Answer Happy

Case 24.3 N-JOY TOBACCO COMPANY* Aiming at Best Practices in
Distribution "Smoking is injurious to health". a warning punch
line, the statutory requirement that all tobacco manufacturers
should print on all tobacco products leaving their factory. The
warning is not deter- ring the smokers as is seen from the
increasing consumption of cigarettes in the country. India is the
second largest smoking market in the world consuming 950 billion
sticks per year. The products include biddies, cigarettes, cigar,
cheroot, and so on. Among the cigarette smoking countries in the
world, India ranks eighth, consuming 102 billion cigarettes per
year. The cigarette industry in the country is growing at the rate
of 3.5 per cent per year. An interesting feature of the cigarette
industry is the presence of a wide array of brands. There are four
major manufacturers of the product in the country. The Indian
cigarette industry is market- ing over 160 brands across the
country. Out of the 160 brands, 45 brands come from N-loy Tobacco
Company (NTC) Ltd., which is one of the leading manufacturers of
cigarettes in the country. These 45 brands together constitute a
wide product spectrum offering varied prices, quality and sophisti-
cation to suit the different tastes and income levels of multitudes
of cigarette users. NTC has a sales er of over INR 50.000 million
and comman ds nearly 50 per cent of the cigarette market in the
country. NTC is facing stiff competition in all the market
segments. The management of the company believes that the survival
of the company depends on brand management supported by an
effective, efficient and innovative distribution chain. For gaining
a competitive edge over their rivals, the management has identified
three goals for the distribution supply chain:
1. To make available 45 stock-keeping units (SKUs) at the 1
million retail outlets to reach 50 million smokers
2. To ensure freshness of stocks- product shelf life 2
months
3. Operating a cost-effective logistics supply chain through the
proper management of critical cost elements such as inventory,
freight and warehousing.
TC currently has four factories of their own. In addition, they
subcontract production to five other parties. Besides their own
network of marketing offices, they service the clients through
their wholesalers and retailers. The movement of goods from the
factories to the ultimate consumer 15 explained in Figure 24.3.1.
TC provides services to its consumers through a network consisting
of its own marketing offices, which control the channel members,
such as wholesale dealers. wholesalers and the retailers. Marketing
set-up Regions- + Regional Managers Branches- 20 Branch Managers
*This case study was prepared by Prof. V.V. Sople for classroom
discussion. Dealers NTC is having over 750 exclusive dealers spread
over the country, who only deal in NTC products. They get the
material from the C&F god owns as per the instructions of the
branch office they are covered by. As the percentage commission on
the sales is very low in the cigarette industry, these dealers work
on sales volumes. They control a number of wholesalers in the
region in which they operate. The exclusive dealers own a fleet of
delivery vans for distributing the products to the wholesalers.
These dealers also maintain a team of cycle salesmen who directly
interact with retailers for getting orders, organizing supplies and
collecting payments. Sixty per cent of the supplies are made
through the cycle salesmen directly to the retailers and the
balance 40 per cent through the vans to wholesalers Wholesalers
Wholesalers get their materials from the NTC dealer through the
dealer's vans. 'They supply the goods to the retailers twice a day
through three or four wheelers. The van driver acts as the salesman
and payment collector. The material is supplied against cash
payment and no credit is offered to the retailers. The investment
capacity of the wholesaler is 10-20 days. To control freight the
focus is on distribution route planning. On an average the van
salesmen make 4 million calls per annum to attend the retailers
Retailers They are the last link of the distribution channel
and number over 10 million. Retailers generally have an investment
capacity of I or 2 days. The requirement IS small, but need high
frequency Sup. 406 Logistics Management plies. They are attended by
8000 cycle salesmen and 1000 supervisors making 84 million sales
calls and 6 million merchandizing and supervising calls per
year.
The Marketing and Manufacturing Interface
The role of the branch offices is crucial in the coordination of
field requirement with factory supplies. In the distribution chain,
the dealers place the order on the branch office. The dealer gets
the requirements both from the wholesalers and retailers. The
branch office consolidates the dealer's requirements, which is
conveyed to HO (marketing) for all India consolidation in order to
prepare the raw material procurement plan and the manufacturing
schedules. The branch office draws the requirements from the
factory
Measures to Control
For managing 94 million calls per year, the NTL logistics
manager proposes the following measures to manage the supply chain
so as to reduce the logistics cost as a percentage of sales from
2.3 to 1.8 per cent.
