Colgate Case Study - Restructuring

7/31/2019 Colgate Case Study - Restructuring

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COLGATE-PALMOLIVE

DISTRIBUTION NETWORK

Case Study on distribution network in Karachi

Prepared By:

M SUHAIL ANJUM

(8107)

Submitted To:

Mr. Riaz Khan

(International Marketing)


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In 2004, Taimoor Asim Butt (currently working as Director Sales at CP Pakistan), a member ofUnilevers FERRARI program joined Colgate Palmolive (CP) as Zonal Manager Karachi.Colgate Palmolive, a Rs. 5 billion company in 2004 was losing its sales contribution fromKarachi. In just 5 years time the contribution of sales dropped from 26% to just 14%. It was analarming situation for Mr. Taimoor as Karachi being the biggest city was performing poorly. Thisworrying situation pressed a need to shake up the management and revise the distribution

activities/operations in Karachi.

With a vision in mind, CP Pakistan decided that to achieve positive results, it needed a majoroverhaul in its structure. Distribution formation at that time relied too much on primary sales,while the relations between coverage and trade were not extensive enough to obtain the desiredresults. Thus a new distribution network was needed. Mr. Butt launched a program named,Distribution Privatization, to make his and Companys vision a reality.

CompanyThe 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 ofCompanies. The group currently owns 29 companies and has diversified its businesses in the

areas of Restaurants, Financial Services, Insurance, Paper and Packaging, Informationtechnology, Travel Services, Surgical Instruments, Textile and Media.

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 CPPakistan. Surface Care is the second largest contributor with a share of 24%. Oral carecategory includes the Colgate toothpaste and tooth brushes which offers to around 15% ofsales. The personal care category is small and only contributes 7% to the total business.

Scenario at Colgate KarachiKarachi was the leading contributor in terms of revenue to CP with a share of 26%. The trendfrom the year 2000 saw a sharp decline as its share dropped to a mere 14% up till 2004. Thesystem at CP was being operated manually, which was one of the biggest flaw in the sharpsales decline in Karachi as the distributors operations were not being monitored effectively. CPstarted by analyzing the industry and market through different census reports generated by ACNielsen & MEMRP. They found out that Karachi had a lot more potential than expected because

of huge inflow of people from other (rural) areas of Pakistan in hope of employment, therefore,Karachis geography was expanding and new outlets were establishing i.e. Census reportsidentified, in total 35,000 outlets in Karachi, which was one of the potential determinant ofpossible future growth, therefore, the management compared its own research data withresearch agencies prospecting outlets and come up with the figure of around 18,000 outletsthat were relevant for Colgates business. The deviation in research agency and Colgates ownresearch of outlets was that the agency had incorporated the total outlets of Karachi whichincluded some outlets that were irrelevant for Colgates business because of their nature andtheir data was established on a restricted sample size.


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CP was the market leader and the only way to move forward was to have an efficient andextensive coverage of the market. Thus with some guidelines from CP global head office andthe extensive research, it was established that the distribution model at CP Pakistan had to bere-established.

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

1. Geographic Distribution2. Distribution Operations3. Sales Hierarchy4. Sales Monitoring and Reporting

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

Express Distributor lacked the necessary infrastructure and investment and it soon becameapparent 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 and the Channel distributor was beengiven the responsibility to cover the area of Orangi Town in 2002. However this measure did nothave the desired effect and again in 2003 Colgate hired another distributor named Khalid

Associates to ensure Karachi was covered up to maximum. 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 afterthat, company noticed a serious problem in the distribution when it found out that Khalid

Associates had some under table partners and the company wasnt being informed about suchan agreement of Khalid Associates with any of the partners. This was a clear and straightviolation 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 itsdistribution 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 todistributors were monitored and main emphasis was to make sure that enough was sold to thedistributor so that companys targets were achieved. Focus was primarily to just make sales andachieve its targets in terms of revenue and quantity sold. The system for the calculation ofinventory and revenue was manual and large registers were being maintained.

