Sunray India Limi

Class discussion
a Limited
 Sunray India Limited
Sunray India is a multi-national tea marketer with a strong 23% market share in India.
As the distribution eco-system had not developed when they entered the market in 1953, they had establ
directly to retailers.
Sunray India had 1800 depots pan India each operated by company sales executive
All other Tea marketers had moved to the distribution system adopted by FMCG companies but Sunray In
Ajit, CEO Sunray India called for a meeting of his functional heads to take a decision on migrating to the di
“We are running this business and believe we know how our direct distribution system compares with the
pushing me to migrate but I am keeping an open mind and would like the data and your analysis of the lon

Madhu (Sales Head) responded with “I am strongly in favor. Our distribution in interior markets is way bel
are not operating credit and this is eroding our competitiveness. We may be losing anything between 5%
Operation. In some cases it leads to higher Opex due to additional servicing of high volume outlets. Also it
is getting de-motivated with no career growth”

Keshav (Finance Head) “I guess I am in favor of migration but would like to know the proposed margin stru
Francis (HR head) “Our admin operations are bursting managing this sales force and our annual medical in
would be unfortunate to sack our sales team. The age profile will limit the job opportunities. I am not sure
make sense we should be well prepared for a seamless implementation as we cannot afford bitterness or
work out a severance plan for the team and c) have a dialogue with the team and work out a detailed plan

HR

1)      Financial implication of moving to outsourced distribution

a.      Do we gain or lose?
b.      If we are losing in financial terms should we still push ahead
2)      New distribution model
a.      How will it help in increasing sales?
b.      Are there risks involved?
c.       What should be the profile of distributors
d.      Operating terms and Margin structure
e.      Supervision and control
3)      What happens to the sales man-power? How are we going to manage the pain of mass retrenchment
4)      What about the administration process, controls and audit points for the new distribution system in c
n India.
ket in 1953, they had established company own depots all over India and redistributed

utive
G companies but Sunray India held on to the depot system
ision on migrating to the distribution model. He started the meeting with his observation
n system compares with the third party distribution system. The board is continuously
and your analysis of the long term perspectives to persuade me to take a decision”.

interior markets is way below par and I can’t keep opening depots in those towns. We
sing anything between 5% and 7& of sales volume on account of our ‘No-Credit’
high volume outlets. Also it is a nightmare managing such a large team that is ageing and

w the proposed margin structure and operating terms before I can comment on it”
e and our annual medical insurance cost is going out of control. That notwithstanding it
opportunities. I am not sure if the migration will help financially at all. Even if it does
cannot afford bitterness or blocks in the way. We should therefore a) phase it out b)
nd work out a detailed plan.

pain of mass retrenchment

ew distribution system in comparison to existing
 Annexure-1
Comparison of Depot operations and OSD
Sunray Other Tea marketers Impact
Depot/Distributor 1800 2700 1.5
Company Sales executive 1800 360 0.2
Runner 1800 nil 100%
ASM 180 60 33%
Zonal Head 20 Nil 100%
Regional Head 4 4
Margin to distributor NA 7%
Margin to Retailer 10% 10%
Commission to Sales executive 0.30% NA
Own Stock at Depot 10 days NA
Paid stock at Distributor NA 7 days
Sales Tax 10% 10%
Market credit NIL ( Salesmen collected cash 3 days to 10 days
same day as billing)
Retail stocks 15 days 20 to 30 days
Capex Average of Rs.2 lacs per store. Admin and Vehicle operation
Fully depreciated in all stores. subsidy of .5% on turnover.
 Sunray : Depot Turnover dispersion
Depot turnover Depot Opex ( Rs.
range/Rs. Lakh /month Number of depots lakhs)/month
9-Oct 800 0.75
Nov-15 600 0.9
16-20 300 1
25-40 100 1.1
Total 1800
 Case facts Summary
Sales All Markets Not extending Credit , impacting retail
stocking and
Leading to support
Sales Loss assessed at 5%
Smaller towns Low service frequency, impacts sales and
relationship
Low reach. Outlets/towns not serviced?
Higher Opex
Diluting Sales Focus Focus on sales and administration
Manpower Keeping SE motivated
Promotions??

