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Advotics Whitepaper Key Distribution Challenges in Indonesia
Advotics Whitepaper Key Distribution Challenges in Indonesia
DISTRIBUTION
CHALLENGES
IN INDONESIA
2
Table Of Content
2 TABLE OF CONTENT
3 A MANUFACTURER’S DILEMMA
12 HOW DO WE PRESS DOWN THE LOGISTIC COSTS REQUIRED TO DELIVER OUR PRODUCTS?
18 ABOUT ADVOTICS
A MANUFACTURER’S DILEMMA
Price that customer pays
Marketing-driven costs
Sales-driven costs
Logistics-driven costs
Inventory-driven costs
Co Transaction-driven costs
st t Finance-driven costs
o se r
ve
Customer contribution
Illustrative
Overseas Local
1
manufacturer manufacturer
E-B2B
Sub
Distributor
Modern
B2B Outlet
Marketplace E-Commerce/
Brand Website Wholesaler
Individual
Customer (B2C)
36K+ 3Mn+
Brand Official Stores VARIOUS SALES CHANNEL
Warungs
FOR END CUSTOMERS?
Supermarket/ Hypermarkets Brand Online Stores
Traditional Markets
Minimarkets
Logistic
3
Administration
Costs 17% Transport
HOW DO WE PRESS DOWN 25% Costs
Logistic Costs Warehouse 40%
THE LOGISTIC COSTS REQUIRED Costs 17%
TO DELIVER OUR PRODUCTS?
Inventory
Costs 26%
Manufacturer Revenue
Challenges
4 HOW DO WE MAKE
THE TRADE MARKETING
PROGRAM MORE EFFECTIVE?
Extensive Manual Hard to Quantify Difficult to Deploy Potentially Trigger
Process Return on Investment (RoI) Personalization Strategy Follow up Issues
Indonesia is the largest archipelago country in the world which spans across 5,200 km and
comprise of a total number of 17,508 islands in which about 6,000 are inhabited. However, 95% of
manufacturing firms emerged in Java and Sumatra, where 80% of Indonesia’s population and
economic activities are concentrated¹.
Source: 2018 Indonesia Ministry of Health Source: 2015 World Bank Group
More complexities arise from the consumer's habit of purchasing in non-chain offline stores. In
Indonesia, there are more than 3 million stores in the combination of both modern and traditional
trade.
If the manufacturer or importer (altogether called as Principal) only serve a small number of
customers, they can sell their products directly. However, to cater to one region or even national
coverage in Indonesia, with a larger customer base and more various customer segments & needs,
middlemen are critical in ensuring economies of scale & efficiency are achieved. In Indonesia’s
supply chain, the middlemen are led by distributors with sub-distributors, wholesalers, and
retailers down the chain.
250
Middle to Large Micro & Small
200
38K 5 Mio
200
179 181
150 168
152 152
0
2014 2015 2016 2017 2018 2019 288K 15 Mio
Source: 2020 Badan Pusat Statistik
Three
Expanding a Principal’s Advocating Principal’s Providing trade credit:
Main Roles of reach: extending product brand through placement, giving payment terms to
Distributor availability to new areas promotion, and pricing: retailers
increasing brand awareness
With those critical roles of distributor, Principal need to work together with them in ensuring the
most optimized route to market, to deliver their value to the customers.
We have surveyed several leading companies to figure out their opinion on the biggest challenge
of the distribution process in Indonesia.
This whitepaper will deep dive into aforementioned distribution challenges and how to tackle
those challenges with modern technologies.
We will focus on:
multiple-tiered fulfillment distribution model, instead of direct Principal to end consumer
model
consumer packaged goods (e.g. consumables & aftermarket products).
It's been proven that companies who invest in analyzing and understanding the core business
model of their distribution system have been able to take significant cost out of their business while
increasing profits or reducing product prices to gain an edge over the competition².
