TABLE OF CONTENTSPage no.4

DetailsDistribution Structure Of Nestle India - Structure - Ownership transfer - Transportation - Policies Selection of distributors Incentives to the distributors Motivation of Channel Partners Evaluation Distribution in Practice (DIP) Training Forecasting and target setting Channel Conflicts - Distributor - Sales Officer Distributor survey - Ghaziabad Retailer Survey Delhi Observations Annexure A Annexure B

9 10 12 14 17 18 21

24 26 27

Annexure C

2

DISTRIBUTION STRUCTURE OF NESTLE INDIA(NCR ONLY)

Mother Godown at Ghaziabad, Delhi UP

Respective C&F Agents

Distributors as per assigned territories

Wholesalers in their area.

Retailers in their respective territories

End Consumer

FORMAL STRUCTURE INFORMAL STRUCTURE

Note: Wholesalers are not a part of the formal structure of Nestle Indias distribution network for NCR .They make bulk purchases from the distributors directly thereby leveraging on the margins.

3

OWNERSHIP TRANSFERStocks manufactured at the factories and co-packers reach the C&S through mother Godowns. The stocks stored at C&S are the property of Nestle. Encashment of stocks are done through Invoicing to Cash Distributors C&S as per the guidelines given to them.

4

They also receive and store support materials like give aways, stickers and complementary items etc.

TransportationFrom the factory to the distributor stage the company ensures that there is availability of cool chain for transportation. At the mother godown (Located at Sahibabad) there is temperature control by hired cold storage. For the purpose of transporting chocolates from the mother godown to the Cash Distributor Dedicated Air Conditioned Vans are used (especially for the summer seasons) The following is the transportation system followed by the company:

5

TRANSPORTATION SYSTEM

6

Company Policy and Guidelineso The company has created two kinds of distributors, namely Trade and Chocolate. The former deals with the Maggie range, Nestle dahi, Aquafina etc. Chocolate deals with all confectionery items like chocolates, sweets etc. o A representative of each distributor goes to the various outlets, once or twice a week (depending upon the area), takes the order and then either delivers the goods there and then, or on the same day. o It has been realized that a retailer has a limited pocket for a days purchase. If one sales representative goes for an order with 50 SKUs the retailer will only buy what his pocket allows, for a one-time purchase. Whereas, if two different sales people go, representing different distributors there is a possibility both will get an order and the company will witness better sales. o The company has also taken an initiative for deeper reach and penetration into the market with its operation STING. Whereby the sales representatives on the company go on bicycles and try to fulfill the order of small ignored and unserved outlets. For example the panwallas, the kinara stores etc.

7

Selection of distributorsCriteria are:

1) Capital investmentThis is dependent not only on the present required turnovers but also on the estimated future capital investments that will be required by the distributor (based on companys growth plans in the area). Amounts required vary from area to area and markets to markets.

2)Relevant experienceIt is imperative that the distributor has had some prior experience as a channel member in the FMCG sector so that no training is required to be imparted to him on aspects of the business. The distributor should not be dealing in competitors products and should be able to function as a dedicated channel for Nestle. For example, while deciding on a distributor for chocolates, an obvious preference would be an existing distributor for other products of Nestle This is because he will pay attention to the entire range of the chocolates and not focus on any particular SKU only.

3) InfrastructureAppropriate infrastructure(depending on the market served and overall volumes ) Should be therea) Godowns / storage space. For chocolates, air conditioned godown space (with wooden padding will be required). b) Delivery vehicles c) Salesmen However there are no written guidelines that are fixed for the above criteria and the company exercises its discretion based on markets to be served. Distributors Record Card (Annexure A) is attached which mentions the relevant details about the distributor for their records.