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

Channel distributor was hired to cover the part of Orangi town. This did not fulfill the needs ofexpanding city and Khalid Associates was hired to cover Lyari and Saddar. Other remaining


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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 Colgatewere 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 onlyone distributor.

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

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

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

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

Sales Monitoring, Target Setting and ReportingTargets were simply set on the basis of sales increase during the year. If there was an increase

in sales in a year then targets for next year would be set at this increasing rate. However, if thesales had declined during the year then the sales targets would be decreased as well. Theincrease or decrease was decided on judgmental basis.

Sales Monitoring was done by the field officers. They were responsible to compile all therecords. There was no automated system present and thus records were prepared manually bythe field officers. Usually manual registers were maintained by the field officers. This practicewas very time consuming and several areas were not visited by field officers for several weeks.

Distributors OperationsOperations of distributors were mainly focused on the volume. Major objective of the distributorswas 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 alsobuy in high quantities. Areas which were far flung or had more travelling time were eithercatered fewer times than necessary or were not catered all together for a week or at times twoweeks, even if the potential was there. This practice by the distributor was mainly to reduce thedistribution expenses.

Companys main focus was also on achievement of volume sales and no emphasis was givenon how, where and which product is being distributed. This gave distributors a free hand as towhere and when they should distribute the product. Also, company only focused on achieving


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the targets set for primary sales and no emphasis was made on secondary sales. And the factthat distribution was in the hands of sister company of Lakson Group, the distributor wasntbeing controlled effectively.

DISTRIBUTION PRIVATIZATION (restructuring)

After analyzing the current system, Mr. Taimoor with his team at CP Karachi decided to makechanges in distribution and channel. It also changed its way of thinking and opt the strategy tocover each and every outlet regardless of the sales contribution of that outlet. This approachwas focusing on the deep penetration in Karachi. The new system was launched on theremodeling of the 4 factors. These factors were geographic distribution, distribution operations,sales hierarchy and sales monitoring and reporting.

Geographic DistributionKarachi was restructured into 3 regions, named as Karachi 1, Karachi 2 and Karachi 3, seeExhibit 2. The restructuring concept was based on selecting and allocating the distributionactivities on the basis of geography, with the policy that one geography will have only onedistributor. 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 ineach area. As a result, 15 distributors are now operating in Karachi. This policy was also in linewith the global policy of No single distribution by International Head office of ColgatePalmolive.

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

Landhi and Korangi

Malir

Shah Faisal

Gulistan-e-Jauhar

Gulshan-e-Iqbal

Rashid Minhas upto Quaid-e-Azams tomb

N.Nazimabad, N.Karachi

Orangi Town

Baldia

F.B.Area Liaqatabad

Saddar, Shahbuddin Market

Defence, Clifton

Jodia Bazaar


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Kharadar, Lyari

Tariq Road and P.E.C.H.S

Sales Hierarchy

Focus was changed and new layers were added to ensure that the management was till retailerlevel and even consumer end. Secondary sales were given priority rather than primary. Three

Asst. Zonal Manager posts were added to the hierarchy and the Job descriptions of allmanagers were modified.

The three Asst. Zonal managers were now responsible for the part of Karachi that was assignedto him (see exhibit 3). As Karachi was divided in Karachi1, Karachi2 and Karachi 3, there wasone Asst. Zonal manager responsible for each division. The three zonal managers reported tothe Senior Zonal manager who further reported to Director Sales.

As Karachi was geographically segmented into 15 areas, the Area managers were increased to15 also; each responsible for his own area and the distributor serving it. An area was furtherdivided into belts. A belt would consist of 2 or 3 sub divisions of the area which were catered byField Officers. For example, Defense would be further divided into 2 or 3 belts. Each belt wasserved by a field officer.

