Setting up a New Distribution Business

Services Marketing

Kicking the pot of Gold

Khalid Mansoor Setting Up a New Distribution Business

July 1st 1998 KM was confronted with the biggest decision of his life, to embrace the much cherished Pot of Gold or to Kick it.

In 1996 KM an Executive with 25 years of marketing, sales and management experience, with the leading multinationals operating in Pakistan decided to implement his dream.

The dream to turn into a multi millionaire by going into a business for himself, “if I can make millions and billions of rupees of profit for my employers why cannot I do it for myself. As an employee he had been recognized for his initiative, drive, and the ability to deliver profits in a competitive scenario.

July 1st 1996 he put in his resignation, from an extremely lucrative job and set upon realizing his dream. The field chosen by him was “Distribution Marketing”.

The service (distribution) model concept was based on a situational analysis of the distributors operating in Pakistan. At that period of time, there were two large established distribution houses in Pakistan. UDL – United Distributors Limited, and VIKOR Associates, each with 5-6 key accounts, primarily of multinational brands. All other distributors were small, private concerns, with assets ranging from 2-4 delivery vehicles, hired drivers, they lobbied business establishments, primarily through contacts to obtain accounts and started operations often in a basic fashion without much awareness of the service concept.

The style of operation of the existing distribution setups was based on cost cutting, I.e. Trying to deliver to large retailers, to meet sales targets of the principles. The key concept of retail audit (Listing of all retailers, with their addresses, owner’s particulars, business reputation, ability to clear credits, time and motion study, efficient routing, stock keeping levels etc.) were ignored. A distribution run would generally cover a retailer once a week; this often resulted in oversupply, thereby tying of extra credit in the market or under supply which resulted in shortages, and a loss of business. Generally the operations were crude, inefficient with small margins of profit. This forced most organizations to do self-distribution. At this point of time the ‘concept of outsourcing’ was becoming popular and therefore the situation analysis conducted by the marketing executive indicated a vacuum, providing the distribution business was run on proper marketing principles.

Having experienced all the above inefficiencies himself, as a marketing executive, he decided to quit a very lucrative job and enter the distribution business in Lahore.

However this opportunity also presented some challenges, the foremost being to acquire the distribution rights of FMCG and Pharmaceutical products. Using his contacts, he approached some organizations which had a sizeable market share. At each meeting with prospective principles, he was given an encouraging response but was asked to setup a running organization which required:

1. Renting premises

2. Purchasing properly fitted delivery vehicles

3. Hiring staff (drivers, sales personal, accountants and storekeepers)

4. A license from the Punjab Government for pharmaceutical distribution.

Thus started the first expenditure from his limited resources.

Pharmaceutical distribution is considered profitable, firstly due to the type of the commodity i.e. medicines are not bulky and one delivery vehicle can accommodate upto Rs. 500,000 worth of goods and secondly due to the fact that manufacturers do not restrict distributors in dealing with competitors. The pharmaceutical retail trade is concentrated around hospitals with some bigger departmental stores, having a pharmaceutical counter as well.

Accordingly premises were hired at Walton Road, Lahore, which consisted of two large storage halls as well as an office area. Accessibility to the premises, which could receive goods in large containers from the principals (no traffic police restrictions) and ease of unloading were factors of primary consideration in the choice and size of the location.

Medium and small sized delivery vehicles were purchased (Kia and Suzuki Pickups) and appropriate staff was hired.

The business was named SKANS marketing, using the first initials of the family members.

S Sabiha (Wife) K Khalid (self) A Ali (son) N Nazia (daughter) S Sonia (daughter)

The first account that SKANS marketing obtained was of a pharmaceutical manufacturer known as MEDIPAK which specialized in IV solutions (drips). There were 7 products, plastic bottles, in 2 different pack sizes.

A retail audit had been conducted and Lahore was divided into 3 delivery zones based on the concentration of chemists.

After the first day of operations the following inefficiencies were noted:

1. Each vehicle was able to cover only 50% of the shops they had to make deliveries to.

2. Only 30% of the stocks loaded into the vehicle were sold.

This was in spite of the fact that one delivery vehicle was manned by the salesman of the ex-distributor who professed to know the business. Upon analysis it was discovered that the reason for poor performance was twofold.

1. Vehicles were loaded at random. The first chemist visited demanded stock which was placed at the rear end of the loaded vehicle. This entailed unloading the entire vehicle on the road (a busy thoroughfare as it turned out), supplying a few dozen crates and then reloading the vehicle again. This practice repeated itself at almost every chemist shop resulting in unnecessary labor, wastage of time and loss of sale.

2. Due to random loading, the stock of IV solutions, which were in high demand, finished very soon and those with a lower demand remained undelivered and were returned to the office. Therefore wastage of fuel and labor costs.

The normal working hours of the office were 8: 00 AM- 6:30 PM.

To overcome the above difficulties, two additional sales representatives were hired each given a particular territory. Their assignment was to visit all chemist shops in their designated areas, and obtain orders for next day delivery. The timing for order taking (on printed forms) was 7: 00 AM - 2: 30 PM (chemists operate around the clock). At 3 :00 PM they would return to the office and make packages of the demanded products on a shop-wise basis, print invoices, (as compared to making invoices at the time of delivery- thereby wasting time) , and mark each package as 1,2,3, etc in the sequence of the shops to be visited the next day by the delivery vehicle.