8

Incentives to the distributors1) MarginsMARGIN LAYOUT (Kit Kat)

Company

5.8 %Distributor

11.5 %

FlexibleRetailers

Wholesalers

NegotiableRetailers

2) Schemes spread over 2-3 months . These schemes encourage specific targetachievements. Targets are given as indexed growth rates based on weights. For example the meaning of 10% growth for a distributor having slaes of Rs.20000 will have a different meaning from one having sales of Rs. 1 lacs. The prizes in the schemes can be monetary- for example additional 2% margin on turnover

9

Or non monetary for example free T.V. sets on achievement of targets. It is attempted to keep in mind the monetary benefit to distributor in case he sells the gift given in kind ( for example T.V.)

3) CertificatesCertificates of acknowledgement for achieving the targets for a name like Nestle are priced by the distributors. They frame them and display them in their offices.

10

Motivation of Channel Partners Proud to be NestleThe company consistently comes up with schemes for it channel partners to motivate them. One of their successful schemes was Proud top be Nestle Supper awards for super achievers! launched on March 30, 2002. This contest was open for the following: i. ii. iii. iv. v. Area Sales Managers Sales Officers Cash Distributors Pallet Salesmen (a S.O. may have 2-3 Pallet salesmen reporting to him to enable him cover a wider territory.) Distributor Salesmen (These salesmen are the employee of the distributor, but are under indirect pay roll of Nestle, since their salary is reimbursed by the company.) vi. Merchandisers

How does it workStep 1: The qualifying criteria for the contest is : 100% achievement of internal target for Qtr III (invoicing) Minimum 10% RDBN turnover growth over the last year Qtr II. Duration : o Invoicing: 01/04/2002 29/06/2002 o RD: 02/03/2002 23/06/2002 Step 2: All ASMs who fulfill the above criteria were then ranked on the basis of an Index INDEX = % RD turnover growth * absolute value increase Step 3: Top ASMs (as fixed by the branch) win prizes. P.S. Cash Distributors and Sales Officers performance monitoring Sheets have been attached as Annexure B & C.

11

The winning team comprises of: All SOs in the ASM team Two top ranked CDs in each SO Zone (Index = %RD growth * absolute turnover increase) Two distributor salesmen in each of the top two CD One Merchandiser in each of the top two points ( performance will be assessed by S.O. on quality of merchandising achieved)

The top ranked ASMs (Nos. as fixed by the Branch) and their teams take home the following prizes: RDBM T/O growth achieved 20% + 15-19.99% 10-14.99% 5500 4500 3500 3500 2500 1800 2300 1800 1300 2000 1500 1000 1200 1100 1000 SO CD PS DS Merchandisers

The Top ranked ASM team also wins a TEAM TROPHEY and certificates.

12

EvaluationOnce a distributor is appointed the company generally does not take away business from him, except when the underperformance has been observed over long periods. While evaluating his performance, his targets performance is studied relative to that of other distributors in the nearby area (because growth patterns may by regions)

13

Distribution in Practice (DIP) TrainingThere are proper training programs for the C&S agents as well as distributors. Following are the modules included in the program:

-

Nestle Quality System Good Warehousing Practices (GWP) Good Distribution Practices.

Major aspects of the program include: 1. Stacking as per norms: FIFO basis of Inventory management is used. Stocks are kept in pallets away from the walls. Godown. Stacking is done in an orderly fashion and the different batches are visible. There must be moving space between various stacks.

2. Good Warehousing Practices Security Fire Fighting: Appropriate provisions are made to handle emergency caused due to breakage of a fire. Cleanliness Pest Control Temperature record and maintenance at A.C. Godown Proper ventilation The required Licenses as per the local laws have been obtained. For Eg. Sales tax etc. Transportation: Effective, reliable and quick transport is available to and from the warehouse.

14

Proper Loading / unloading: The labours have been properly trained to ensure that no damage to the goods take place at the time of loading / unloading. Remittance: Timely deposits of remittances are ensured. Proper records are maintained with regard to Sales tax and exemption certificates.

3. AccountingA stock register is maintained to record receipts and dispatches with detail of accompanying documents. Shortages (if any) are accounted for separately. Sales tax and Octroi are handled by C&S.. A separate register is maintained for materials which are meant for free distribution. All the related expenses that are incurred are paid by C&S and are subsequently reimbursed by the company.

