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Anudeep
Nagalia & Devroop Dhar
IIM Kozhikode
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Introduction
The saying goes, 'Customer is the King'. Gone are the days of supernormal
profits; gone are the days of monopoly. In the 21st century, more and
more companies have realized the importance of acquiring and retaining
customers. Companies have moved beyond customer satisfaction, customer
delight is the new mantra.
The FMCG industry in India is characterized with low switching cost. Mostly
it is an industry having low involvement buying, where the customer is
ready to experiment with new brands. With more and more companies fighting
for customer loyalty from the same consumer group, constantly meeting
and exceeding customer expectations is the key to success today.
Who are these customers?
The first step in providing customer delight is to identify the customer
correctly. For large FMCGs, customers are both internal and external.
1. Internal Customers: The sales personnel, the internal warehouses/depots
2. External Customers: The distributors, retailers and end consumers
The organization has to work towards delighting all its customers to add
value to the bottom-line.
What is Customer delight and why is it important?
Customer delight can be defined as constantly exceeding customer expectations.
It is providing the unexpected. In a Kano Model-diagram more and more
'delighters' have to be provided from it.
The need of customer delight can be deduced from the following -
- In the FMCG sector customer loyalty is very low as the cost of switching
is negligible.
- There is low product differentiation that leads to low customer loyalty
and high switching. Thus providing customer delight is essential.
- Customer retention becomes very important as acquiring a new customer
is five times more costly than retaining the existing customer.
- If one organization is not providing customer delight then its competitor
will provide the same and drive it out of market.
Problems with large FMCGs: What is hampering customer
delight?
- Complex Network of warehouses/depots, distributors and retailers
- Most of the FMCGs have a large network of warehouses/depots, distributors
and retailers. Also most of the retailing in India is through unorganized
sector, with only about 2% of retailing through organized retail. This
has resulted in complex distribution network for most of the FMCGs.
Making the products available with all distributors and retailers in
right numbers at the right time according to the demand is the biggest
challenge for the FMCG sector.
- High variation of sales in a year across various months or seasons
- Seasonality of demand can be seen in most of the consumer goods. The
demands vary across months and seasons, thus resulting in a mismatch
between the demand and the production schedule. When the products manufactured
are not in tandem with the demand, there are stock-outs or excess stocks
perishing before the requirement that comes in the same season next
year.
- Skewness of sales within a month - There arises another variation
in demand within the month also. The last 10 days of the month have
much more demand for goods from the retailers than the first 10 days.
This can be attributed to two reasons -
- Buying patterns of the major salary drawing Indian consumers, who
do the chunk of their buying in the first week of the month. This makes
the retailers to place their request for products to the distributors
in the end of every month just before the expected sale.
- The second reason is the sales targets that are set for the sales
agents in the company. Inability of meeting the sales target in first
20 days or so makes the agents to offer discounts to distributors and
retailers. Accustomed to this strategy, they buy products only when
the sales agent is desperately looking for buyers to meet his sales
and offering discounts. This has two negative impacts on the company.
First, the company has higher sales, but lower profit margins. Second,
this breaks the balance of supply and demand at the retailer's end leading
to stock outs sometimes and excess stock at the other times.
- Too much data and no integration - Another problem that exists is
that there is an immense amount of data flow that is going on from the
market to the company. With so many different brands in the market being
promoted through different territories results in a lot of data that
is never analyzed. Also, different systems are used to capture various
data and there is no or less integration between them. In other words,
the systems don't talk to each other.
- Lack of visibility of stocks - There is always a lack of visibility
into the stocks available at the depot/warehouse and with the distributor.
Company never gets to know the stock that is lying with the distributors
and retailers. Instead the sales targets for the new month are set.
The top down approach of setting sales target leads to dumping of stocks
and not actual sales.
How to resolve these problems to provide customer delight?
A solution to all the above problems a company may face is to create more
value for it customers. They need to understand, create, deliver, capturing
and sustain this customer value. Companies need to use Value Chain to
provide such value to the customers. Through this, the company can improve
its activities right from its operations and logistics to the services
it gives to the customer.
The activities that can be taken up for providing better customer value
are -
- Companies need to have direct distribution channels to reach out to
the distributors. A dedicated sales team needs to be in place for the
same. Alternative distribution channels like Internet can be used in
large cities. Also the company can plan direct distribution into big
retail marts like Big Bazar by avoiding distributors. This will result
in disintermediation and provide cost benefit for the organization,
which can be passed onto the customer.
- Large FMCGs find it difficult to reach out to the vast Indian market
and at times are not able to provide a complete product portfolio to
them. In these cases the company should get into distribution alliances.
For example, a company with a deep penetration into rural market can
form an alliance with another company having a very strong urban distribution
network. They both can be helpful to each other through a strategic
alliance where one can draw benefits from other's competency.
- Companies need to follow a Bottom-up approach, which is very necessary
to maintain a smooth supply of products. This approach would follow
a system where the demand will come from the market through the retailers
to the distributors. The company can accordingly supply the products,
not forcing extra products on the distributors at discounted prices.
So the company would no more lose revenue in offering discounts towards
the end of the month.
- Companies need to completely de-link the sales from the supply of
the products. This will help in getting rid of the stock-outs and excess
stocks that happen at the retailer and distributor end. The new supply
can be based on the demand from retailers and the sales target can be
set independently as high as the marketing department feels.
- Companies need to focus more on the Secondary sales rather than the
Primary Sales. Primary sales are the sales from the company to distributor,
while Secondary sales are further down from the distributor to the retailer.
In the bottom-up approach, the secondary sales will govern the primary
sales.
- FMCG companies need to implement the Vendor-Management Inventories
(VMI) system. VMI is the means of optimizing Supply Chain performance
in which the manufacturer is responsible for maintaining the distributor's
inventory levels. Here the speed of processing is also improved and
the right product is made available in the right time.
- There is a need for integration between the front-end and the back-end
management of the company. The Operations department and the Marketing
department need to work in tandem and the mangers from all work function
area need to be a part of a core team, which will manage the value chain
entirely. Moreover, the different departments in the marketing division
itself, like the sales force, advertising, customer service, product
management, marketing research etc should work together towards the
goal of getting more sales.
- IT solutions have to be leveraged across the organizations. Implementation
of SCM solutions like i2 or Manugistics can be implemented. The solution
should extend from the shop floor planning to warehouse/depots and distributors.
Real time availability of stock data at depot/warehouse and distributor
level can be made available to the organization online.
Conclusion
FMCGs need to wake up to this challenge. The issues present are critical
ones, and the company, which will resolve them, will emerge as the winner.
It's a 'winner takes it all' battle where FMCG companies have to constantly
innovate and achieve to delight their customer. And finally, there can
be only one winner - the Indian consumer.
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