New Delhi Institute of Management

PGDM (G) / PGDM (M) / PGDM (F)

PGDM 2020-22 Semester-III

End Term Examination, October, 2021
PAPER 2 (SET-A)
--------------------------------------------------------------------------------------------------------------------------------
Sub.: Distribution and Channel Management (Major-1) Paper Code: MM-10
Max. Marks: 30 Duration: 2 Hour
--------------------------------------------------------------------------------------------------------------------------------
Note: There are two case studies (15 marks each)

CASE STUDY 1: DRAGON BATHROOM FITTINGS

Dragon bathroom fittings specialize in chrome plated bathroom fittings such as showers, soap stands, decorative
taps, cloth hangers, and pipe fittings. Dragon fittings is a well-established firm, with a history going back some
five began to expand beyond its original geographical market concentration. Dragon fittings have a well-
equipped factory and warehouse in Coimbatore in Tamil Nadu, and sell their products through a large network of
distributors and retailers all over the country.

In 2009, the firm enjoyed a sales turnover of about Rs75.00crore. About 300 workers at its factory and
warehouse and another 50 in its sales force spread all over the country. The firm has been expanding rapidly over
the past decade on the back of the fast-growing economy and construction sector. The firm plans to double its
sales turnover in the next five years.

The firm designs and manufactures a range of bathroom fittings. The product range stars form chrome-plated
soap stands costing about five hundred rupees, to highly decorative taps costing about two thousand rupees. Put
together, the firm produces about fifty different products and product varieties all under the Dragon name.

The company sells at the higher end of the market and does not concentrate on low-priced products. The firm
competes head-on with other well-known brands such as Koehler and Jaguar. However, being a relatively small
company with a brand name that is not as well-known as its competitors, dragon is finding it difficult to gain
support from its distributors and retailers.

Most of the company’s distributors are multi-brand distributors who sell other brand’s as well as other product
categories. The company has a strong presence in Tamil Nadu and parts of Kerala, but is not well represented in
other states of India, especially in north India. The company has a distributor in almost all cities with populations
of more than 0.5 million and in smaller cities of Tamil Nadu and Kerala.

Most of its distributors also retail with one or several shops through which they sell. Some of the distributors do
not have any retail operations, but sell to smaller retailers in the same city. The company has recruited a sales
force comprising of 40 salespeople and 5 supervisors to manage the sales function. Each salesperson roughly
looks after 10 to 20 distributors. There is a sales supervisor for a region who supervises about 8 to 10
salespersons.

The order cycle starts with the salesperson visiting a distributor to seek orders. The sales person has a duty to
visit a distributor at least once in a fortnight, and to promote sales by encouraging the distributors to order at
least 5 to 10 per cent more than what was ordered for the same product last month. Once the salesperson receives
order from the distributors, it is immediately conveyed to the central office over the phone or fax. The central
office located in Coimbatore receives the purchase order is packed, and sent to the distributor within a week.
Dispatch is through contracted trucks after in voice preparation along with other documents required for sending
the goods.

The distributor typically receives the goods within two weeks of placing the order, though distributors near the
factory would get the goods within a week. Once the goods are received by the distributor, the salesperson has a
duty to collect the payments in the course of another couple of weeks. The company has no strict policy on credit
terms, and typically depends upon the ability of the distributor to pay on time. However, the company has not yet
faced any major problem with tied-up working capital and continues with the lax credit policy. It mostly relies
on word-of-mouth marketing and its standing with end-users and plumbers.

Apart from sending POS displays to retailers, the company does not employ and major promotional activities.
Distributors are given 40 per cent margin for the goods sold which is quite above the industry standard. This acts
as an incentive for distributors to recommend the company’s products to customers who are often plumbers and
architects. However, being multi-brand distributors, most of the channel members are not committed to the
committed to the company. Distributors have to protect their own requirements of attracting customers by
stocking other well-known brands. These brands typically have a faster inventory turnover compared to Dragon.

