COLGATE-PALMOLIVE

DISTRIBUTION NETWORK

Case Study on distribution network in Karachi.

Prepared by:

Ammar Mansoor.

Suhail Anjum.

Syeda Nida Zehra.

In 2004, Tahmoor Asim Butt, a member of Unilever’s FERRARI program joined Colgate Palmolive (CP) as a Sales Director. Colgate Palmolive, a Rs. 5 billion company in 2004 was loosing its contribution from Karachi. In just 5 years time the contribution of sales dropped from 26% to just 14%. It was a worrying sign for the CP Pakistan as Karachi being the biggest city was performing poorly. The result was that management decided to shake up its management in Karachi and also all over Pakistan before Karachi’s performance was repeated all over the country.

With a vision in mind, CP Pakistan decided that to achieve positive results it needed a major overhaul in its structure. The present formation relied too much on primary sales, and relations with coverage and trade were not extensive enough to obtain the desired results. Thus a new distribution network was needed. Mr. Butt launched a program names Name of Program, to make his and Company’s vision a reality.

Company BackgroundThe Company was incorporated in Pakistan on December 5, 1977 as a public limited company. It was establishes as a collaboration between Colgate Palmolive and Lakson Group of Companies. The group currently owns 29 companies and has diversified its businesses in the areas of Restaurants, Financial Services, Insurance, Paper and Packaging, Information technology, Travel Services, Surgical Instruments, Textile and Media.

Scenario at Colgate PakistanKarachi was the leading contributor in terms of revenue to CP with a share of 26%. The trend from 2000 saw a sharp decline as its share dropped to a mere 14% in 2004. CP started by analyzing the industry and market. They found out that Pakistan had a lot more potential than expected and with the boost in economy CP could carry on its vision further.

CP Pakistan soon established that acquisitions could not help achieve its targets. This was due to the fact that CP Pakistan was already the market leader in its core business units and no local company was good enough that could fulfill their purpose. CP was in direct competition with brands of Unilever, Proctor and Gamble et cetera. Thus with the help of other global regional teams of CP it was established that the distribution model at CP Pakistan had to be re-established.

Hence it was decided that the structure was to be re-modeled on the following domains:

1. Geographic Distribution.2. Distribution Operations.3. Sales Hierarchy.4. Sales Monitoring and Reporting.

Business Area UnitsDuring the restructuring process Colgate classified its products under following business areas:

Fabric Care - includes; Detergents, Fabric Softener. Surface Care– includes; Home care products, like, Max Bar, Max Liquid, Max paste Oral Care– includes; Tooth Paste, Tooth Brush Personal Care– includes; Soap

Fabric care is one of the leading categories and contributes to about 54% of the sales of CP Pakistan. Surface Care is the second largest contributor with a share of 24%. Oral care

category includes the Colgate toothpaste and tooth brushes which offers to around 15% of sales. The personal care category is small and only contributes 7% to the total business.

KarachiKarachi was one of the major concerns for CP because being a growing metropolitan city, sales contribution declined sharply from 26% to just 14%.The concerned personnel identified that the major cause of decline was due to coverage and unavailability of Colgate’s products in many parts of the city.

Initially, Colgate only operated with one distributor to cover the entire city of Karachi. This was done by Express distributor, a subsidiary of Lakson Group. Up until 2001, Express Distributor was able to cover the entire city of Karachi.

Express Distributor lacked the necessary infrastructure and investment and it soon became apparent to Colgate that in order to consolidate sales from Karachi it would have to look else where. Thus Colgate decided to add one more distributor. Channel distributor was given the responsibility to cover the area of only Orangi Town in 2002. However this measure did not have the desired effect and again in 2003 Colgate hired another distributor named Khalid Associates to ensure Karachi was covered. Up until 2004 approximately 13000, 1000 and 1400 outlets were covered by Express, Channel and Khalid Associates respectively.

