Lubol India LimitedA Case Study on the Structure of Distribution Network

Introduction to the case

Target of LIL : To increase market share from 1% to 9%

3 Types of Outlets: NOC Retail Outlets (Petrol Pumps) Bazaar Trade (Automotive stores & Service Centres) Direct Large Customers (OEM’s, large fleet owners, & large

industrial customers)

Distribution Channels Own (Bazaar Trade and Unicorn) NOC (Retail and Direct)

1.Criterion for selection of distribution network

(Narrow or Wide)

Expected market growth

Transportation Cost

Wholesalers cost

Professional CFAs

availability

Promotional campaign &

Risk mitigation

Inventory carrying cost &

handling losses

Narrow Distribution Network

Ahmedabad CFA

LCW Trombay

Rajkot CFA

Ahmedabad(W&S)

Ahmedabad (E) Nadiad Dholka

2.Recommendation for LIL

Location Demand Sales Tax

Operating Cost

Accessibility

Growth Opportunity

Policy Environment

Maharashtra, Gujarat, Tamil Nadu*+Kerala

High High High High High Supportive

UP*+Delhi, WBMP*+Bihar

High High Moderate Moderate Moderate Neutral

Chandigarh*+Punjab+Haryana+ HP

High Low Moderate Low Moderate Supportive

Karnataka, Andhra Pradesh

Moderate Moderate

Moderate Moderate High Supportive

Rajasthan Low Moderate

Low Low Moderate Supportive• The remaining markets can be more profitably catered through NOC retail channel as demand is low

3.Criterion for method of Depot Management

Factors NOC Warehouse CFAs

Operating Cost Lowest Highest Moderate

Customer Service Lowest Highest Moderate

Operational Efficiency Lowest Moderate Highest

Customer Reach Highest Lowest Moderate

Division of Work Moderate Lowest Highest

Marketing Lowest Highest Moderate

4.Selection of Distribution Nodes

Warehouse

High demand, Competition,

Responsiveness, Long term Plan

Gujarat, UP

CFAs

Moderate demand,

Operational Efficiency,

Expected ROI less

Bihar, Andhra

Pradesh, Rajasthan

NOC

Low Demand, Customer

scattered, Low Accessibility,

Growth Potential low

Low demand Markets

5.Inventory Norms not Linear

• Batch production

• Demand uncertainity

• ABC classification

• Service frequency

• Supply uncertainity

6.Recommended fee structure for CFAs

• CFA

Example: Andhra Pradesh

Sales=285 KL; Inventory=100 KLPhysical space Cost=7*50*100=Rs. 35,000 Fixed Operating Cost= Rs. 5000Variable Cost=100*285= Rs. 28,500

Total Cost= Rs. 68,500Revenue=48*285*1000= Rs. 1,36,80,000

Revenue/Cost= Rs. 199.7

Profit=12*285*1000= Rs. 34,20,000

• Own Warehouse

Example: Maharashtra

Sales=803 KL; Inventory=300 KLPhysical Space Cost=10*50*300= Rs. 1,50,000Fixed Cost= Rs. 25,000Variable Cost=100*803= Rs. 80,300

Total Cost= Rs. 2,55,300Revenue= Rs. 3,85,44,000

Revenue/Cost= Rs. 150.9Profit=12*803*1000= Rs. 96,36,000

Contd..

• Fee structure should be according to strategic growth plan and customer service level so that participative growth is ensured and the entire distribution moves in harmony towards targeted growth

F=0.01*S1 + G + SG= [0.05* {S1-S0}] if G>=0 else G=0

S=0.05*(CSL-0.85)*(S1-C1)

Example: Andhra PradeshF=0.01*13680000 +0.05*478800 + 0.05*(0.9-0.85)*(12*285*1000) =136800 + 23940 + 8550Fee=Rs. 1,69,290

Cost=Rs. 68,500Profit to CFA agent=Rs.1,00,790

7. Source Allocation

• Transportation model is the solution to this problem with known data of transportation cost per unit

Depots

Blending Sources

D1 D2 D3 D4 D5

S1 2 4 2 1 3

S2 2 6 3 7 5

S3 7 9 6 1 11

Multiple depot Selection

Kolkata

Chennai

Mumbai

Chandigarh

Vadodara

Salem

• Existence of three sources influence the need for multiple depots

• High demand markets and locations away from blending plants and having maximum adjacent market coverage to be given preference for setting up depots

• Unnecessary Material handling cost can be reduced• Optimum distribution of inventory according to

demand

Existing plant location

Multiple depots

THANK YOU