity in a cluster move. Each state depends on factors like location of the cluster, volume of milk produced and competition amongst milk buyers.

At the very outset, we will make it clear that according to DNE, quality based payments for milk wherein each farmer gets paid exactly according to the quality of milk poured by him is the best situation that we can have and that is something that DNE hopes to achieve through its interventions.

Before we go further we would also like to clarify that by quality we mean the nature of chemical composition and extent of microbial content in milk. For a dairy processing unit which converts raw milk into various dairy products, what matters is the solids content in the milk. If we go deeper, the solids in milk consists of fat, proteins, lactose,minerals. Depending on the product manufactured in the dairy plant, the milk may be valued at a higher price if it has a higher content of one of these components. However,the most common method of quality based payment is on the basis of the total solids content in milk. This is the easiest to find out and it requires a simple lactometer dip.( Lactometers measure the specific gravity of milk and hence the solids content.)In slightly better cases, milk is paid on the basis of fat.

The different forms of payment that the farmers get are:

Volume Based:

This method is normally followed in case where the farmer sells milk to a milk vendor/agent or sells it to households directly. S/he may bargain for a better price just on the basis of the perceived “thickness” of the milk.
More volume you pour more money you get.
Why is this good: No hassles of measurement. No investment required to collect milk or keep track of the payments to be made.
Why is this bad:The farmer has no incentive to produce good quality milk. S/he adds water.Entire dairy supply chain suffers.

Entry of an “organised” player into an area for milk collection does NOT guarantee “right” price for milk. There are multiple systems under which the organised players collect milk.

They may let a milk agent collect milk for them.

Quality Based:

Normally followed by the organised sector or to some extent by milk agents in case of competition.

Why is this good: Farmers have incentive to pour better quality of milk, the rest of the supply chain gets benefitted immensely.

Why this is bad: Requires different level of complexity and investments to implement.

Different “versions” of quality based payments

  • The milk buyer may collect milk from farmers and NOT measure the quality of individual sample separately and pay all the farmers in a cluster according to the quality of the bulk sample of all the milk poured in that cluster. The farmer gets paid as per the volume of milk poured and as per the quality of milk poured by the entire village.
  • The milk may be collected from farmers and the TS content measured for each farmer separately. The farmers are then paid according to the TS content for each farmer. The equipment required at the village level is a simple lactometer and a measuring cylinder.Cost Rs.200 (approx).
  • Milk may be collected from farmers and individual samples taken for milk poured by each farmer. The samples may then be taken to the nearest chilling unit/dairy plant to measure the fat and Solids Not Fat content of milk. The equipment required at the village level is a sample bottle tray, a lactometer and measuring cylinder. Cost Rs.1500 (approx)
  • Each milk sample is not tested daily. It is randomly tested and each farmer gets payment based on the quality of the milk that gets tested once in a week/fortnight/month.
  • Milk is collected and tested at the village level for fat and TS. the testing of milk may be done using a manual system where all samples will not be tested everyday. The equipment cost would be about Rs.5000-6000.The farmer gets paid according to the quality with the fat being tested once in a two days/week.
  • The testing of milk may be done using an electronic equipment. The total setup would cost about Rs.30000-60000. This would enable payment as per fat and SNF for each sample of milk poured.Farmer gets paid for every sample of milk that s/he pours differently based on quality.
  • There is an automated milk testing setup available which would enable creation of records of payment automatically through a computerised system. The setup costs Rs.80,000-1,20,000.

In other countries, the microbial load of milk is also judged for payment. In some cases (cheese plants), the protein content of the milk is considered for payments.

Tri-partite agreements as a solution

Where could we stop the cycle? The supply chain gap is evident in a situation where the milk volume in a cluster is not enough to justify a milk collection centre being setup by an organised player and it is higher than the demand of milk agents resulting in suboptimal price for milk to farmers.

