Karan Automotives Company – Restructuring Physical Distribution System

Karan Automotives Co. (KAC) was founded in 1960 to manufacture automotive spark plugs and die­sel fuel injection equipment in India. The company has a virtual monopoly in the products range they manufacture. The other products they manufacture include auto-electrical, special-purpose machines, hydraulic and pneumatic equipment, portable electrical tools, and so on. With the grow­ing markets, more and more new competitors are entering the race and to deal with competition in replacement markets, KAC has increased its dealer network to more than 3000 in FY 2001. To keep with emission norms, KAL has introduced fuel injection equipment complying to Euro I.

The domestic auto ancillary industry is highly fragmented, with hardly any player with a global- scale capacity. Technology is the key factor in the product manufacture but it has remained static. The small-scale manufacturers have captured the replacement market to a great extent, because of the following three reasons:

1. The industry is not capital intensive.
2. The market growth is very high.
3. End-users are price-conscious and ready to compromise on quality.

All the original equipment manufacturers (OEMs) are mainly served by the players in the orga­nized sector. The industry, which until recently was on a growth pedestal, has to face the repercussions of a slowdown in the auto sector. But riding piggyback on the ever-growing replacement sector and scope for exports in this industry might just seem to hold its own in the face of growing uncertainty.

Fuel injection pumps (FIP) are used in diesel engines to pump diesel to the combustion cham­ber in the engine. Multi-cylinder FIPs are used in the commercial vehicles, while single-cylinder FIPs are used in agricultural pump sets and power tillers. Spark plugs are used for ignition of the compressed air-fuel mixture in an engine cylinder. The requirement is one spark plug per cylinder. The average life of the spark plug is 15,000 km.

In order to brace itself for the concept of world-class manufacturing and continuous process improvement, the company has adopted the principles of total quality management (TQM) and innovation for keeping the customer satisfied. This calls for an overall approach to improvement in all organizational areas. As a major step toward TQM the company has upgraded its corporate metallurgical and chemical laboratory in FY 2000. The company plans to continuously develop and design the fuel injection system taking cognizance of fuel consumption, emission and greater safety of the end-user.

The distribution network is the backbone of KAC. Distribution served as the link between the company and the retailer, who finally sells the product to the end-user. KAC distributes its products through the main distributor, dealer and the retailer, who is the final link with the end-user. Of late, KAC had sensed a major problem in its distribution link. The company management observed that the promotional schemes evolved and introduced by the company never reached down the line.

As a result, the coverage and awareness about the new products was limited for lack of motivation. After an investigation the KAC management found that the dealers never allowed the benefits of the schemes to go down the line. The dealers used to promote those products wherein the margins were good. KAC decided to restructure the channel structure. They identified the following weak­ness in their distribution system:

• Communication gap between the distributors and the company
• Inadequate or low compensation for going products such as spark plugs
• Limited market coverage

However, on the product front KAC found that the product is well accepted in the market and there are no quality complaints. It was clear to them that the product has a good brand image in the market. The firm identified that there is good scope for its products in the two-wheeler seg­ment, which is growing at 15 per cent per annum. Further, the company discovered that because of the excellent product quality, invariably all OEMs were using KAC products; nevertheless, in the replacement market the firm could not achieve the desired coverage and sales growth, owing mainly to the dealers’ inaction to pass on the promotional schemes down the line. In view of this, the KAC management has taken the decision to do away with the dealers. The retailers were served by the company’s main distributers.

As per the existing compensation package the C&F agents, distributors and dealers are com­pensated on percentage basis on the sales generated.

C&F agents:                   1 per cent

Main distributors:            4 per cent for spark plugs

6 per cent for other products

Dealers:                          3 per cent on spark plug

                                       4 per cent on other products

In the new structure, KAC has removed the dealers and increased the compensation of the main distributors. The distributors were now getting 7 per cent on spark plugs and 10 per cent on other
products. The KAC management has also introduced new incentive schemes linked to performance on targeted sales, turnover discount, quantity discount, and so on, so as to have faster sales growth and wider market coverage. The new scheme on infrastructure commission of 2 per cent was also introduced for distributors having two salesmen and one deliveryman. KAC has decided to work on a uniform pricing policy and have the maximum retail price (MRP) printed on the products. This new scheme was backed up by the following:

• Goods were sent to distributors on freight-paid basis
• Octroi on KAC’s account
• Resale tax paid by KAC

KAC has reorganized its sales through 4 sales zones, 23 sales offices, 41 distributors and 26 C&F agents (one in each state) across the country. Under the new scheme the distributors were asked to invest in communication and information processing facilities for online connectivity with KAC HO and factories. KAC has adopted the hub-and-spoke system of distribution. They have organized storage of finished goods at four hubs located at Bangalore, Delhi, Jamshedpur and Nagpur (all near to their four manufacturing plants) to supply the material to C&F agents located in the nearby states. KAC has entered into a long-term contract with one of the leading transporters in the country. However, the warehousing infrastructure is owned and managed by KAC. This arrangement reduced their logistics cost to 4.5 per cent (of sales) from 7.5 per cent earlier. They have achieved better control over inventory movement, thereby reducing inventory- related costs to half. Their finished goods inventory stocks have come down to 18-20 days from 30-35 days earlier.

KAC management wants to further reduce the finished good inventory to 8-10 days and the logistics cost from 4.5 per cent to 2.5 per cent of the sales in the next three years. However, the investments required for the logistical and information system front are estimated at INR 200 million. The current sales turnover of the company is INR 8000 million. However they are deter­mined to boost the figure up to INR 10,000 million in the next three years.

In the current system, KAC is facing a lot of problems in transit damages that are to the tune of 1 per cent. In addition, for goods rejected on quality grounds and those damaged in transit, KAC has no returned goods policy. The goods returned for replacement reach the factory (in most of the cases) after its guarantee period is over. The complaints resolution takes a lot of time and sometimes it becomes very difficult for the distributors to handle the annoyed customer. For over­coming this problem, KAC has considered two alternatives. One is to have a well laid out returned good policy supported by a reverse logistics system controlled by a senior executive of the com­pany. The second is to empower the distributor to handle and resolve the return goods complaints on their own with support from HO or the regional office. KAC thought of an incentive scheme for distributors to control and reduce the return goods complaints.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.