Rediff Business presents the TCS [Get Quote] Smart Business Case Study Contest for managers, along with The Smart Manager, the management magazine! We give you a profile and the history of a company. All you have to do is study it and post your solution here, in 500 words or less. The best solution will win a cash prize of Rs 25,000 and a one-year complimentary subscription to India's first world class management magazine! The Smart Manager will also publish the winning solution along with your photograph.

Hurry! The last date to post your solution is September 18, 2006.

Indian Ink Blues

When a global ink maker entered India market, it bypassed dealers. It won customers, market share and profits. But at a high cost. Soon it saw its market share under pressure from disgruntled dealers. How can it win back the high ground?

Mahesh Bhagat, CEO of Excellent Inks India, was a worried man. A consensus leader and a team builder, he had consistently supported the decisions of his sales head (Jay Anand) and marketing head (Rohit Singh).

At first their ideas had worked. As he told them, "On this day exactly a year ago, we were celebrating the fact that we had captured a market share of 10% from next to nothing. Today we have lost market share. We are down by 3% and our market share is a shaky 7%. We need to grow, please put together some ideas on our options." They set a week from Thursday for the review.

Excellent Inks India (EII) is at an interesting phase of its growth trajectory. A 100% subsidiary of one of the world's largest ink makers, EII set up shop in India two years ago when it built a state-of-the-art ISO 9001 manufacturing plant at Shyamnagar in Tamil Nadu. EII's technology, manufacturing process, quality control and quality assurance system conform to Excellent Inks International's global standards.

At EII, customer service goes beyond the supply of the inks. EII believes in operating as a strategic partner with its valuable customers, and is open to discussing a wide range of issues with them.

To meets the service requirements of its customers, EII set up eight offices in India with local color matching centers. It also developed an in-house advisory on printing technology for customers.

Mature Market

The ink business's market size is Rs2.4bn, with 288 suppliers competing against each other. Being a mature business sector, the players come in all shapes and sizes. At one end of the spectrum are the organized, large manufacturers: MNCs such as EII, Sicpa and Micro Inks [Get Quote], and Indian makers such as the DIC Group.

At the other end are the unorganized players such as the small ink makers located in Sivakasi. Production capacity varies from 1,000kg per annum to 600,000 kgs per annum. There are also importers who mainly buy from the UK and Germany, and sell in India.

The Customer

Commercial inks come in two types: paste and liquid. The various uses of paste inks are catalogues, newspaper, posters, textbooks, magazines, financial reports and greeting cards. Liquid inks are used for labels by almost all companies, but those in pharmaceuticals, alcohol and cosmetics are particularly large customers.

The food companies are also significant users: liquid inks are used for labeling and packaging of dry snacks like potato chips, edible oil and juices like Frooti and Appy. EII makes and sells both paste and liquid ink. Customers are divided in two categories:

1. Direct or institutional customers: This segment comprises 30% to 35% of the total market. These are the large quantity ink buyers: their requirement varies from 15,000kgs to 30,000kgs per annum. The Times of India, Tetrapak, and Indian Express come into this category.

Given that quality and price are critical factors in the negotiation process, ink makers tend to deal directly with these volume customers.

2. Dealers: This segment comprises the remaining 65% to 70% of the market. Every dealer is appointed for a specified territory, and cannot sell in any other territory without prior permission from the ink manufacturer.

Most dealers cater to a large number of printers who may place yearly orders for as little as 600kgs or as large as 12,000 kgs. These dealers are expected to maintain some inventory.

When it launched in India, EII found that most Indian ink manufacturers seemed to be more comfortable having the dealer as their primary customer as their money was then largely safe and they got payments in time.

Distribution Choices

Even before production began, both EII's sales and marketing team as well as top management understood that they had to get right the design of the distribution channel strategy. A mis-step at this stage would give a wrong picture to customers, besides tangling up the physical movement of the product to markets.

