Distribution Management
Case Study
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QCaliber-India Services Pvt. Ltd.
Business Query Resolution Approach – A Case
Study on Distribution Management(Page 1 of 3)
Client Situation
Client Query
• The company is manufacturing a range of drugs. The company wants to understand the current distribution
channel structure and tips to understand how to leverage the current distribution channel prevalent in the
industry.
(1) What challenges restrict us to expand our distribution channel?
(2) How other players in the market deal with the current distribution channel prevalent in the market?
(3) What are the margins at various levels of distribution channel?
(4) What changes in the distribution channel are expected in the market in future?
charged
Query
Resolution
Research
Key
Business
Aspects To Be - Industry
Information
Required & Business Analysis
Reviewed Per Priority
Source (Information sourced
during)
On-Boarding
Industry Assessment
• Product offerings, Industry structure, Distribution
chain, Government regulation. Key Trends
Market mapping
• Market sizing, channel partners roles and contribution,
channel margins, competitors benchmarking
Distribution
• Distribution channel study, organized vs unorganized
chain of both company and other players in the
industry
Identified
Areas
Problem
Identified Constraints
Secondary
Research
Query
Resolution
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Tools and Techniques Deployed
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• Benchmarking, Channel
mathematics
• Modeling, Flow charts, Channel
structure, Channel selection
• Highly fragmented nature of the distribution network, excessive number of layers, low margin, competition, lack of
required regulatory reforms to strengthen the distribution system, brand substitute, launch of new generic drugs
• Sales channel and marketing team do not have sufficient resources, system, budget and technology like other
competitors to grow and maintain relationship with distribution partners, organized retailers demand high margin,
sales and marketing team unable to play successful role in convincing physician and hospitals.
Contd.
Confidential & Proprietary
© 2009 QCaliber-India Services Private Limited.
Page 2
(continued)
Business Query Resolution Approach – A Case
Study on Distribution Management (Page 2 of 3)
Key areas studied to resolve client’s query
1
2
Distribution Model and Market
Concentration
Distribution Channel Mathematics and Trends
Market Size and Distribution Model
• The Indian pharmaceutical industry is continuing its robust growth rate at 13% for the
last six years. The industry has the potential to reach US$25bn by 2010.
• Distribution accounts for around 35% of the retail cost of a drug.
• Drug distribution in India is layered and regulated.
• Branded product distribution-chain: C&F Agents (CFAs) to Wholesalers to Retail shops
to customers: The pharmaceuticals manufacturer delivers goods to the first layer
including a clearing and forwarding agent, a super stockist or a company-owned depot.
From this layer, the products are delivered to stockist, which further distributes these
products to wholesalers, medical institutions, hospitals and retailers.
• Generic drugs can pass through a super stockist/wholesalers to retailers
• Manufacturers can directly distribute these products to institutions and hospitals, but
never to a retailer.
• Around seven medical stores organizations located at different regions strategically in
India, which supply drugs/products to government hospitals and dispensaries in rural
and suburban areas.
• Most of the Indian Pharma companies have distinguished distribution channels
(dealer/distributer network/customer offerings) for prescription and OTC products.
Number of Channel Partners in India – Distributors’ Market Concentration
• Most companies deal with 1 to 3 CFAs in each Indian state, which indicates a large
organization can work with a total of 25–35 CFAs and small organization can include 6
to 9 CFAs.
• A CFA can handle the stock of only one company. However, a stockist (distributor) can
simultaneously handle over one company (usually, 5–15 on location basis) and can deal
with more manufacturers till 30 or more.
• The usual credit limit to deal with stockists includes 30–45 days. The CFAs are paid by
the company yearly, once or twice. The payment to CFAs is based on the percentage of
total revenues from products. Many small manufacturers deal directly with super
stockists. According to the Indian Retail Druggists and Chemists Association, the total
number of stockists in India is about 65,000 currently as compared to 12,000 in 1997
and the number of pharmacies is around 550,000 as compared to 125,000 in 1997.
Estimation of Industry’s Distribution Margin Through Competitive Benchmarking
• The component of drug price are: Manufacturer’s import (selling) price + tax or duty or
distribution / wholesale margins + retail margins + Value Added Tax (VAT)
• Clearing and forwarding agents demand 1to10% margin on total turnover and other expenses;
Stockist or distributors account 8% on scheduled drugs and 10% on non-scheduled drugs;
Retailers fetch 16% on scheduled drugs and 20% on non-scheduled drugs.
• Distribution margins are good in India for channel partners, especially because the government
has no price controls on non-scheduled medicines. The margins at various level of distribution
system are plotted in the table in the right.