²Julian Dent, Distribution Channels: Understanding and Managing Channels to Market 2008
Even with strong product awareness, high advertising investment, and excellent product quality,
companies may still struggle to sell their products if the goods are not readily available in the
market at all times. Easy access to purchase is very important for customers. Soon after they get
exposed on the product ads at home, they can see see the products again, available on the store
shelves.
To gain a superiority over competitors, maintaining product availability is a must. Companies need
to ensure that their products are ready to be purchased in as many numbers of stores or other end
customers' touch points. This objective requires acquiring stores, managing relationships with
stores, and maintaining adequate inventory levels, as the minimum key activities.
Overseas Local
manufacturer manufacturer
Importer Main
Distributor
E-B2B
Sub
Distributor
Modern
B2B Outlet
Marketplace E-Commerce/
Brand Website Wholesaler
General
Corporate Trade
Customer (B2B) Key Projects
Individual
Customer (B2C)
Economies of scale
For locally produced goods, manufacturing plants are usually centralized, usually in between 1-3
locations, while imported goods have to go through one centralized hub first (e.g. Tanjung Priok,
Jakarta), then distributed around. Product demands, however, can come from anywhere in the
country, that drives most principals to work with a local distributor in order to manage their area
coverage better.
Another reason why Principal need to work with a third-party distributor is that managing all
delivery from one central location can be extremely complicated, costly, and time-consuming.
Especially with a small order value from stores, starting from Rp 1.3 million (~USD 85), broken
down in 2 orders per month, and up to 1 million stores to be managed³.
Apart from that, strategically, acquiring stores and establishing a long-term relationship would
work better with someone who has local knowledge. Hence, every interaction with clients are
personalized and not merely just a logistic process.
Additionally, if the responsibility of expanding store coverage, administering sales orders, ensuring
stock level in all stores, fall solely on the Principal's hand, the company would start losing their
focus.
Even though the distributor's role is important, Principal still have to conduct proper distribution
management, one of them is by controlling the number of distributors in that area to balance with
the demand.
Distribution Management
Just like their retailers, distributors usually have specialization in types of products they distribute
(e.g. stationery, electronics, groceries, building materials). However, in areas outside Java island,
distributors tend to focus more on area coverage, where they can sell more than 1 sectors (e.g.
FMCG, staple commodities, automotive supplies, etc.) in more than 1 province. The combination of
both distributor type provide channel for Principal to cover more areas up to the whole country.
Our study found that 1 Principal in Indonesia require 100-200 distributors to cover national
distribution.
Figure 7 Average Distribution Network Coverage
SELLING FLOW
# of Distributors*
1
1 # of Distributors* GT Store
Principal Early-Scale <50
# of Stores
# of Principals
1 Sector-focused 0.5-1K 1
Distributor FMCG & Building Distributor
15-50
Materials
Regional Players 1-15K
Chemicals 100-159
Leading Player 15-200K**
³Advotics Analysis
In-store execution
Distributors need to put intensive care to their stores, especially in a dynamic market. Firstly, to
attract more sales orders. The 25 product categories that average traditional store in Indonesia
sell, is 2x categories that traditional stores in Vietnam sell. Hence, to ensure the store owners’
brand loyalty, sales visit is important. This is backed up by the fact that sales orders can increase
by up to 30% when salesmen visit stores regularly4. The more frequent salesmen visit stores, the
higher is the sales order volume.
Secondly, when customer demand and condition are fluctuating, like in current Covid-19
Pandemic, real-time market information become more valuable. Those information can be
gathered during salesman/merchandiser visit to the stores.
Average space of 12 m2
Sell 25 product categories
in average
Frequent order frequency
20-80 times per month
Managing multilayers of distributors is not an easy job, but it's the most crucial
capability for ensuring product availability. Successful companies conduct the
following strategies:
Efficiently manage the distributor companies with regular performance management,
esp. on these metrics: sales performance, outlet coverage, and financial returns
Collaborate with distribution networks in defining sales strategy
Implement integrated order & distribution system to capture real-time data
Advotics Analysis
4
75+
70-74
65-69
60-64 Average Annual Income
55-59
>USD 15,000 4%
50-54
45-49
Age Group
20-24
<USD 1,500 31%
15-19
10-14
5-9
0-4
Female Male
To accommodate demands from a wide range of customers (various age range and socioeconomic
background), principals need to calibrate their sales channels accordingly.