So, in order to make a milk buyer setup a collection centre in a village, the milk produced in that village should be so much that even after selling some milk to the milk agent the village is left with milk to be sold to the collection centre which is enough to justify setting up of a collection centre.

Once again, back to the same solution: Finance milch cattle.Problem is, the financiers are banks which do not penetrate deep into the remote rural locations where the dairy farmers reside. The banks can not lend and collect repayments from them because the farmers are in such far off places!

Enter the Dairy Processing units which are in need of more milk to run their operations and they have milk collection centres in the deep pockets where farmers reside. They offer to issue cattle loans to farmers on behalf of the bank and repay directly to the bank from the milk payments. This way they would collect more milk because the people who have taken loans from them will be “indebted” to supply milk to them.

That is how the model of a tripartite agreement between the dairy processor (milk buyer), a bank (financier for cattle loan) and dairy farmer was innovated and the cash flow trapping mechanism utilised.

This expectation of farmers becoming indebted to the dairy processor because the dairy processor is giving loan to buy cattle comes from the practice of milk agents giving loans to farmers to purchase cattle. Under such circumstances the farmers are virtually bound to give milk to the agents!They give the milk to the milk agents at whatever price he pays! The dairy unit thought that a similar thing would happen.

However, one key difference between a dairy processor and the milk agent is the social pressure that the milk agent can wield to make the farmers stick to him even by paying him/her a lower price. Dairy processors do not have that power. The tripartite agreements began to fail because the farmers went about pouring their milk with other who paid a better price. Loyalty that was expected from the farmers because of financing, veterinary and other forms of support did not quite show up.

What this situation reveals that a partnership between the dairy processor and banks which seemed to leverage each other’s strengths could not really do well because of the basic inability of either party in keeping the farmer within their “loop”.In fact,practically, this is NOT possible.

I am told that one of the largest banks in the country has in fact stopped cattle financing altogether because of the failure!

Who will buy the milk?

Went to a few villages which no longer had co-operative milk collection centres. They had it in the past but because of disputes they shut down. The local milk agents/sweet shops gave more money per litre than the co-operative collection centre. They accepted even water added milk/adulterated milk. The price was paid within 2-3 days! People expected the same “benefits” from the co-operative society. Milk started flowing to the milk agents.

However, the milk agents have limited capacity. They can collect only up to a certain volume. The ability to collect milk fluctuates wildly with season. Slowly the number of HHs having cows/buffaloes have gone down.

Average Milk production was 2 litres in a day. The volume of milk was low enough to prevent problem of milk sales. It was mostly sold to them without a hassle.

There is no doubt in the minds of farmers that dairy farming is profitable BUT only if there is guaranteed buyer of ALL milk.Buying high value cattle would actually increase the pains if there is no guarantee of all milk being sold milk.

Our understanding: If at all the co-operative DOES reopen its collection centres in these villages,after a few months, the first lot of milk from each farmer might still go to the milk agents (because they get a higher price there), it will be the remaining milk that would reach the co-operative milk collection centre. However, there is a limit to the volume that the agent can collect.

Let us assume that cattle financing is done in a village where an organised milk collection centre (offering guaranteed milk purchase with quality based payment) is reopened/opened. As the volume of milk production goes up in a village, the price the milk agents pay for the milk will go down because it will be easier to get milk (good old demand- supply). The farmers will start to earn less per litre of milk sold. However, since there is a milk collection centre in the village, the milk agent will offer a price slightly higher than the milk collection centre rate ALWAYS. So, for most farmers, the first attempt would be to sell milk to the milk agent and then the remaining to the collection centre.So while the price received per litre will go down,the volume of milk sold is now higher (because of high yielding cattle purchased with cattle loans), the total earnings will be much higher than earlier.

IF the milk collection centre does NOT exist in the village where cattle financing is done, the price of milk will dip drastically and milk agents will rule. They farmers will have no alternate option to sell milk and will suffer and will slowly lead to farmers taking lesser care of cattle and finally leading to a situation where they keep low yielding cattle just because it is a tradition or because it meets domestic requirements of milk.