Government Regulations
• National Pharmaceutical Pricing Authority (NPPA) largely controls prices and the margins of
drugs for the wholesaler and retailers. Scheduled drugs are price-controlled whereas
nonscheduled drugs are not price-controlled. There are 76 scheduled drugs.
• Wholesalers and retailers are also compensated with other trade offers, apart from the margin
decided by NPPA/manufacturers/channel partners. Hospitals and large institutions can interact
directly with manufacturers to acquire drugs at lower costs.
Key trends
• Stockists compete with each other in a given city.
• Hospitals order large quantities and are able to negotiate with multiple stockists.
• Organized retail pharmacies are in a nascent stage in India, however, have gained quiet a good
portion of the market share in metro cities at key locations..
• Due to increasing M&A, the number of stockists for each company has grown and competition
among them has increased. Retailers have more bargaining power and hence, can extend the
credit period and ask for heavy discounts. Stockists needs more support from manufacturers to
maintain their profitability and to compete with other stockists in the same market.
• Generic drugs market is growing rapidly in India. These firms are offering higher trade margins
at the retail level, which can reach up to 500% trade margins. This leads to brand substitution.
• Emergence of third-party logistics (3PLs) is one of the key drivers of change, which will lead to
more consolidation and development of more organized industry structure, where in 3 to 5 3PLs
will distribute products from manufacturers to retailers through optimum number of warehouse
locations.
3
Confidential & Proprietary
© 2009 QCaliber-India Services Private Limited.
Page 3
(continued)
Business Query Resolution Approach – A Case
Study on Distribution Management (Page 3 of 3)
Key areas studied to resolve client’s query
3
Company Internal Diagnostics
Company Internal Diagnostic
• Margin offered to channel partners were very low as compared to industry benchmark
• Company’s sales force are not customer-centric
• Limited trade offers and incentives
• Low institutional sales due to inability to meet institution/hospital’s requirement
• Weak product pipelines
• The excessive distribution channel and high frequency of brand substitution clearly demonstrates the need for presence of all the stock keeping units (SKUs) at all levels at all times. In India, most
of the drugs’ brands (patent) have generic versions and margins are also higher for generic products. In order to minimize risks of substitution, company must ensure their products are always
available to the stockists and retail shops. Further, trade offers should be more frequent to stockists and retailers/doctors.
• For prescription drugs, the company needs a customer-centric approach for key customers of the company includes doctors/ physician, end users, pharmacy, hospitals and retailers. Doctors
recommend consumers to buy a particular drug from the retail shops/pharmacy, provided the drugs are available (otherwise, it may cause brand substitution).
• Train sales force with required information for gaining more confidence of physician.
• Design of more customer-centric territories to enhance sales force relationship with individual physician - contact details, needs, preferences, and prescription criteria – to increase efficiency and
productivity of sales force and to increase sales of products.
• Sales team also need to report the strength of doctors to send sufficient number of customers to outlet for the company’s drugs.
• Maintain high sales and margin through economies of scale
• Advent of organized pharmacy retail chains. Focus on increasing penetration through organized market with focus on brand building exercise, in order to gain competitive advantage in the longrun. As per the industry study, the organized market will help improve margin of manufacturers in the market
• Evaluate and identify efficient and loyal stockists/retailers, which own the largest share of the entire market, and aim to build long-term relationship with these customers.
• Focus on building relationship with existing and new hospitals with timely direct supply /or through use of efficient wholesalers.
• Build and train sales force and channel partners to encourage institutional sales
• Distribution channel network is highly fragmented, but changes expected with increasing contribution from organized retail chain – which is growing at a rapid pace. Government involvement
restricts changes in the margin structure for certain categories of drugs – and the regulations will continue in future. Emergence of third-party logistics and organized retail market to benefit the
drugs manufacturer in future – as this will allow elimination of large layers/levels in the distribution structure. Various drug manufacturers have implemented CRM technology for maintain
relationship with Physician and to better leverage them to market and promote company’s drugs. Company should focus on following areas – R&D to strengthen product portfolio, organized
retailers to benefit from growing organized market, institutional sales to benefit from establishment of powerful direct sales team and network, as the layering is low in this channel, encourage
retailers to promote and sell company's drugs that are sold without physician prescription (over the counter) for common diseases as well as encourage patients to buy their brand/products
substitute for prescribed drugs that are not stored by the retailer. Maintain stocks through proper communication system and through effective management of supply chain as well as
distribution chain to avoid brand substitution of their drugs.
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© 2009 QCaliber-India Services Private Limited.
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© 2009 QCaliber-India Services Private Limited.
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