Traditional Stores
74.0 74.2 74.0 74.0 73.8
Super Hyper
Minimarket
8.5 8.1 7.4 6.9 6.7
Why are General Trade stores still important in these day and age?
Compared to General Trade, Modern Trade has higher growth rate of 5,4% yearly from 31,966 in
2018 to 35,643 in 20205. However, with more than 3 million outlets6, general trade is still
dominating the final tier sales channel for customers in Indonesia for overall products, compared
to modern outlets or online channels.
Warung (small traditional store) is the #1 preferred channel for Tobacco products across all
income level7. It contributes to ~70% middle-low customers and ~50% customers with higher
income. For FMCG categories, even though the upper middle income consumers are more likely to
purchase from Modern Trade due to their better assortment and availability, the remaining groups
prefer Warungs for the convenience and more affordable price. Overall, customers are more likely
to go to Traditional Trade for daily last minute meal shopping, as their pantry extension, while
Modern Trade is more for planned monthly groceries8.
Similar pattern is also seen in non-FMCG products, such as building materials, BPC, automotive
spare parts and aftermarket products, where general trade still dominate the final-tier resellers.
Based on research that compares winners' and losers' strategy in growing their sales channels,
winning manufacturers focus on non-price activation levers in MT Channels (e.g. displays and
demos)9. They also tailor their products/packaging specifically, based on insights collected from
close partnerships as well as joint activities between them. To do all these initiatives, ~55% of their
modern-trade accounts are served directly by the Principals.
Meanwhile, for GT, with thousands of retailers to be managed, it's not possible to analyze each of
them separately neither to treat all of them the same. Store segmentation is a key to personalized
stores, either based on sales performance, potential demand in a particular area, or any other
further advanced variables.
Store Location
(Main Road/
Neighborhood Area) High Inventory Level
Store Size
Pricing
Low
Competition
All this information on brand’s performance along with competitors', ideally should be collected
during a salesman store visit. However, due to the many layers of distribution between principal
and retailers, the principal often get blinded on what’s happening in the market.
This emphasizes the importance of collaboration between principal and their distributors who
directly manage the stores.
Additionally, winning companies believe in distributor management as the most crucial capability
for driving growth in General Trade10. Winners use several criteria to evaluate distributor
performance, including financial returns (a metric that only half of the non-winners use), sales
performance, and outlet coverage, to be followed up by a joint sales planning with their
distributors.
3 How do we press down the logistic costs required to deliver our products?
As discussed before, Principals, including manufacturers and importers are mostly located in Java
and Sumatra. This additional logistic cost tend to lead to higher product prices in other areas
outside those two islands.
Logistic cost includes transport, warehousing, and inventory. In 2015, the total logistic cost of
Indonesian manufacturers are 25% of their sales. Higher than Thailand at 15% and Malaysia at
13%11.
Efficient logistics could reduce the product price in less connected regions. In order to optimize
logistics process & costs, there is a high dependency to infrastructure factor, where based on LPI
(Logistic Performance Index)12, Indonesia only ranks 46, much lower than Malaysia (41), Vietnam
(39), and Thailand (32). However, there are still elements where the manufacturer & their
distribution network are more in charge.
Logistic
Administration
Costs 17% Transport Including logistic waste:
Costs Product returns
Warehouse 40% Dead stocks
Costs 17%
Unused vehicle capacity
Inventory Unnecessary routing/product movement
Costs 26%
Transporting Costs
Principals who send their freight from Java or Sumatra to other islands are most likely to be
confronted with lengthy supply chain layers. Especially in Indonesia where inter-island
distribution is constantly faced with a combination of land, sea, and air freight
infrastructure and uncertainties in delivery time.