A. Sales Forecasting
• The expected forecasting accuracy +2 per cent (the variation
of +5 per cent in forecasting results in stockpile or stock
depletion equivalent to the capacity of a small factory leading to
high carrying cost or lost market)
Bottom-up forecasting
Develop forecasting model
B. Funds Management
No credit sales
Open more collection center Encourage dealers/wholesalers
to have a higher stock-turnover ratio for higher RO] instead of
increasing the commission
Collection responsibility on the wholesaler only
C. Inventory Management
Excise on cigarette is 60%. Hence, post-excise inventory (i.e.,
in-transit/pipeline) of minimum 4 days
The inventory at factory before excise: 6 days
Stocks with channel members (wholesalers): 6 days •
Factory should produce and dispatch strictly as per the branch
orders
Inventory and forecast review once a week
Branches to directly order on factories
Zero time lag between forecasting and ordering
D. Transportation Management
No delays: as a delay of one day in transit time costs INR 30
million as interest cost
Daily interest cost on one truckload or maternal Rs
3500
Long route coverage and no transhipments
Transit time bonus/penalty for transport contractors
QUESTION:
1. Do you agree with the proposals of the logistics manager? If
yes, what resources are required to implement the suggestions?
2. Do you suggest any model for controlling the inventory?
3. Do you agree that NTC should engage the services of a
third-party service provider to bring effectiveness and efficiency
in the system?
4. How will you plan and implement the logistics programmes for
meeting the requirements of the channel members? For effectively
controlling the supply chain of NTC, do you foresee any limitations
in planning and implementation of the information flow.
406 Logistics Management plies. They are attended by 8000 cycle salesmen and 1000 supervisors making 84 million sales calls and 6 million merchandizing and supervising calls per year. The Marketing and Manufacturing Interface The role of the branch offices is crucial in the coordination of field requirement with factory sup- plies. In the distribution chain, the dealers place the order on the branch office. The dealer gets the requirements both from the wholesalers and retailers. The branch office consolidates the dealer's requirements, which is conveyed to HO (marketing) for all India consolidation in order to prepare the raw material procurement plan and the manufacturing schedules. The branch office draws the requirements from the factory. Branch • Stock Requirements Orders. Orders on Factories Dealer Finished Products Marketing HO Consolidate Requirement Manufacturing Programmes Factories Materials Fig. 24.3.2 Manufacturing and marketing interface Measures to Control For managing 94 million calls per year, the NTL logistics manager proposes the following measures to manage the supply chain so as to reduce the logistics cost as a percentage of sales from 2.3 to 1.8 per cent. A. Sales Forecasting • The expected forecasting accuracy +2 per cent (the variation of +5 per cent in forecasting results in stockpile or stock depletion equivalent to the capacity of a small factory leading to high carrying cost or lost market) • Bottom-up forecasting • Develop forecasting model B. Funds Management • No credit sales • Open more collection centres • Encourage dealers/wholesalers to have a higher stock-turnover ratio for higher ROI, instead of increasing the commission • Collection responsibility on the wholesaler only Cases 407 C. Inventory Management • Excise on cigarette is 60%. Hence, post-excise inventory (i.e., in-transit/pipeline) of mini- mum 4 days • The inventory at factory before excise: 6 days • Stocks with channel members (wholesalers): 6 days • Factory should produce and dispatch strictly as per the branch orders • Inventory and forecast review once a week • Branches to directly order on factories • Zero time lag between forecasting and ordering D. Transportation Management • No delays: as a delay of one day in transit time costs INR 30 million as interest cost • Daily interest cost on one truckload of material Rs. 3500 • Long route coverage and no transhipments • Transit time bonus/penalty for transport contractors REVIEW QUESTIONS 1. Do you agree with the proposals of the logistics 4. How will you plan and implement the logistics manager? If yes, what resources are required to programmes for meeting the requirements of implement the suggestions? the channel members? 2. Do you suggest any model for controlling the 5. For effectively controlling the supply chain of inventory? NTC, do you foresee any limitations in planning and implementation of the information flow 3. Do you agree that NTC should engage the system? services of a third-party service provider to bring effectiveness and efficiency in the system?