Selecting the right channel would ensure better customer service, enhance sales, and provide consistent growth. As Rohit pointed out, "Channel decisions have long term consequences for marketers since establishing new relationships can take a long time while ending existing relationships can prove difficult." EII had three choices in distribution coverage: mass, selective and exclusive.

EII had no problem in immediately rejecting the mass coverage (or intensive distribution) option. This strategy attempts to distribute the product in all locations where that product is sold. This level of distribution is best suited to relatively low priced products that appeal to very large target markets.

"A product such as biscuits is a classic example," Rohit had explained at EII's first top level sales and marketing meet. "Biscuits are available in a wide variety of locations including grocery stores, convenience stores, hotels and many, many more. Given the large number of locations, the distribution cost is extremely high and must be offset with very high sales volume."

For some time the EII team flirted with the selective coverage option but only for a short time. The strategy here is to deliberately limit the number of locations. EII's manufacturing managers were puzzled by the marketing team's decision, asking why would marketing not try to capture all markets.

"The logic of this strategy is tied to the size and nature of the product's target market as well as the size and reach of the manufacturer," Rohit responded to the implicit criticism. "Some products appeal to smaller, more focused, target markets compared mass market products. If the market size is small, there's no point having too many locations to support product distribution."

In the end, Jay and Rohit agreed that EII's best strategy would be to go for exclusive coverage. "We are a high end product in a very narrow market that has a relatively small number of customers," Jay had stressed during their deliberations.

"Our customers are highly discriminating and want high quality and good service." Added Rohit, "Moreover, I believe they are willing to pay a good price." Left open were some crucial decisions. Should EII appoint dealers or not? Should they allow the large dealers to become resellers for smaller and less profitable markets? Should EII set up company owned stores in select locations.

To arrive at the right answer, as a newcomer EII decided to survey the existing practices in the Indian market.

B2B or not to be

Within a few days EII discovered that most manufacturers and importers do not limit themselves to just one distribution channel but use a combination from a basket of options. These include:

• Working through dealers who buy inks from the manufacturers and sell to the printers. Some are "super" dealers or resellers who buy in bulk from manufacturers and sell to smaller dealers who in turn sell the inks to printers in their territories.
• Working through a dedicated sales force remunerated through salary and performance pay. The sales force serve both dealers and institutional customers.
• Engaging in direct selling via direct marketing (catalogs and flyers) and telemarketing.

The EII team found that dealers play a vital role. They are the main influencers in the printers' buying process. But while dealer sales constitute a major market, it is dynamic in nature.

At one level, standard commercial procedures prevail. For example, an ink manufacturer sells ink to dealer for a basic price of Rs100 per kg + Excise Duty and Education Cess @16.32% or Rs16.32 = Rs116.32 + Sales Tax (MVAT) @ 4% or Rs4.65. This formula translates into a dealer price of Rs120.97.

However the end customer, printers, are offered varying final prices as different dealers attach different profit margins before selling the ink to the printer.

Further though most ink manufacturers typically give dealers a 22.5% commission, in reality dealers manage to extract much better deals. Manufacturers often offer dealers an additional 2.5% discount on the ink's basic price as a turnover discount at the end of three months if sales are above the agreed target.

The billing cycle in the ink business is fifteen days, and if a dealer meets the agreed terms, i.e. he does not fall short on any payment commitments, he could get an additional 2.5% from ink manufacturers as a prompt payment discount on the ink's basic price.

So the dealer's gross earnings could be as much as Rs 27.5 per kg (Rs 22.5 + Rs 2.5 + Rs 2.5).

Musing over this dynamic situation, Jay and Rohit noted that no one observes the official list price: every dealer rewards printers unequally based on their ink consumption, payment terms and relationship history.

On average dealers give good printers a discount of between 8% to 10%, carved out of the 22.5% commission given by ink makers. Typically EII found that the dealer buys ink at Rs 98.47 per kg and sells at Rs 111.32 per kg. After passing on this 8% discount, most dealers are typically content to earn Rs 13 per kg.