The biggest problem facing dragon is the lack of a credible and purposive channel information system. Though
the firm receives a constant stream of orders from distributors, the company often has to face stock outs for most
of its product variants. Since the company has about 50 different SKU’s and more than 600 distributors, it is very
difficult to achieve a hundred per cent fill rate for its products. This creates problems with the distributors, since
many of them end up getting far fewer numbers of products than they have ordered. Problems also occur with
the pricing of products. The company follows a freight absorption pricing method with the distributors not being
charged for the transport.

However, since the transportation cost, increase, the company ends up revising its prices almost once in two to
three months. This creates enormous confusion in the system with distributors being charged a higher price than
what they had actually ordered. Also, though the company gives a good profit margin to distributors, there is no
major discount scheme linked to large orders. Nor does it employ other promotional means (such as quoting
dragon brand in large projects). This also creates consternation among the distributors.

At the central office there is only a sales information system which is crudely linked to the production system.
Sales are recorded based on the invoice raised from the accounts department. This is fed to the sales department
which shares this with the production department. This is compared to the sales of a similar product last month
to develop production plans. Raw material procurement is not linked to sales and there have been rare instance
when raw material was found to be short during a busy production’s month.

The middle management monitors this activity to compare the sales and production figures with their quarterly
targets. The company does not analyse sales per distributor, although the accounts department while raising an
invoice for each distributor could-if they wanted-develop such a system. Some if the distributors are not very
active and some perform much more than the average. The top and middle management are more focused on
bringing out better and more attractive designs. The emphasis is on research and development (R&D) and
production. The marketing department is headed by a general manager who also doubles up as the in-charge.

Questions

1. What form of channel information system does the company presently have? (5 Marks)
2. What are the biggest drawbacks of the present system? (5 Marks)
3. Can you design a more purposeful channel information system? What are the main constraints in
implementing a very sophisticated system? (5 Marks)
 CASE STUDY 2 : FOODDELIVER.COM & THE DISTRIBUTION DILEMMA

Fooddeliver.com is a start-up that plans to offer services in the online food distribution market. After a
comprehensive market study spanning five metros and ten other cities with a population of more than one
million, the promoters were convinced about the potential in this market. While restaurants with takeaways and
food delivery who can provide reliable and easily accessible online delivery services linking customers to
restaurants through a telephone number available from their website or a telephone directly and ordered food.
But this often led to offer got a curt reply from the restaurants saying that they do not provide food delivery.

It is to this market that several new players entered offering websites or online-market places that listed
restaurants that provided takeaway/food delivery services and offered other incentives like discount coupons,
advice on food menu, etc. customers could directly order food from these restaurants through the websites or
apps. This proved to be very successful and such online market places rapidly increased their customer base as
well as restaurant tie-ups.

However, these websites (or app) were basically just electronic market places that allowed a search and
transaction interface to their customers. The food was eventually delivered by the restaurant. The delivery time
varied from one restaurant to the other and this led to several customer complaints. In general, while customers
were happy with the food and options to choose from a range of restaurants, the delivery part always
problematic. It is this problem that fooddeliver.com wanted to tackle.

Fooddlive.com planned to establish its network initially in four metros-Mumbai, Delhi, Chennai and Bangalore
and then expand itself to other cities in due course. The idea was very simple; customers can download an app or
visit their city-specific website. The website will list all the restaurants with whom fooddeliver.com will have a
contractual arrangement. From the menus of these restaurants, customers can order food and make payments.
Customers are also charged a specific amount for delivery. Once the customer paid, a guaranteed delivery time is
generated.

If the delivery does not happen within the guaranteed delivery time, the delivery charge is waived off. The
guaranteed delivery time was calculated using a mathematical model that considered the time to cook and pack
the order, distance between the restaurant and the delivery point, level of traffic at the time of order, etc. in fact,
the app only allowed a customer to order food from a restaurant that is within a 10 km radius. While this
restricted the choice, allowed for reliable delivery and consistent service which the company felt was much more
valued by customers than a large choice.