4. Handling of Bad Goods:The bad goods are separated and marked saleable or unsaleable appropriately. 5. Temperature control for chocolates: is ensured not only at the time of storage but also at the time of transit.

15

Forecasting and target settingTarget setting is a result of negotiation between the distributor and the company. Mid month targets for the next month are given by the company at around 5 th -10th of a month. These are set for the Sales officers, ASMs and Branch Managers in the hierarchy and driven down by them. At the month end the distributor can negotiate these targets in the range of +/- 10%. The branch manager is responsible for coordinating targets of the factories and the targets of the individual product managers. Confirmed sales set as weekly targets. For a sales officer, the focus is the redistribution targets, also called as secondary invoicing (from cash distributor to the redistributors) For an ASM, primary invoicing ( From C&S to cash distributor) is more relevant. For the company as a whole, primary as well as secondary invoicing as adjusted against back is important. The company is now moving on to a statistical tool called Winters model for demand forecasting .This is done by the SCM and the inventory managers at the corporate levels along with interactions with the sales and senior sales officers. Under the winters model, the baseline demand curve is worked out, that is remove the effects of other factors like sales promotions, unexpected variations like wars etc. on sales. This is done by the sales officer by preparing a monthly log and writing against each month the reason for any exceptional variation in sales, if any. After negating from the past sales, the effect of these exogenous variances , trends are calculated and sales of the next year are calculated. On these figures, the effects of any planned promotions, any foreseeable variations etc, are imposed to get the approximate forecasts. For example normally the effect of a TPP (Temporary Price Promotion) on sales is that of a 150% sales. That is sales of 6 weeks are achieved in 4 weeks. Inventory holding ( on an average 3 weeks of inventory is held) 16

Channel ConflictsEarlier large areas used to be assigned to the distributors and there used to be some scope for confusion or conflict due to overlapping. However, now the number of distributors have increased and there is clear earmarking of the areas as well as markets for each distributor by the company and there is hardly any scope for conflicts based on areas. There are a few sources of channels conflicts like-

A)

WHOLE SELLERSAs discussed above, these are not a part of the formal structure of Nestle Indias distribution network for NCR .They make bulk purchases from the distributors directly thereby leveraging on the margins. Typically the wholesaler gets a margin of about 2%3% from the distributor , of this he retains 1 % and passes on the remaining 2% as discount to the retailer. It is this discount which induces the retailers to buy from wholesalers in areas like sadar bazaar in old Delhi etc. Such sales based on undercutting can be a source of irritation to the distributors who are not supplying to the retailers but are suffering due to selling by the whole seller in their areas. RETAILER AND DISTRIBUTORS SURVEY KAROL BAGH, DELHI Out of the 5 retailers covered, only 2 bought from the company distributor. These 2 retailers are: Bhasin Bakery Shop and Frontier Bakery. The other 3 retail outlets namely Cool Palace, Ashoka Stores and Sindhi Corner are purchasing from the wholesalers in their market.

17

The distributor for the area is Duggal Enterprises, who also looks after Patel Nagar, Rajinder Nagar & Nariana. The main issue in this area of survey has been the prominent presence of wholesalers who sell Kit Kat to the other 3 retailers. It is important to note that these wholesalers buys the chocolates in bulk from the distributor and sells to these retailers at a better margin as compared to the former.

Reasons to buy from the distributor:The 2 retail outlets have a good business and they purchase in ample quantities from the distributors. They have the shelf space to showcase the company offering and thus the company (distributors) provides them with a display in the form of discount of Rs.150 every month. This Display discount varies in the range of Rs.150-400 (depending on the sale of the retailer).

