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HUL’s rejigged rural distribution network March 15, 2009

Posted by Ramnath Rangaswamy in Business, Consumer Goods, Emerging Markets, India, Indian Economy, Logistics, Supply Chain.
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There was a news item, sometime in January 2009 about HUL (Hindustan Unilever) rejigging it’s rural distribution network.

Distribution networks are modified and tweaked to be in line with the market reality and company goals. When growth in urban areas was tapering, FMCG companies started concentrating on rural markets. In line with this, FMCG companies modified their distribution structure to be in line with this strategy and increase rural distribution.
Similarly, when Modern Retail chains were setting up shop in India companies modified their distribution strategy to serve them.
Companies will modify their distribution channels when VAT is implemented and CST% goes below 2%. When CST is reduced the necessity of maintaining a depot in each state vanishes. Companies will then rejig their distribution networks.

This latest change by HUL, in my view is to make the distribution channel more efficient and reduce costs.
HUL has removed one layer called the Star Stores.
HUL has also reduced the margins of the Rural Distributors by 2% from 6.76% to 4.76%.

What is the change in the distribution network.

Before the change the distribution network might have worked like this.
The RDs would have placed orders on depots and would have been delivered stocks from the depots. The RDs would have then supplied the Star Sellers based on a fixed route schedule. The Star Sellers in turn would have serviced the retail outlets in each village.
What will now happen is that the RDs will have to service the retail outlets previously serviced by the Star sellers.

How will the RDs cope the situation?

Here is how the RDs will cope with the situation.

  • RDs will start milk runs: What this means is that the RDs vans will start from a base town (the town in which the RD is located) loaded with stock. It will travel on a particular route selling to retail outlets on that route (these retails outlets would earlier have been serviced by the Star Sellers). The route will typically end at the base town itself.
  • For village clusters that are faraway from the base town, the RD may retain the Star Seller, replenishing the Star Seller’s stocks on a regular basis (once a week or once a fortnight). The Star Seller would continue to service the retailers as before.
  • Wholesellers might be appointed. Instead of Star Sellers, the RD may sell to wholesellers in that area. The retail outlets would come to the wholeseller to buy their stocks/supplies.
  • The RD may have his seller who takes visits retail outlets for 3-4 days and takes orders. These orders are conveyed to the RD who despatches to the seller, the stocks. The seller then spends the balance of the week 2-3 days supplying the stocks and collecting the cash.
  • Some retail outlets will be dropped from coverage. The dropped outlet will have to depend on the wholeseller and buy from him.

Where and how is the value being unlocked in this whole rejig of HUL’s rural distribution network?

How will the RDs manage with lower margins?

  • It can be reasonable assumed that the RDs will give a better quality of coverage to the rural outlets. This is because they would be covering the outlets directly. The calls on the retail outlets will be more reliable (i.e. same day every week), credit would be given to the retail outlets, quality of execution of promotions will improve and visibility and stock weights will improve. With better coverage, business will increase. This will help the RD get more margin money (on an absolute sense) and reduce the fixed costs per call.
  • Also, RDs will have a larger area and hence the fixed cost of distribution will be distributed over a larger number of stores. This would reduce the cost of coverage per store.

One thing you can be sure of.. this is not the last distribution rejig you have seen!

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Comments»

1. Shivaji Prasad - April 11, 2009

This is a very good article on Network and Distribution optimization . Do we have a particular date from when the CST would actually be reduced to 0 % .
There are many MNCs (Retail/FMCG/ Auto / Garments ) in india who have a similar supply chain . Are they also looking for consolidation in this pattern on pan india level . Any clue if these companies are using any n/w optimization tools for these kind of consolidation .
The reson i ask this is bcos i am a SCM consultant in South east asia and we have been optimising the network of many differen companies using our tools .

Rgds

streamlinesupplychain - April 12, 2009

Hello Shivaji!
The date for reducing CST to 0% has been constantly changing. The tentative date for CST to get to 0% is April 2011 as the Central government has postponed the reduction of CST from the curent 2% to 1%.[ see this url- http://www.business-standard.com/india/news/centre-defers-cut-in-cst-rate-to-1april/354066/%5D However, as CST falls to 1%, companies would start consolidating warehouses. This is because cost of operating a warehouse would usually be around 1%, in case of Pharma, FMCG.
Companies use networking tools and heuristics to optimize the network.
Hope this helps.
Regards,
Ramnath

Neeraj Pahuja - July 7, 2009

Hello Shivaji,
I am a SCM consultant in India. I am frequently coming across assignments of Redesigning the distribution network because of changing tax structure. I am currently recommending ILOG Logicnet or CPLEX. Do you have some product useful in this area? There could be a possible opportunity for collaboration. You can reply me at pahuja.neeraj@gmail.com or call me at 9892074180. Thank you Neeraj Pahuja

Vasant Agarwal - March 9, 2011

Hi Shivaji,
I have some excellent products for rural India
that need your distribution expertise. Am based in New Delhi.
Please call me at 9958960437
Thanks
Vasant Agarwal

2. The rural game | The Marketers - March 17, 2013

[…] network. (For those interested in knowing more, here's a very informative article about HUL's rural distribution) In recent times, marketing firms have ramped up their rural distribution through innovative models […]


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