Finance Would like to know the cost between 2

systems before taking a position

HR Issue: Managing large workforce Administration is an issue

Providing support for large/ageing team
Sensitivity of retrenchment
Medical and other manpower benefits is a
huge operation
Worried about Job loss
How to break the news
Impact on Morale
Sunray India Limited
What is this case about
What do we want to discuss/take out
1 Depot system Cost analysis
Identifying the parameters for evaluating the 2 channel business mo
distributors.
2
3 Comparing the 2 channel business models-----direct ( own depot) dis
4 Distribution Eco-System
Appreciation of the flexibility and open and hidden advantages in the
2 channel business models-----direct ( own depot) distribution with third party

direct ( own depot) distribution with third party distributors.

dden advantages in the 3rd party distribution
Sunray India Limited-What is the Opex of Sunray India as a %
Depot turnover Mid- point ( Rs. Number of Depot Opex Turnover
range/Rs.
9 to 10Lakh Lacs)
9.50 depots
800 ( Rs.lakhs)/mont
0.75 ( Rs.lacs)
7600
11 to 15 13.00 600 0.90 7800
16-20 18.00 300 1.00 5400
25-40 32.50 100 1.10 3250
Total 1800 24050

What is your inference from this working

Without factoring variable redistribution cost in distributor system and capex/replacement cost in depot system
y India as a % of turnover for each turnover slab and in the aggregate
Depot Opex Depot Opex Depot Opex Opex as a % Distributor
Fixed
600 Variable
23 ( Rs.lacs)
623 8.2% 532 Margin
540 23 563 7.2% 546
300 16 316 5.9% 378
110 10 120 3.7% 227.5
1550 72 1622 6.7% 1683.5
0.9011944444

ment cost in depot system

n the aggregate
Sunray India Limited
What are the parameters for comparison
Sr. No
1
2
3
4
5
6
7
8
9
10
11
ray India Limited
What are the parameters for comparison
Factor Criticality
Operating Cost, capex High
Nature of cost and evaluation of cost High
Sales High
Service High
Market control & market development Low
Flexibility to expand reach/servicing. Flexibility to add products High
Accounting & Auditing convenience and control Low
Manpower Management Medium
Logistics Low
Working capital Medium
Impact of Change in Sales tax incidence point Medium
Sunray India Limited
Can we attempt a quick comparison across the various parameters

Company Depot
a) Operating Cost Fixed Cost
b) Sales Sales loss between 5% and 7% due to
zero credit operation
Personalintouch
the depot
c) Service Relationship: of
company
d) Market control & market development For company: Control over
redistribution.
Low flexibility toSystematic market
e) Flexibility to expand reach/servicing. step up frequency
Flexibility to add products of distribution. Adding new products
--- Flexibility may or may not be
there.
Depends on current capacity
utilisation and additional load.

f) Accounting & Auditing Exponential increase in number of

transactions,
accounting/banking/auditing/stock
verification.Transaction with 15
million retailers

g) Manpower Management Own manpower to perform regular

redistribution work. Low value
add.Large and unwieldy manpower.
Over time difficult to design career
growth and keep them motivated.
Cost also keeps going up

h) Logistics Need warehousing/insurance/

transport/returns/damages
management in 1800+ locations

What are the working capital and sales tax implications when Sunray mig
What will they gain and what will be the net margin cost assuming
Parameter Company Depot
i) Working Capital ( WK) Retail stock of 15 days
k) Effective margin payout 7% -.57% ( WK impact)= 6.43%
 3rd party distribution Remark
Variable cost Depots with low turnover may be operating below break-
even andturnover
Monthly be a dragison financials.
Rs.240 Financial
Crores. break-even
Assuming is a
contribution
Relationship: Marginally inferior to margin at 50%
Distributor impact
system hasof sales
huge loss is loss of monthly
advantage.
depot
A weaksystem
or indifferent distributor can
create sub-optimal
High flexibility distribution
to open new markets, Within a range when you add more products in the depot
increase service frequency and also system there may be no incremental redistribution cost.
expand product/pack portfolio . ( ask And the viability of depots with low turnover will improve.
distributor to augment resources or Depot system does have its advantage in a rising turnover
get new distributor) scenario….