After the introduction of Khalid Associates the business ran smoothly up to 6-8 months. But after that, company noticed a serious problem in the distribution when it found out that Khalid Associates had some under table partners and the company wasn’t being informed about such agreement of Khalid Associates with any of the partners. This was a clear and straight violation of the agreement with the company. Those partners were pressing the Khalid Associates for their invested money which created a serious financial problem and it affected Colgate Palmolive directly with a further decrease in their sales in Karachi.

Thus CP Pakistan ended its dealings with Khalid Associates and decided to restructure its distribution network across the country and focus on Karachi.

Conventional System of Sales and DistributionThe conventional system of distribution only focused on primary sales. Sales of company to distributors were monitored and main emphasis was to make sure that enough was sold to the distributor so that company’s targets were achieved. Focus was primarily to just make sales and achieve its targets in terms of revenue.

Geographic DistributionAt first Karachi was only covered by one distributor and did not have any other division. As Karachi expanded there was need to have more distributors so that more areas could be covered.

Channel distributor was hired to cover the part of Orangi town. This did not fulfill the needs of expanding city and Khalid Associates was hired to cover Lyari and Saddar. Other remaining areas were covered by Express which included Clifton, Defence, PECHS, Tariq Road, Korangi, Shah Faisal and Malir.

Other outskirts of the city were considered dangerous from security point of view by Colgate were not taken into account by CP and were not covered at all by the distributors.

Areas of Kaharadar, Lyari and Jodia Bazaar which had high potential were being served by only one distributor

Sales HierarchySales Hierarchy of Karachi constituted of Director Sales, 1 Zonal Manager, 3 Area Sales Managers and 3 Field Officers under each Area Manager.

Field Officers reported to Area Sales Manager. Field officers were responsible to look after all the categories of business. Field Managers only had one distributor reporting to them. 9 field officers covered the entire city. Each field officer was given 2 or 3 areas to cover and sales to look after.

The responsibility of a field officer was to verify the distribution claims of the distributors. The work load of a field officer was enormous as he had to cover lot of retailers every single day. As a result many tasks could not be completed or paid attention at.

Area managers were responsible to coordinate the performance and results of field officers to zonal managers who looked after the trade offers and other promotions. Targets were also amended if necessary.(Exhibit 1 shows the sales hierarchy)

Sales Monitoring, Target Setting and ReportingTargets were simply set on the basis of increase or decrease during the year. If there was an increase in revenue then targets for next year would be set at an increasing level. However, if the sales had declined during the year then the sales targets would be decreased as well. The increase or decrease was decided on judgmental basis.

Sales Monitoring was done by the field officers. They were responsible to compile all the records. There was no automated system present and thus records were prepared manually by the field officers. Usually manual registers were maintained by the field officers.

This practice was very time consuming and several areas were not visited by field officers for several weeks. It was mainly because the

Distributors OperationsOperations of distributors were mainly focused on the volume. Major objective of the distributors was to deliver in areas where high volume is purchased. Profit margins were kept high by making sure that delivery is made in areas which are close to their distribution points and also buy in high quantities. Areas which were far flung or had more travelling time were either catered fewer times than necessary or were not catered all together for a week or at times two weeks.

Company’s main focus was also on achievement of volume sales and no emphasis was given on how or where the product is distributed. This gave distributors a free hand as to where and when they should distribute the product. Also, company only focused on achieving the targets set for primary sales. No emphasis was made on secondary sales.

Program NameAfter analyzing the current system, CP Pakistan decided to make changes in its distribution and channel. It also changed its way of thinking and opt the motto to cover an outlet even if only buys 1 SKU. The new system was launched on the remodeling of the 4 factors. These factors were geographic distribution, distribution operations, sales hierarchy and sales monitoring and reporting.