Distributors provide these people with good service, replacement of spoilt products, occasional credit and maintain good cordial relations with them. Since these people buy in good quantities (2-3 cartons), they usually dont face a stock out. Thus the system of 1visit per week suits as long they are provided with their requirements on call, occasionally in case of urgent need. The big outlets are also provided with dispensers frequently as compared to the smaller shops in the same market. (same is the case with fridges)

Reasons to buy from the Wholesalers: The wholesalers, as compared to the distributors, provide higher margins.

18

These small shops can purchase the minimum required quantity as and when needed. There is a convenience factor as there is order on call facility, all round the clock.

B)

INVASION BY SALES OFFICERA second type of conflict, though rare, is on account of invasion of anothers sales

area by a companys sales officer under pressure of sales target. An example citedwas when the S O of Haryana dumped goods by giving discounts to a distributor of Rajasthan under desperation to meet his sales targets. This has to be worked out at the companys end.

19

Nestle Distributor Survey - GhaziabadName of the Distributor: Kumar Brothers Kumar Brothers is the sole distributor of Nestle for District Ghaziabad, Uttar Pradesh. Beat Plan for the Distributor: The distributor has segregated complete Ghaziabad District into 6 divisions (6 working days of the week Tuesday is an off). The sales force of the distributor is divided into 3 heads namely: Milk Products Chocolates Other Products

All the 3 teams visit the retailers once in a week; the days of visit have been specifically kept different. The collection is done by the same team for the goods supplied. The sales force is complimented by a weekly visit to the district by the sales executive of the company. The idea behind the visit by the company personnel is to supplement the lags in the distribution by wholesaler and in certain specific cases to push extra stock in the market; the mission is achieved by allowing higher margins to certain prominent retailers.

Credit PolicyNestle India Limited: The distributors are termed as Cash Distributors because the company charges the distributors before the stock is delivered; the company has connected the distributor online and the transactions happen online. The Distributor: The distributor sells goods on credit; the period of credit ranges from 1-2 week. The wholesaler allows discount of 1% on cash payment (policy followed by the wholesaler).

20

Stock Policy:As per the company regulations the distributor is supposed to maintain a stock of 3 weeks; the distributor maintains a stock of 3 -3.5 weeks in monetary terms it equals to Rs. 30 lakh for the distributor. The stock is formalized by the company; the dealer can negotiate on 3-4 end days, the stock policy is formed for the month. The distributor to push in slow moving SKUs clubs them with fast moving SKUs for the retailers. DUMPING: the company dumps significantly on the distributors, the distributor has to mange the supply by the company. The distributor has some resentment on the issue but has to content with it, the result is the stock gets blocked and distributors stores it till the expiry and then return it; result: cash crunch for the distributor and loss for the company in the long run.

The UndercuttingThe major problem that the wholesaler has to contend with is the problem of undercutting; Ghaziabad is one of the closest places to the main distribution market Delhi and that results in retailers buying from Delhi at higher margins which wholesalers are incapable of providing. The wholesaler contents with this as a problem with every company so it is a part of the market.

Lead PeriodWholesaler: The lead periods in providing stocks to the dealers differs from the SKU and quantity ordered; some SKUs are delivered correspondingly with taking order but some are sent from the warehouses. A higher quantity ordered has to be replenished from the warehouse.

Company: The stock from the company is provided every month but company keepsreplenishing stocks at the requests of the distributors. It takes 2 days for company to replenish stocks.

21

Return PolicyThe company follows a policy of return when the product has past its expiry date, damaged or has a defect; the replenishment is done with cash and happens at the end of every six months.

Return On InvestmentsThe company does not gives any guarantee to the distributor with regard to returns on his investment which is in line with the market credentials of the company; the distributor has invested Rs. 60 lakhs in the whole business.

Storage PolicyThe distributor maintains Cold Storages and Deep Freezers for the storage of the products; the investment in infrastructure is considerable for he company to maintain such infrastructure.

Sales ForceThe company does not have a policy to train the staff of the distributor, the distributor trains his own sales force. The remuneration and all other expenses are borne by the distributor.