What about turnoverr growth from price increase??

Bill to distributor on advance

payment terms. Transaction with
3000 parties

Lean/supervisory manpower to
direct the distributor and focus on
key activities such as BTL and
demand stimulation

Need warehousing/insurance/
transport management in 30+
locations. Returns/damages also
managed thru distributor

tions when Sunray migrates from depot system to distribution system?

margin cost assuming they pay the same 7% to the distributors
3rd party distribution Remark
Paid up stock at distributor- 7 days This makes for additonal working capital. Assuming cost
Retail stock at 20 days to 30 days. of funds at 12%, this benefit can be quantified at 0.57%
Additional discussion point
other companies
Impact of Price increase

0.005666666667
 Sunray India Limited- Cost Analysis on Migration fro

Depot Number of Depot Opex Turnover Depot Opex Depot Opex

turnover
9.50 depots
800 ( Rs.lakhs)/month
0.75 ( Rs.lacs)
7600 Fixed
600 Variable
23
Mid- point (
Rs.13.00
Lacs)/ 600 0.90 7800 540 23
month
18.00 300 1.00 5400 300 16
32.50 100 1.10 3250 110 10
Total 1800 24050 1550 72
Capex replacement cost under Depot
Redistribution cost under Distributor syst
Total savings on migration to distributio
What are the other savings
Manpower cost savings working
Reduction in Manpower 1200
CTC/ annuum ( Rs.lacs) 5
Savings month (Rs. Lacs) 500.0

Sales 5% increase in Revenue Impact in 1202.5

sales
Assume 40% Rs lakhs per
Contribution 481
contribution month
Impact in Rs lakhs
margin per month
alysis on Migration from OWN depot to Outsourced distribution
Without WK factor With WK factor
Depot Opex ( Distribution System Net differential between Distribution System
Rs.lacs)
623Fixed :Margin 532 payout (Rs. 2 systems91 (Rs. Lakhs)/ :Margin 489
payout (Rs.
+ variable Lakhs)/ month month Lakhs)/ month
563 546 Depot Opex- 17Distribution 502
316 378 system-62opex 347
120 228 -108 209
1622 1684 -61 1546
ex replacement cost under Depot/month 60
bution cost under Distributor system/month 120
avings on migration to distribution system -122
tion
With WK factor
Net differential between
2 systems134
(Rs. Lakhs)/
month
62
-31
-89
76
60
120
15 0.0006438669439
What is the break-even point between the 2 systems
Let us derive the equation
And draw the graph…

Depot

Fixed Cost
Turnover + Small
Range ( Rs.
variable
Lacs cost Depot Fixed cost
9.50 ( Rs.Lacs)
#REF!
13.00 #REF!
18.00 #REF!
32.50 #REF!

Break-even point
.003X+.95=.07x .95=.67x
x=.95/.67 x=
14.17910448

Turnover ( Rs. Lacs)

3
6
9
12
15
18
21
24
27
30
33
etween the 2 systems

OSD

VariableRange
Turnover cost
Variable Cost ( Rs. Lacs Variable Cost
0.30% #REF! 9.50 7.00%
0.30% #REF! 13.00 7.00%
0.30% #REF! 18.00 7.00%
0.30% #REF! 32.50 7.00%

Depot cost OSD cost

0.759 0.21
0.768 0.42
0.777 0.63
0.936 0.84
0.945 1.05
1.054 1.26
1.063 1.47
1.072 1.68
1.081 1.89
1.19 2.1
1.199 2.31
Turnover ( Depot costOSD cost
3 0.759 0.21
6 0.768 0.42
9 0.777 0.63
12 0.936 0.84
15 0.945 1.05
18 1.054 1.26
21 1.063 1.47 1
24 1.072 1.68 Cost ( Rs. Lacs)
0.9
27 1.081 1.89
30 1.19 2.1 0.8
33 1.199 2.31 0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
0 5 10 15 20 25 30 35

Depot cost OSD cost

Turnover ( Rs. Lacs)
30 35
 Sunray India Limited

1) what happens to markets the depot is not breaking even??