Geographic DistributionKarachi was divided into 3 regions, named as Karachi 1, Karachi 2 and Karachi 3. The restructuring concept was based on selecting and allocating the distribution activities on the basis of geography, with the policy that one geography will have only one distributor. Following their motto, all small areas which were not previously covered were also brought into consideration as Colgate realized that sales potential from them was high as well. This way, Karachi was then, further divided into 15-geographical areas with one distributor in each area. As a result, 15 distributors are now operating in Karachi. This policy was also in line with the global policy of “No single distribution” by International Head office of Colgate Palmolive.

The geographical region of Karachi was segmented into the following areas with each area having a sole distributor:

Landhi and Korangi. Malir. Shah Faisal. Gulistan-e-Jauhar. Gulshan-e-Iqbal. Rashid MInhas Road upto Quad-e-Azam’s Tomb. N.Nazimabad, N.Karachi. Orangi Town. Baldia. Nazimabad, Liaqatabad. Saddar, Shahbuddin Market. Defence, Clifton. Jodia Bazaar. Kharadar, Lyari. Tariq Road and P.E.C.H.S.

Exhibit 2 shows the division of areas under the heads of Karachi 1, 2 and 3.

Sales HierarchyFocus was changed and new layers were added to ensure that the management was till retailer and even consumer end. Secondary sales were given priority rather than primary. A Senior Zonal Manager post was added to the hierarchy and the Job descriptions of all managers were modified.

The zonal manager instead of being responsible for the entire zone was now responsible for the part of Karachi that was assigned to him. As Karachi was divided in Karachi1, Karachi2 and Karachi 3, there was one Zonal manager responsible for each division. The three zonal managers reported to the Senior Zonal manager who further reported to Director Sales.

As Karachi was geographically segmented into 15 areas, the Area managers were increased to 15 also; each responsible for his own area and the distributor serving it. An area was further divided into belts. A belt would consist of 2 or 3 sub divisions of the area which were catered by

Field Officers. For example, Defense would be further divided into 2 or 3 belts. Each belt was served by a field officer.

Field officers were increased to 35. This helped increase the service level. Field officers were made liable to look after investment of the distributor, coverage, product availability, product visibility. He was also responsible for stock management and merchandising activities. Field Officers adopted two methods to visit the retailers. Usually back checks were used where field officers would go independently to retailers to monitor distributor’s activities. Second method was route riding, where he would accompany the distributor while he is catering to the retailers or following his PJP.Exhibit 3 shows sales hierarchy

IMT and Institutional sales were turned into separate departments which reported directly to the Director sales. Both departments have same structure with Area Managers reporting to Zonal Managers. Area Managers are reported by Sales Executives.Refer Exhibit 4

Sales Monitoring, Target Setting and Reporting

Target SettingParameters for target setting were changed and more scientific methods were developed to ensure that the company achieves its objectives and also have profitability. Leading indicators were developed which ensured that targets and results could be monitored and amended on a consistent basis. Following components were identified to set targets:

1. Volume: Targets are set on the basis of quantity that has to be sold throughout the year. It is not only planned on product level but also on different SKU’s. First annual targets are established and are then broken down into quarterly and monthly targets. All theses targets are broken down into targets of zones, areas, belts and distributors. Also the targets are broken into different SKU’s as well. For example if Colgate has a target to sell 100,000 tons of Tooth paste in a year, then first it will be broken down into zones, then into areas, belts and then for distributors. These targets are also divided on different SKU’s as per their selling potential. (Here zone mean like Karachi, Lahore, Islamabad; Area is Karachi1, Karachi2 and Karachi3; Belts; North Nazimabad, P.E.C.H.S et cetera.)

2. Profitability: Another factor was established to ensure profitability. A portfolio of different SKU’s was maintained to ensure that sales generate maximum profitability. Focus was given to profit generation and not only to revenue. This was done to ensure that the SKU’s that have lower profits are not the only one’s that are sold. By selling only small SKU’s, volume targets could have been achieved but they have smaller margins for the company and it would not help achieve revenue targets. Thus, targets were set on two levels, volume and revenue.