Fooddeliver.com could easily get entry into restaurants across the four metro cities as many restaurants were
grappling with food delivery problems and increasing competition. Foodeliver.com in fact charged 10% of the
order value from the restaurants who also need to complete the cooking and packing of food within a mutually
agreed time period which will then be fed to the computer model to calculate the guaranteed delivery time.
Given the simplicity of the business model as well as the huge benefits being offered to the restaurants.

Within the first two months of floating the firm, foodeliver.com got support from more than 3000 restaurants in
the four metros. This was more than adequate to achieve good geographical coverage to attract customers. Some
of the restaurants that signed up to foodeliver.com were upmarket restaurants that never thought of offering
delivery of their food before. The promoters felt that getting access to more restaurants will not be a major
problem once the operation got going.

The next step was to design and establish the logistical network across the four metros to ensure reliable delivery
of food ordered by the customers. The main issue was ensuring a consistent and 100% fool-proof delivery
system comprising of staff in the ground. At the same time, being a start-up, the company was not in a position
to invest in huge capital expenditure. After considerable discussion within the promoters to possible solutions
were considered:

1.In plan-A, the company will appoint its own delivery boys who will on their payroll. The company initially
planned to appoint 100 delivery boys in each metro, who were paid a salary of Rs.15, 000 per month initially.
The company will also buy their uniforms, two wheelers and special thermos boxes in which the food will be
carried. A team of 20 delivery boys will be supervised by manager and all the managers in the city will report to
the logistics managers of the city. In this model, the revenue collected from both the customer and the restaurant
will go to the company and from this income the company will pay the salaries and other expenditures like fuel
costs and insurance costs.

The revenue will also pay for the interest of the loan the company plans to take for buying the two wheelers and
the thermos boxes. Each delivery boy was supposed to use a smartphone where a special app designed by the
company will be downloaded. This app will give directions about the restaurants from where the orders need to
be collected as well as the details of the delivery location and the guaranteed delivery time. The company will
operate a logistics control Centre in each of these cities.

2.In plan-B, the company will appoint the delivery boys as commissioned agents. This would imply that the
delivery boys will not be on payroll of the company but instead will get a fee for each order delivered. While the
company will appoint the logistics managers and will operate the logistics Centre as in plan-A, the status of the
delivery boys will be different. First of all. The delivery boys will be asked to buy their own two wheelers,
uniforms, and the special thermos delivery boxes from the company.

The company would arrange bank loans without any hassle. In return, the delivery boys will keep the delivery
charged provided by a customer as well as half of the commission paid by the restaurant (i.e5% of the total price
of the food delivered). If the delivery doesn’t happen within the guaranteed time, the delivery boy for 20
restaurants initially and then increases the numbers if necessary.

In both the plans the company had to design, develop and maintain the website, customer app as well as the
delivery boy app; market the company to both customers as well as restaurants; negotiate and enter into contract
with restaurants; and maintain the transaction and payment system for the delivery boys (payroll in case of plan-
A or commission in case of plan-B). The start-up company was partly financed by a group of venture capitalists
as well as own savings from the promoters. While it was not necessary to show profits in the very first year, it
was necessary to demonstrate that their business model is viable and can generate profits after one or two years
of growth.

A key decision was also about the fee to be charged to customers as well as percentage to be charged from the
restaurants (although an initial 10% has been agreed). The start-up company was now in crossroads. The key to
success was designing the delivery system that can consistently offer the service quality promised to the
customer while maintaining adequate profitability. The promoters need to choose between plan-A and plan-B
and implement whichever model was selected.

Questions
1. Explain the service outputs implicitly and explicitly guaranteed by foodelivery.com. Will the service outputs
attract sufficient customers given the existing options? (5 Marks)
2. Discuss the pros and cons of plan-A and plan-B stating which is more viable and appropriate in the present
situation? (5 Marks)
3. In the long-run is there any strategic advantage that plan-A offers above plan-B or vice-versa? Why?
(5 Marks)