Sounds very logical and obvious.Solution for Co-ops: Finance cattle to collect milk. Problem is co-operatives did try to finance cattle.But most of the milk started flowing into the milk agents channel because they were paying higher.So, neither did the repayment of loans happen and neither did they get the milk. Finally the co-operative collection centres shut down. Obviously, the moment the collection centres shut down, the milk agents had the freedom to decide prices and volumes to be collected as per their requirements. The active veterinary support provided through co-operatives stopped. The Govt veterinary support was only partly functional. The farmers found it difficult to maintain good quality cattle and hence the present state where average milk production is 1-2 litres!

Dairying: as seen by the small farmer

We went for a few Focussed Group Discussions in Ganjam District of Orissa under Dhanei Kshetriya Financial Services service area. The idea was to interact with dairy farmers and understand the status of dairying. A lot of things came up during the discussions, stories are same as those heard in any other part of the country.

Loan for cattle:

There are schemes of the Govt under which the farmers get subsidised loans for buying cattle and getting insurance. Under one such scheme, the co-operative facilitates to help the farmers get a 50% subsidy for loan but stipulates that they are “required” to buy cattle ONLY from a fixed place.

The farmer goes and buys a cow which gives about 10-12 litres of milk and it costs him Rs.18000. He brings the cow home and realises that the cow actually gives just 3-4 litres and not 10-12 litres!

The loan officially issued in his name is of Rs.18000 but it seems that the actual value of the cow is only about Rs.9000-10000! What happens to that Rs.8000 extra is anybody’s guess.

The farmer is left with a cow which gives 3-4 litres/day and in some cases even less! He has to repay a loan which even after subsidy on interest would still mean too much to repay from the cash flows “generated” out of a 3-4litre/day milk!

Cattle Insurance:

The subsidy scheme also applies to the insurance product. The farmer pays just Rs.300 for annual insurance cover for a Rs.15000 animal which converts to a 2% premium for the farmer and 2% for the govt for a total of 4% premium charged by the insurance company.

In order to get claims settled in case of death of cattle, the farmer has to call the vet, pay him/her Rs.50-Rs200, ask for a death certificate, get the photograph of the dead animal, collect the tag of the dead animal and along with all these things, farmer goes to the nearest town and deposits at the “bank” for claim to be settled.
In recent experience, out of 6 people in one village only one person’s claim has been settled!
Why should they take an insurance product when the claim will never get settled?

Healthcare:
Govt vaccinates cows regularly but even after that, there were cases of cows dying of preventable diseases which they were vaccinated against!
Our assumption is-low quality vaccines/cold chain not maintained!

On an average, the farmer spends about Rs.300 annually on veterinary care. If we add up cases of pregnancy diagnosis etc, the spending is about Rs.500-600. On occasions they end up spending upto Rs.1000-2000.

Financing for High Value cattle:
The farmers know that keeping high value cattle is better for generating more returns but keeping high value cattle means additional care.For those who are interested to take the “hassles”, their concern is finance. The requirement of finance is not just for cattle but also for the shed. High value cattle need proper sheds to be constructed for them. The spending on feed is also higher.

Assuming about Rs.5000-6000 for shed and Rs.1000-1500 for feed, a “cattle loan” product has to provide finance for two cattle purchased at about 6months interval and also has to provide for cost of shed and feed for 1 month and cost of insurance as well. A simple calculation will reveal that the total financing requirement would actually add up to more than Rs.50000. (Assuming cattle of Rs.20000-25000)

(Off course if we assume a 10-15% contribution from the farmer for the “Project” of two high yielding dairy cattle, we will get a figure between Rs.45000-Rs.49000 as the amount for a comprehensive cattle loan.)

NOTE:A cattle loan would not make sense unless there is a guaranteed price for milk sold. In other words, forward linkage is a basic necessity.