Additionally, there is also a constant shift in the balance of costs between shipping and
storage, reflected in the decision to centralize or localize the warehouse (e.g. with regional
warehouse).
Vehicle Capacity
Waiting Time
(Weight & Volume)
Opening Hours
Road Classification Driver Working Hours
(Warehouse & Consumer)
Distributors usually bear the inventory risk, which is why they need to always balance
supply and demand carefully to lower inventory cost, minimize deadstock, and streamline
cash flow. This is very important because deadstock may directly impact the gross margin
of the cost of goods sold (COGS).
In recent years, as price pressure grows, some companies respond by driving down the
stock levels. Stock levels in many mature sectors globally are now around half what they
were only 10 years ago14. Without being supported by proper supply chain technology,
there is an increased risk of business disruption if transport logistics are affected by
weather or unforeseen changes in demand, which recently experienced in the Covid-19
Pandemic.
Optimization in warehouse operations is also important to ensure the First In First Out
method (FIFO), reduce pick-up time, optimize warehouse space utilization, and minimize
damaged products in warehouses.
How can the manufacturers and their distribution network optimize the logistic costs?
Optimize route planning for field people and delivery
Assess the feasibility to utilize third-party logistics (3PL) services
Distribution management that acommodate multi-warehouse strategy
More efficient warehouse operations with technology: e.g. inventory & forklift
tracking
Julian Dent, Distribution Channels: Understanding and Managing Channels to Market 2008
14
A single retailer can sell products from 100 principals for General Trade and up to thousands of
principals for Modern Trade. For retailers to value principal’s products, they need to be convinced
that selling principal’s brands will ultimately create value for them too. Trade marketing is a B2B
marketing strategy directed to distributors, wholesalers, and retailers for them to promote
principal’s products against competitors’.
Trade marketing programs can range from collaborative initiatives with resellers to increase
shoppers’ awareness, up to direct transactional-based promotion. Oftentimes, principal need to
pledge slotting allowance for retailers to secure high traffic shelf position, such as near the cashier.
Another important role from distributors that sometimes forgotten is providing trade credit to
their distribution network. Retailers usually manage cash business, but it takes time to turn their
inventory into customer purchase. Hence, their suppliers (wholesalers or distributors directly) may
extend a 1 to 2 months payment term with a certain credit limit to help easing the cash flow burden
of store owners.
The more upstream in the supply chain, to the wholesalers or distributors, due to the bigger
business scale, they are usually only offered shorter payment term, reaching around 2 weeks ToP
between principal and distributors. However, distributors may experience special discount if they
are able to pay off the invoice on cash.
With the highly volatile customer demand, such as in the current Covid-19 Pandemic, retailers
encounter the immediate impact of any demand increase from the customer side. In a short time,
the effect will also roll-out to the upstream layer. If not handled well, the impact will lead to product
scarcity in the market. This has increased the challenge for the supply chain to remain financially
sustainable.
Depend on the financing provider, the loan can be in form of a secured loan (that require asset
collateral from borrower/buyer) or an unsecured loan with the submission of historical financial
and transaction record. The former may provide lower interest rate as trade-off of the collateral
provided, while the latter can give more access to buyer with a good business transaction record,
but only have limited physical assets.
About Advotics
Advotics is an Indonesian based SaaS startup
specializing in supply chain. In the past 5 years, we have
been providing end-to-end integrated supply chain
solutions, from production to distribution, to 70+
companies. Our clients range from SMEs to
multinational enterprises, among them are
Exxonmobil, Sampoerna, Danone, Mulia Group,
Nutrifood, Saint Gobain, and many more.
DPS
DMS (Delivery
Planning System) Workforce
(Distribution Management System
Management System)
WMS RMS
PDM (Warehouse
(Route
(Product Digitalization Management System)
Management System)
Management)
POS
(Point of Sales)
VMS ARM
(Vehicle (Advocate Relationship
Management System) Management)
CoHive 101 9th Floor, Jl. Mega Kuningan Barat Kav. E.4.7
0819-7700-ADVO(2386)
sales@advotics.com
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