This resulted in three benefits. As the packages were in sequence, stocks to be delivered at the first chemist were in the front part of the vehicle, unloading/delivering was efficient, and exactly what was required by the retailers was supplied. Within a month of operations the sale of MEDIPAK doubled. Also a buzz went around the pharmaceutical market that a senior executive with multinational experience had entered the distribution business and the operations were highly efficient.

This venture required further investment for working capital management.

As a consequence ABBOT laboratories one of the leading multinational Pharmaceutical Company operating in Pakistan was approached for their account, to which they readily agreed. ABBOT product range was much bigger than MEDIPAK. It had 83 medicines, with multiple packing. Although the distribution commission was lower than MEDIPAK, but the high turnover more than compensated, as no additional infrastructural investment was required the same chemists who were buying iv solutions were customers for ABBOT products. The same vehicles and staff were adequate to deliver ABBOT products as well. The system of advance order booking worked for ABBOT as well and their sales increased by 75% in two months. However stock management and credit control became more complicated and important. This was resolved by obtaining information on ABBOT products regarding their off the shelf movements based on this information stocks were divided into ‘fast’ movers, ‘medium’ movers and ‘slow’ movers and stocked accordingly.

In the meantime the negotiations with English Biscuit manufacturers bore fruit and they awarded their distribution business to SKANS marketing. This required an expansion of operations as the customers for biscuits were entirely different to pharmaceuticals. Additional vehicles, along with delivery staff were employed to cope with the new challenge. Again a retail audit was conducted. The city of Lahore was divided into 4 delivery zones as compared to 3 zones previously for pharmaceuticals. 975 new shopkeepers were identified (as compared to Peak Freans old distributor’s retail network of 500 shops).

Additional injection of funds were required to manage this business, Wider retail coverage, increased the frequency of supply; advance order booking and strict monitoring of staff, job descriptions and key performance indicators were prepared for each staff member and monitored on a weekly basis. All these resulted in Peak Freans sales increase of 50% in three months.

SKANS marketing’s good reputation spread like a wild fire. Well reputed organizations like Glaxo pharmaceuticals, FINIS insecticide and Burke’s Supraseal offered their distribution business. Apart from Burke Supraseal, the other offers were kept pending as the chief executive of SKANS marketing had been negotiating with Smith Kline and Beecham – the leading multinational in Pakistan. This was considered the most lucrative account from the distribution point of view as Beecham had 6 products (antibiotics) only and they had enormous demand. What made this account even more desirable was the fact that their products were sold on a cash basis in the market. Obtaining this account would have launched SKANS into a very profitable operation. Monthly sales were Rs 10 million and with a markup of 9%. A monthly profit of Rs 800,000 was assured. As additional expenses would be around 1% to distribute 8 additional medicines (antibiotics) SKANS Marketing at that stage was already making a monthly profit of RS. 400, 000/- and with Beechams margin the monthly profits would have soared to Rs, 12, 000,000/- per month. Additionally Glaxo Pharmaceuticals and Finis insecticides had also offered their business to SKANS Marketing. A major investment of Rs10 Million was required at this stage to manage the Beecham account. Right at that time his eldest child Ali got admission to McGill University Canada thereby increasing the personal household expenditure to fund his education.

Financials of SKANS marketing are shown below:

Profit and Loss Account For 1 Month

Income: RS 100,00 MEDIPAK (2 million @ 5%) 0 120,00 ABBOT (4 million @ 3%) 0 PEAKFREANS (4 million @ 300,00 7.5%) 0 420,00 Total Income For Month 0

Less: Expenses Salaries 50,000 Fuel 30,000 Utilities 15,000 Rent 20,000 115,00 Total Expenses 0

305,00 Profit Before Tax 0 Investment Payback Period 39 Months Statement for financial position As at Month

Non-current Assets RS (Million) Vehicles (6) 9 Storage Racks 1 Office Equipment 2 Total Non- current assets 12

Due to the increase in the frequency of supply and delivering precisely what was required by the retailers, against dumping which was the norm, the credit extended to the market was reduced by 2 weeks.

The chief executive was now faced with the biggest decision of his life. All the funds available to him had already been invested in the business.

 Capital investment

 Working capital management

He was primarily buying on cash, from his principles, and selling on credit to the retailers. The pot of gold, the Beecham account which offered an additional net profit of Rs, 800, 000/- per month had been offered to him. Since this required a further investment of Rs 10,000, 000 which he did not have.

The following options were available to him.

 Bank loans - interest rates were very high at that point in time 20% per annum. Also no bank would lend without collateral

 Partnership- finding a willing partner to invest in the business, and offer him a share of profit or loss.

 Closing the business - As a stagnant business, without growth opportunities is destined to make losses. What should he do?

Internal Corporate Analysis

 Identify company’s resources like

1. Financials

2. Labor

3. Know-how

4. Physical assets

5. Limitations

6. Growth potential 7. Professional preferences

8. Competitor Analysis – to discover opportunities for differentiation.

9. Finally the plan of action must analyze the cost of achieving the result versus

the expected profit.

What aspect of the check-list shown above, do you think was responsible for the decision to shut down the business?