Field officers were increased to 45. This helped increase the service level. Field officers weremade liable to look after investment of the distributor, coverage, product availability, productvisibility. He was also responsible for stock management and coordinating merchandisingactivities. Field Officers adopted two methods to visit the retailers. Usually field officers would goindependently to retailers to monitor distributors activities and second method was to

accompany the distributor while he is catering to the retailers or following his PJP.

Sales Monitoring, Target Setting and Reporting

Target Setting

Parameters for target setting were changed and more scientific methods were developed toensure that the company achieves its objectives and also have profitability. Leading indicatorswere 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 SKUs. First annual targetsare established and are then broken down into quarterly and monthly targets. All thesestargets are broken down into targets of zones, areas, belts and distributors. Also thetargets are broken into different SKUs as well. For example if Colgate has a target to


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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 ondifferent SKUs as per their selling potential.

2. Profitability: Another factor was established to ensure profitability. A portfolio ofdifferent SKUs was maintained to ensure that sales generate maximum profitability. Thiswas done to ensure that the SKUs that have more profits are not the only ones that aresold. By selling only small SKUs, volume targets could have been achieved but theyhave 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 setting

Targets are set not only on the basis of past sales and promotions planned but certain otherfactors are taken into account as well. Competitors share and their activities, expected growth of

the industry, socio-economic development in the area, expected increase or decrease in the percapita income levels et cetera are some of the other factors considered while setting targets.

Competitors share and their activities include competitors sales and promotions, advertisingcampaigns, trade offers et cetera.

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

Efforts made to ensure achievement of targets

Yearly targets are divided into monthly targets and then into weekly targets. These targets alsoinclude the sales levels for different SKUs to be achieved. It varies from area and category wisebecause the purchasing trends in each area are not alike. Area Sales Manager is responsible tomonitor these targets on weekly basis. Based on his analysis he is able to take correctiveactions if necessary.

Sales Reporting

To ensure that efficiency increased at all levels a new automated system was installed to reportsales 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 topotential 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 outby distributors.


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In such a system, the order booker carries an ACPAC device with him and enters the data ofeach sales transaction which gets updated in the distributors main office from where the onlineconnection reports the transaction directly to the company. This system helps the company toanalyze the brands current performance on daily basis comparing it with the last periods

performance.

Different reports could be produced which would help monitor and analyze the performance ofdifferent brands and SKUs. Following monitoring reports are being generated from the SnDsystem:

Average SKU per Bill (Exhibit 4)

SKU productivity. (Exhibit 5)

Business Performance - SKU. (Exhibit 6)

POP counting. (Exhibit 7)

Channel wise contribution. (Exhibit 8)

Sales performance of an order booker(Exhibit 9)

Sales targets achieved up to date and any shortcomings in the targets achievement

(TOP sheet). (Exhibit 9) Stock Information.

Sales Monitoring

With the help of new SnD system, certain parameters were also developed to make sure thatdistributors 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 ismeasured 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 totalsales made during a period. (Exhibit 9)

Key improvement areas were identified through these KPIs and appropriate actions weredrafted to increase the profitability. Also, details regarding every outlet and distributor can bemeasured and analyzed through the help of Permanent Journey Plan (PJP). The PJP isupdated on a consistent basis. New outlets are identified and verified by distributors and fieldofficers of the company respectively. Upon verification they are entered into the SnD systemand are incorporated into the PJP.


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Operations

Distributors Assessment

A new criterion was developed to select distributors which would ensure that the right person isselected to help fulfill the vision of the company. Certain guidelines were setup for the selectionof 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 distributors (see Exhibit 10)

Distributors performances were also monitored on a consistent basis to guarantee high levelsof 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 andvolume) 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 companys policy every distributor will have to keepstockings not more than 6 days so that the product should not be with the distributor formore time in order to avoid any issues during launch of promotional campaigns thatswhy the company monitors it on regular basis. (This KPI is given importance in the casewhen a new promotion has to be offered).