Promotion PolicyThe company follows a policy for consumer promotions but as regard the trade promotions they are scant rather negligible, the promotions put in extra pressure to push more quantity. The problem of maintenance of the promotional item is considerable and takes in huge energies and money.

22

Retailer Survey DelhiFor the purpose of this project we had visited retailers. Given below are some of the details which we have gathered from them. Rana Partap Bagh Retailer 1 This retailer gets his supplies from Distributor of Nestle and also from the market. He is satisfied with the distributor as he gets his supplies from the distributor at his doorstep and does not need to travel for the supplies which he is sure he will sell during the week. The distributor comes once in a week for supplying the ordered stock. The stock order is taken a day before the supply is made. But he prefers the wholesalers when in between the week, his stock gets exhausted and he needs more supply. As the distributor will visit him once in a week only, except in special occasions, i.e. when the order in mid of the week is a big one. From the wholesaler retailer also gets discount larger than what he gets from the distributor. One main advantage that the retailer has here is that he can get a replacement of spoiled stock. Although, distributor sometimes forces to keep other SKUs as well. The main point to note in this retailers SKUs is that he dose not keep 4 fingers and 2 finger kit Kats because of the selling price reason.*** As for competition from Cadburys he is satisfied with them as well, and makes not much of a distinction between the two distributors. Retailer 2 This retailer has a different point of view all together, he dose not take his supplies from the distributor. Rather he prefers to go to the market ie, wholesalers and buy what he needs. He himself visits Sadar Bazar and buys the SKUs according to his own requirements.

23

The main reason for doing so is that he gets discounts from the wholesalers, and thus a better margin for himself. He visits the wholesaler twice in a month and gets his supplies in bulk. Here he dose not have to be bound to take, and neither is there any pressure to keep any other SKUs of Nestl. Point to note here is that this retailer is quite happy and content with Cadburys Distributors. He is ready to give his order to him as he is getting good margins and dose not really need to visit to the market. Ashok Vihar The retailer of Ashok Vihar also has some opinions, which match to that of the Retailers of R.P.Bagh. He dose not take his supplies from the distributor, but from the wholesaler. with higher margins left for himself.

24

ContactsNestle1. Karanjeet Singh- Ex-Sales Officer, Nestle, 9811772225

Distributors1. Kumar Bros.Mr. Lalit Kumar Distributor, Ghaziabad 150, Durga Tower, Gound Floor, Raj Nagar, Ghaziabad 2. Duggal Enterprises Karol Bagh, Patel Nagar, Rajinder Nagar & Nariana.

Mr. Rajan R 505 New Rajinder Nagar

RetailersKarol Bagh Cool Palace, Ashoka Stores Sindhi Corner Frontier Bakery Bhasin Bakery Shop

25

Observations1. As seen earlier, the wholesalers are a cause of conflict in the distribution system. However, the company does not objects to the unwarranted existence of wholesalers as they serve as means to improve the distribution of companys products and the undercutting done by them helps to push up sales in the long run at times. An example in this context is that of Nestls clairs. The sales of clairs were disappointing till 1998 in spite of various attempts by the company to alter packing, size, prices etc. Then the company offered the wholesalers QPS (Quantity Purchase Schemes) margins ( or even T.V.s) on bulk buying by them over a period of time. They pushed the product into the retail channel and once sold at the retailers end, repeat purchases followed. Henceforth the official route set in , the distributor could ensure repeat sales by building upon the previous successful sales of clairs by the retailer. 2. The company introduces contests to motivate their channel partners regularly. In 2001 the company had launched a contest Khulja Sim Sim - Supper awards for super achievers similar to Proud to be Nestle. 3. Training of Sales force of Distributors should be taken over by Nestle to ensure optimal performance. 4. The company dumps huge stocks of slow moving SKUs to achieve targets, but in the long run, it results into dissatisfaction of distributor and losses for the company. 5. The selection of Distributors is a very crucial decision for the company. A lot of time and effort is spent to train them. Also, they are not frequently changed.

26