2) What happens where the depot is operating well above break-even

3) If it is not viable for company, how will it be viable for distributor

Can he afford to give credit if viability is an issue
Will the operating cost come down or go up for the same market when distributor takes over di

4) Partial /Phased Migration:

Can also take a call to continue with Depots where turnover is > Rs.20 lacs ??
n distributor takes over distribution??
 Sunray India Limited

1) what happens to markets the depot is not breaking even??

Distributor viability can be an issue particularly with extra credit
Shared resources/ Shared redistribution can mitigate this issue
However cant generalise -- issue in some and possibly no issue in other markets?
How to handle this
Approach Distributors with large portfolio
Offer manpower/Opex subsidy in identified markets for a defined period of time or till turnover increases to a de
Fixed+ variable margin structure for a more equitable and effective channel value proposition construct
Start with a marginally lower variable margin than market benchmark
Variable margin saved can be ploughed back as a fixed subsidy towards to distributors irrespective of turnover

2) What happens where the depot is operating well above break-even

Partial /Phased Migration:
Can also take a call to continue with Depots where turnover is > Rs.20 lacs ??
er markets?

or till turnover increases to a defined level

proposition construct

utors irrespective of turnover

Manpower Perspective
Retain 360 top executives for managing distribution
Balance??

Can we appoint the Sales Executives as the distributors

Will it work? Risk factors?

Timeline/phases for migration

Start with towns where turnover is less than Rs.15 lacs

Allow company executive the first choice of taking up distribution in the small towns??
 Learning

1 Understand the real value of 3rd party distributor

Third party distributor has unmatched advantages
Flexible
Scalable on variable cost model
Better on Market service -- local relationship and credit
Shared fixed overhead gives huge cost advantage
Entrepreneurial approach makes for acountability , risk taking and operational control

2 Understand the cost structures

3 Makes a case for evaluating if distributor margin should be simply variable or fixed+ variable
ed+ variable
Channel Design
§Performance - Objectives
Parameters
§Reach
§Cost
§Service
§Flexibility
§Scalability
§Minimise Channel conflicts
§Minimise Transaction Cost
§Competitive Benchmarking
§Continuous Appraisal
Channel Design -Process
§Effectiveness — How closely does the channel design address
requirements?

§Coverage — Can the customer find and appreciate the value in

§Cost-efficiency — Can the company justify a trade- off in cost-e

effective- ness and coverage because of the multiplier effect tha
impact of the other marketing variables?
§Long-run adaptability — Can the channel design handle possib
incorporate emergent channel forms? Competitive Moves? Cha
behavior/expectation
§ Competitive benchmarking: Parity/exclusivity/Dominance. Co
 design address customers’ stated and unstated

ciate the value in a firm’s offering?

ade- off in cost-efficiency to gain greater strategic

ultiplier effect that distribution has on increasing the

gn handle possible new products and services and

tive Moves? Changes in Customer

/Dominance. Competitive Share analysis

Assess What
§What service Customer
attributes do the targetwants
customers value?
§How can we use the differences in preferences to segment cus
How well do the available channels meet the needs of the segm

( Secondary Channel partner also a customer)

ers value?
s to segment customers with similar needs?
eeds of the segments?
Channel Design
§Align channels - Objectives
with the overall competitive strategy, by:
•Designing channels from the market back, so the channel activ
the target market.

•Creating barriers to competitive response. (Locking in the best

•Enhancing the delivery of superior customer value. ( Service fre
•Channel functions are the basic building blocks of the design pr
eliminated, they can be combined creatively to reduce cost and
dispersed among several different players.
•Invest in learning. Experiment..
•Translate strategic choices into programs, projects, and near-te
monitor- ing channel performance.
rategy, by:
he channel activities meet the anticipated requirements of

cking in the best distributors and launching Key retail

alue. ( Service frequency, Same day delivery, stock rotation
s of the design process. While functions cannot be
reduce cost and to improve responsiveness and be

ects, and near-term plans and establish controls for