N-Joy Tobacco Company – Aiming at Best Practices in Distribution

“Smoking is injurious to health”—a warning punch line, the statutory requirement that all tobacco manufacturers should print on all tobacco products leaving their factory. The warning is not deter­ring the smokers as is seen from the increasing consumption of cigarettes in the country. India is the second largest smoking market in the world consuming 950 billion sticks per year. The products include biddies, cigarettes, cigar, cheroot, and so on. Among the cigarette smoking countries in the world, India ranks eighth, consuming 102 billion cigarettes per year. The cigarette industry in the country is growing at the rate of 3.5 per cent per year.

An interesting feature of the cigarette industry is the presence of a wide array of brands. There are four major manufacturers of the product in the country. The Indian cigarette industry is market­ing over 160 brands across the country. Out of the 160 brands, 45 brands come from N-Joy Tobacco Company (NTC) Ltd., which is one of the leading manufacturers of cigarettes in the country. These 45 brands together constitute a wide product spectrum offering varied prices, quality and sophisti­cation to suit the different tastes and income levels of multitudes of cigarette users. NTC has a sales turnover of over INR 50,000 million and commands nearly 50 per cent of the cigarette market in the country. NTC is facing stiff competition in all the market segments. The management of the company believes that the survival of the company depends on brand management supported by an effective, efficient and innovative distribution chain. For gaining a competitive edge over their rivals, the management has identified three goals for the distribution supply chain:

1. To make available 45 stock-keeping units (SKUs) at the 1 million retail outlets to reach 50 million smokers.
2. To ensure freshness of stocks—product shelf life 2 months.
3. Operating a cost-effective logistics supply chain through the proper management of critical cost elements such as inventory, freight and warehousing.

NTC currently has four factories of their own. In addition, they subcontract production to five other parties. Besides their own network of marketing offices, they service the clients through their wholesalers and retailers. The movement of goods from the factories to the ultimate consumer is explained in Figure 24.3.1.

NTC provides services to its consumers through a network consisting of its own marketing offices, which control the channel members, such as wholesale dealers, wholesalers and the retailers.

1. Marketing set-up

Regions—4 Regional Managers

Branches—20 Branch Managers

Circles—80 Area Sales Managers

Sections—180 Area Sales Executives

2. Dealers

NTC is having over 750 exclusive dealers spread over the country, who only deal in NTC products. They get the material from the C&F godowns as per the instructions of the branch office they are cov­ered by. As the percentage commission on the sales is very low in the cigarette industry, these dealers work on sales volumes. They control a number of wholesalers in the region in which they operate. The exclusive dealers own a fleet of delivery vans for distributing the products to the wholesalers. These dealers also maintain a team of cycle salesmen who directly interact with retailers for getting orders, organizing supplies and collecting payments. Sixty per cent of the supplies are made through the cycle salesmen directly to the retailers and the balance 40 per cent through the vans to wholesalers.

3. Wholesalers

Wholesalers get their materials from the NTC dealer through the dealer’s vans. They supply the goods to the retailers twice a day through three or four wheelers. The van driver acts as the salesman and pay­ment collector. The material is supplied against cash payment and no credit is offered to the retailers. The investment capacity of the wholesaler is 10-20 days. To control freight the focus is on distribution route planning. On an average the van salesmen make 4 million calls per annum to attend the retailers.

4. Retailers

They are the last link of the distribution channel and number over 10 million. Retailers generally have an investment capacity of 1 or 2 days. The requirement is small, but need high frequency sup­plies. They are attended by 8000 cycle salesmen and 1000 supervisors making 84 million sales calls and 6 million merchandizing and supervising calls per year.

5. The Marketing and Manufacturing Interface

The role of the branch offices is crucial in the coordination of field requirement with factory sup­plies. In the distribution chain, the dealers place the order on the branch office. The dealer gets the requirements both from the wholesalers and retailers. The branch office consolidates the dealer’s requirements, which is conveyed to HO (marketing) for all India consolidation in order to prepare the raw material procurement plan and the manufacturing schedules. The branch office draws the requirements from the factory.

6. Measures to Control

For managing 94 million calls per year, the NTL logistics manager proposes the following measures to manage the supply chain so as to reduce the logistics cost as a percentage of sales from 2.3 to 1.8 per cent.

• Sales Forecasting
  • The expected forecasting accuracy ± 2 per cent (the variation of ±5 per cent in forecasting results in stockpile or stock depletion equivalent to the capacity of a small factory leading to high carrying cost or lost market)
  • Bottom-up forecasting
  • Develop forecasting model
• Funds Management
  • No credit sales
  • Open more collection centres
  • Encourage dealers/wholesalers to have a higher stock-turnover ratio for higher ROI, instead of increasing the commission
  • Collection responsibility on the wholesaler only
• Inventory Management
  • Excise on cigarette is 60%. Hence, post-excise inventory (i.e., in-transit/pipeline) of mini­mum 4 days
  • The inventory at factory before excise: 6 days
  • Stocks with channel members (wholesalers): 6 days
  • Factory should produce and dispatch strictly as per the branch orders
  • Inventory and forecast review once a week
  • Branches to directly order on factories
  • Zero time lag between forecasting and ordering
• Transportation Management
  • No delays: as a delay of one day in transit time costs INR 30 million as interest cost
  • Daily interest cost on one truckload of material Rs. 3500
  • Long route coverage and no transhipments
  • Transit time bonus/penalty for transport contractors

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