Basis for target settingTargets are set not only on the basis of past sales and promotions planned but certain other factors are taken into account as well. Competitors share and their activities, expected growth of the industry, socio-economic development, expected increase or decrease in the per capita income levels of the country et cetera are some of the other factors considered while setting targets.

Competitors share and their activities include competitor’s sales and promotions, advertising campaigns et cetera.

Socio economic development includes data regarding the area or the portfolio of a town. This provided data such as population, consumption per household, population density, age and gender, income levels and other related factors.

Efforts made to ensure achievement of targetsThe yearly targets are first divided into zonal and then into area targets. Then these targets are divided into different belts. After this, each belt breaks them down to distributor and weekly level. Area Sales Manager is responsible to monitor these targets on weekly basis. Based on his analysis he is able to take corrective actions if necessary.

Sales ReportingTo ensure that efficiency increased at all levels a new automated system was installed to report sales at both, primary and secondary level. Primary Sales were monitored through SAP. However, main focus was to monitor secondary sales and ensure that all products reach to potential consumers. Any sales activity beyond the distributor was reported through Sales & Distribution System (SnD). This is a database which helps in monitoring the activities carried out by distributors.

In such a system, the order booker carries an ACPAC device with him and enters the data of each sales transaction which gets updated in the distributor’s main office from where the online connection reports the transaction directly to the company. This system helps the company to analyze the brand’s current performance by comparing it with the last period’s performance.

Different reports could be produced which would help monitor and analyze the performance of different brands and SKU’s. Following reports could be generated from the SnD system:

Average SKU per Bill (Exhibit 5) SKU productivity. (Exhibit 6) Business Performance - SKU. (Exhibit 7) POP counting. (Exhibit 8) Channel wise contribution. (Exhibit 9) Sales record of an order booker. Sales targets achieved up to date and any shortcomings in the targets achievement

(TOP sheet). (Exhibit 10) Stock Information.

Sales MonitoringWith the help of new SnD system, certain parameters were also developed to make sure that distributors performed at the highest levels as well. Certain KPI (Key Performance Indicators) were established to monitor the performance of distributors. These KPIs include:

1. Productivity: number of outlets made productive during a certain period. This is measured on daily and also on monthly basis.

2. Avg SKU per bill: Number of stock keeping units sold on average per bill.

3. Value of sales: This measures the amount of sales made on last visit as well as total sales made during a period. (Exhibit 10)

Key improvement areas were identified through these KPI’s and appropriate actions were drafted to increase the profitability. Also, details regarding every outlet and distributor can be measured and analyzed through the help of Permanent Journey Plan (PJP). The PJP is updated on a consistent basis. New outlets are identified and verified by distributors and field officers of the company respectively. Upon verification they are entered into the SnD system and are incorporated into the PJP.

Operations

Distributor’s AssessmentA new criterion was developed to select distributors which would ensure that the right person is selected to help fulfill the vision of the company. Certain guidelines were setup for the selection of distributors:

1. Finance; investment made in its infrastructure.

2. Market reputation; credibility, credit rating and other qualitative factors.

3. Infrastructure; number of vans, sales force et cetera.

These factors helped in not repeating the past mistakes made by Colgate in their selection of distributors.

KPI for distributorsDistributor’s performances were also monitored on a consistent basis to guarantee high levels of service at all levels. Certain KPI were established to monitor their performances as well. These were:

1. %age of targets achieved: this is simply defined as the sales (in terms of revenue and volume) achieved from the targets set at the beginning of the period.

2. Increase in Investment: Profits invested back in the business.

3. Stock maintenance: as per the company’s policy every distributor will have to keep stockings of 6 days. They monitor it on regular basis because of their trade promotions. Colgate brings on new promotions on regular basis and in order to avoid any trouble in launch of the promotions they monitor the stocks of distributors on consistent basis. (This KPI is given importance in the case when a new promotion has to be offered).