When dealers came to know that EII was coming to India, applications for dealerships poured in but Jay and Rohit found the task of vetting the dealers tough. Each claimed to have excellent logistic support, most turned out to be empty promises.

On further examination, an even larger number were found to be not financially sound. There was a different problem with the well-heeled bigger dealers. In return for stability and consistent performance, they demanded stiff financial terms.

Some would buy from EII only if they got a lower price than other dealers. Others demanded that EII advertise the new brand in their territories, or be paid for supporting the EII brand through local marketing activities.

EII also worried about resellers. "Super" dealers, with their huge volumes, were attractive no doubt but they often threatened smaller but more reliable dealers by encroaching on their customers and siphoning potential business.

Reviewing the situation, EII decided it did not want to be at the mercy of dealers. Being new to the Indian market, the felt that rather than allow the dealer to be between EII and the end customer or consumer, it was better that they themselves get close to the customer and understand local needs.

Well aware of the unhealthy habits of dealers, Jay and Rohit were wary of building relationships with dealers who could be seduced into dumping EII by rival ink manufacturers offering bigger commissions, larger discounts or softer credit terms.

Direct Distribution

Given these issues, EII found that direct selling to institutional buyers was a big business with a big risk. The MNC gave dealers a wide berth when it launched its inks into the market.

After a lot of brainstorming with its internal stakeholders, EII decided on a strategy which they felt would help both the organization and the customer. They decided to sell ink directly to printers with a maximum 20% discount based on certain criteria. In this strategy, the ink price to the printer was a mere Rs 94.03 per kg.

The advantages from the customers' point of view were:

• Those printers who paid excise duties started getting the modvat benefit, i.e. 16% excise duty was adjusted against their excise bill. For such printers the ink cost dropped to as low as Rs 86.81 per kg.
• Direct access to customers enabled faster communication and EII was able to reduce delivery time.
• There was not much negotiation with respect to rates. Most printers recognized that they were getting the best possible rates.

The advantages from EII's point of view were:

• Better control on the market.
• Standardization of prices.

A Pyrrhic Victory

Jay and Rohit felt justified in congratulating themselves on being innovative and distinguishing EII from competing programs. Within the first twelve months of launching in a new country, that too in a mature and highly competitive market, EII's market share grew from 0% to 10%. It managed to build a close relationship with 124 customers. Sales grew to Rs240mn. But then the question arose, now what?

During this tumultuous first year, EII alienated several important sections of the trade. A large number of powerful dealers were unhappy that they were not getting any business from EII, and simultaneously frustrated about losing business to EII. This had a cascading effect.

As in every market, there are good paymasters and bad paymasters. A few printers did not pay EII or paid up after a long follow up. This created a lot of concern and discomfort within EII's leadership team.

The factory was unhappy about constant demands from the sales force for special requirements and small orders of 2kgs or 4kgs of specific colors. Urgent special color matching was impossible for EII to deliver. As they were so growing fast, they did not refuse any order from a prospective customer but neither were they able to deliver. This resulted in many unsatisfied customers.

Many a time it led to a situation where the customer felt totally neglected. Dealers with former good relations with these printers added fuel to the fire.

The sidelined dealers were finally successfully in creating a negative image of EII in the market. To curtail the EII increase in market share, the sidelined dealers started pulling down other ink manufacturers. Dealers also created artificial technical issues through unethical ways.

The end result: EII's market share dropped by 3% to 7%, sales fell to Rs168mn, bottomline was threatened. And EII had no friends in the trade.

The question that you have to solve:

The strategy of depending solely on large customers backfired. EII finds itself in a classic channel conflict situation. EII knows it will have to develop a better sales and distribution network which will include dealers. But how and on what terms?

Please submit your case here!

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Published with the kind permission of The Smart Manager, India's first world class management magazine, available bi-monthly.