4. Maintaining the limits of market credit; as per the companys policy distributorscannot work on 100% credit terms with the market. They have set a limit of 20-25%market credit, which cannot be crossed under any circumstance. One distributor hadbeen discontinued in 2008.

5. Coverage by brand and SKU: Sales of each brands and their respective SKUs interms of weight and revenue.

The above mentioned KPI would help assess the company the performance of their distributorsas well. If one or more KPIs were not up to the mark then corrective actions were taken so thatoptimum levels of service and profits could be achieved. These KPIs also help in assessing thedistributors rewards at quarter or year ends.


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Distributors Profit Margin

Exhibit 11 shows a template through which profit margin for distributor is calculated. Thetemplate helps identify the weak areas which lead to further planning actions to be taken by themanagement. Colgate always tries to ensure that the distributor gets at least 2.5% profits. If thatis not the case then root cause analysis at companys and distributors end is performed to find

out the reasons for lower profits. Changes are incorporated in the system accordingly

Rewards

CP 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 periodicplans for employees.

The basis for periodic awards is the maintenance of Key Performance Indicators by thedistributors while the companys 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 inwhich the salesmen with 100% target achievement and maintaining the KPIs, are beingawarded with an Umrah Ticket plus a cash amount equaling USD 300.

Quarterly & Monthly Awards; Some cash amount along with gifts is given to the salespersonnel performing efficiently.

TrainingTraining and development of staff is an ongoing process. Quarterly trainings are provided to theemployees in areas where they are considered weak following an evaluation. First field officersare 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 bereflected in the next quarters evaluation. The training at Colgate is being done differently fordifferent level of managers or officer i.e. in the training session of sales officers, their areamanagers are not allowed to sit, this is to make sure that the field officers dont feel anypressure of hierarchy in taking part in the session.The company is also engaged in giving trainings to the distributor regarding the effectivehandling of activities and to how to tackle the issues regarding their credit limits in the market,KPI maintenance and how to avoid the issues in ROI.

ConclusionThe restructuring process proved to be a fruitful one for Colgate in Karachi as it is successful to

improve the coverage in Karachi, which helped them increasing the sales contribution ofKarachi to 20% from decreased 14% in 2004. Other benefit that Colgate has reaped from thisrestructuring is of qualitative nature i.e. Colgate has strengthen the relationship bonds with itsdistributors as its the companys responsibility to ensure the profit-to-trade and the requiredtraining needs if its distributors. The focus from manual system is now shifted towards a processapproach that consolidated the sales of the company. Since, this processed approach has beendeveloped into the system, so the company is now focusing on the effective flow of businessactivities. The management believes that constant up gradation of their methods will be required


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to stay in the game. The clear focus to the importance of distribution activities at Colgate can berealized in the statement of Mr. Israr, Customer Marketing Manager, when he said:Now sales dictate what is being required by the brand in terms of marketing and promotions


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EXHIBIT 1

SALES 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


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EXHIBIT 2

DIVISION OF KARACHI

KARACHI

KARACHI 1 KARACHI 2KARACHI 3

Clifton, Defence

P.E.C.H.S., TariqRoad

Landhi., Korangi

Shah Faisal

Malir

Gulistan-e-JoharGulshan-e-Iqbal

Rashid Minhas up toQuaid-e-Azam Tomb

Jodia Bazar.

Federal B. Area,Liaqatabad

North Karachi,N.Nazimabad

Saddar,Shahabuddin Market

Orangi Town

Kharadhar, Lyari

Baldia


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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


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EXHIBIT 4


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EXHIBIT 5


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EXHIBIT 6


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EXHIBIT 6


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EXHIBIT 7


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EXHIBIT 8


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EXHIBIT 9


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EXHIBIT 10


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EXHIBIT 11


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EXHIBIT 11

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Colgate Case Study - Restructuring

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