4. Maintaining the limits of market credit; as per the company’s policy distributors cannot work on 100% credit terms with the market. They have set a limit of 2.5million, which cannot be crossed under any circumstance.

5. Coverage by brand and SKU: Sales of each brands and their respective SKU’s in terms of weight and revenue.

The above mentioned KPI would help assess the company the performance of their distributors as well. If one or more KPI’s were not up to the mark then corrective actions were taken so that optimum levels of service and profits could be achieved. These KPI’s also help in assessing the distributors’ rewards at quarter or year ends.(Refer to Exhibit 11)

Distributor’s Profit Margin

Exhibit 12 shows a template through which profit margin for calculated for distributor. The template helps identify the weak areas and subsequent actions are taken accordingly. Colgate always tries to ensure that the distributor gets at least 2.5% profits. If that is not the case then root cause analysis at company’s and distributors end is performed to find out the reasons for lower profits. Changes are incorporated in the system accordingly.

Rewards for Sales ForceCP adopted an attractive reward system to ensure that it brings the best out of its employees. Apart from the basic salary many incentives are offered to the employees. There are periodic plans for employees.

The basis for periodic awards is the maintenance of Key Performance Indicators by the distributors while the company’s sales team is evaluated on their efficiency in the field.There are;

Annual Awards: it includes, 5-year employment benefit theme and an ‘Umrah contest’ in which the salesmen with 100% target achievement and maintaining the KPIs are being awarded with an Umrah Ticket plus a cash amount equaling USD 300.

Quarterly & Monthly Awards; some cash amount along with gifts are given to the sales personnel performing efficiently. Employees are awarded if KPI’s are maintained.

TrainingTraining and development of staff is an ongoing process. Quarterly trainings are provided to the employees in areas where they are considered weak following an evaluation. First field officers are evaluated by their superiors, that is, area manager. Their quarterly performances are appraised. Training to employees is provided in their concerned areas and the results may be reflected in the next quarter’s evaluation.

ResultThe restructuring process proved to be a fruitful one for CP Pakistan as it is now more than a Rs. 10 billion company. The management came up with a process that consolidated the sales of the company. CP Pakistan is constantly looking forward to innovate its system according to the changing needs of consumers. The management believes that constant up gradation of their methods will be required to stay in the game.

EXHIBIT 1SALES HIERARCHY (PRE-RESTRUCTURING)

Zonal Manager

Area Sales Manager

Director Sales

Field Officers

Director Sales = 1

Zonal Manager = 1

Area Sales Manager = 3

Field Officers = 9

EXHIBIT 2DIVISION OF KARACHI

KARACHI

KARACHI 1 KARACHI 2 KARACHI 3

Clifton.

Defence.

P.E.C.H.S.

Tariq Road.

Landhi.

Korangi.

Shah Faisal.

Malir.

Gulistan-e-Johar.

Gulshan-e-Iqbal up to Quaid-e-Azam Tomb.

Jodia Bazar.

Federal B. Area.

North Karachi.

North Nazimabad.

Saddar.

Orangi Town.

Kharadhar Lyari.

Baldia.

Lyari.

EXHIBIT 3SALES HIERARCHY (POST RESTRUCTURING)

Karachi2: Asst. Z Manager

Area Sales Manager

Director Sales

Field Officers

Karachi1: Asst Z. Manager Karachi3: Asst. Z Manager

Senior Zonal Manager

Area Sales Manager Area Sales Manager

Field Officers Field Officers

EXHIBIT 4IMT AND INSTITUTIONAL STRUCTURE

Zonal Manager

Area Sales Manager

Director Sales

Institution ManagerIMT Manager

Area Sales Manager

Sales Executives Sales Executives

EXHIBIT 5

EXHIBIT 6

EXHIBIT 7

EXHIBIT 7

EXHIBIT 8

EXHIBIT 9

EXHIBIT 10

EXHIBIT 11

EXHIBIT 12

EXHIBIT 12