Studies show that top FMCG companies currently spend between 10-15% of their sales turnover on distribution. The high cost of distribution makes it a significant entry barrier for new entrants in the hyper-competitive FMCG space and a huge competitive advantage for the companies that get it right.

Studies are also unanimous in concluding that automation, through a distributor management system (DMS), is critical to optimizing FMCG distribution for medium and large FMCG companies. A good distributor management system automates and streamlines all distribution workflows and activities, improves supply chain efficiency, eliminates stockouts and overstocking and allows companies to access real-time data from distributors.

The last point – access to timely data – is, in fact, the key benefit of DMSes for the FMCG industry where capital and information must constantly move in both directions: credit and information about products, schemes, and stock from manufacturers to channel partners; payments and information about sales, inventory, returns and claims back from retailers and distributors to manufacturers.

As a recent IIMB report put it, “The distribution channel is powerful for demand activation because the way you set up your distribution channel, the way you interact with small retailers in the absence of mass media is very important.” Clearly, better data = better business.

However, many FMCG sales heads and CIOs we spoke to in the course of developing Bizom’s DMS product were not as enthusiastic about their existing DMS.

“We already have a DMS but it’s not used by the majority of our distributors,” and “We implemented DMS a few years back but we did not see a good return on investment,” were some of the statements we heard. This obvious mismatch between DMS products available in the market and customer needs to force us to look more closely at the distribution ecosystem our clients work in.

IT HAPPENS ONLY IN INDIA

We started by looking at the uniquely Indian distribution challenges that FMCG companies here face. We found that:

1. Retailing and wholesaling in India are dominated by small, unorganized entities – distributors are usually sole proprietors or family businesses.
2. Many distributors have limited financial resources and real estate.
3. Multi-brand distributors are common.
4. Some distributors lack the capital, hardware and expertise to use technology.
5. Discomfort with technology results in a lack of real-time data on orders, inventory, claims and returns leading to stockouts or overstocking.
6. The pressure to reach far-flung rural areas makes it necessary to have several levels in the distribution chain, adding cost and inefficiency.

Some of these characteristics can be traced to limiting factors in the business environment – limited penetration of the Internet, a substandard logistics infrastructure, and poor implementation of laws and regulations. To complicate things further, India has a large base-of-pyramid (BOP) and rural markets which present distinct challenges for distribution.

The good news is that some of these factors are undergoing rapid change in response to fundamental changes in the tax and regulatory environment. The implementation of the Goods and Services tax (GST) is nudging unorganized players to become more lean, transparent and structured. Also, the move towards a more unified domestic market is reducing the complexity of the distribution network by eliminating the need to have warehouses in every state.

However, many challenges still remain in optimizing distribution. Brands must still manage a vast network of thousands of big and small retailers and wholesalers spread out across the length and breadth of the country. They need to juggle the often conflicting needs of different channel partners with limited data and insight into the market. This is where technology comes in.