Kirloskar Oil Engines Limited: Crop Irrigation Business
‘Kirloskar’ is a highly respected brand in Indian market, which started its operations more than a century ago with manufacturing of farming equipment. Kirloskar Oil Engines Limited (KOEL) is the flagship company of now diversified ‘Kirloskar’ group. KOEL’s Crop Irrigation Business (CIBU) is India’s largest manufacturer of Diesel Engine based ‘Pump-sets’, an equipment, required essentially by farmers for pumping water in farm-fields. CIBU also provides a wide variety of spares and oil required for periodic maintenance of its products. TOC journey at CIBU started about 3 years ago.
Rural India, about 65% of Indian population driven mainly by agriculture, is scattered over a large land area, which creates significant logistical challenges for branded products to reach out to every nook and corner of the country. Distribution being costly affair, the pump-set industry operates through ‘Dealerships’, who sell the equipment to end customer from their own shop, severely constraining the last mile reach. Hence, for of any branded product, there are many local variants, which are readily available and cheaper; hence, more desirable. Due to illiteracy, the consumer can hardly make out a spurious brand from an original one. A ‘Kirloskar Type’ pump-set is most common. Due to similarity of products, even spares are interchangeable between the brands.
Before TOC Implementation, CIBU had a similar channel structure with about 250 direct dealers, most of them exclusive for CIBU’s pump-sets. The company also had about 100 dealers for their spares and oil business. Few channel partners were common for both Pump-set and Spares & Oil.
The objective of TOC Implementation was to make desired range of CIBU products (both Pump-sets and Spares & Oil) available in hinterlands of India to reach every potential customer.
The traditional solution of Make-to-Availability (MTA), for distribution with seasonality, was deployed; manufacturing of pump-sets and procurement of spares & oil against consumption from CWH / Depots, followed by replenishment to ‘dealerships’ instead of forecasted orders. The pull based replenishment at ‘dealerships’ reduced their inventory by 50% and improved the daily availability to high 90s, thereby significantly improving their Return On Investment (ROI).
After subordinating to create availability at ‘dealerships’, the obvious next step to reach every potential customer was to distribute products to all potential retail counters in the market.
Offering replenishment to retailers required a ‘dealership sales representative (DSR)’ visiting all the potential retailers in the territory ‘at least on a weekly beat’, along with a delivery van to ensure ‘next day door delivery’ to retailers. For successful implementation and sustenance in future, it was necessary that the dealerships retain the higher ROI. Here, CIBU faced significant challenges,
- Unprofitable Distribution: The dealers being counter-sellers did not have any infrastructure to support distribution. A dedicated DSR, delivery van and warehousing would add to the expenses of dealer. As the dealers were exclusive, the recovery of expenses depended on margins made from CIBU products. Moreover, the percentage of margins made in distribution would be significantly lesser than that made by counter-selling. The existing range of products at most of the dealers was not sufficient to cover these distribution expenses.
- Area of Coverage: In traditional push system, the only way to increase the business of a dealer was to assign larger territory. In the new paradigm, on one hand, when effective distribution required reach to a village-level retailer, the dispersed market-centers in a larger territory would be expensive. On the other hand, reduction in territory would reduce the overall business.
- Seasonality of Products: The sale of products is highly seasonal, dependent on the monsoon and crops in a region. The consumption in the market during off-season is significantly lower. The expenses, during the low consumption time, for weekly visit and delivery to replenish the consumption at retailers, would be more than the margin made, risking the sustenance. Non-availability of products at retailers during off-season would result in loss of sale. Breaking the rhythm of weekly beat for off-season would also endanger sustenance even during season.
The most difficult part of TOC Implementation is ‘Subordinating’ to the decision of ‘exploiting the constraint’, here Customer. In distribution, it meant ensuring daily availability of our products at every relevant point of sale, thereby giving no opportunity to the customer not to get the desired product. Replenishment to the retailers eliminates unavailability in three ways,
- it nearly eliminates the stock-outs at retailers; and
- it releases the cash and space at retailers by reducing inventory of existing products thereby enabling the retailer to increase range; and
- it adds more retailers in fold without any significant risk for both retailer and dealership
Following steps are taken to ensure customer reach,
- Product focused dealers; really? - The dealerships for Pump-set and Spare & Oil catered to many common retailers in a market-center. CIBU challenged the need of ‘product focused dealers’. Reduction in inventory by replenishment, gave CIBU the flexibility to aggregate various products (Pump-sets, Spares and Oil) at one dealer without increasing working capital. The standard SOP of retailer replenishment enabled use of same resources for all variety of products, generating more sales from smaller area. CIBU rolled out ‘One District One Distributor’ policy, reducing the area of dealer, but significantly increasing portfolio.
- Protecting the Down-side - The throughput made by CIBU on every additional unit sold is significantly higher than the trade margin made by a dealer on distribution of the product. Hence, the break-even point for CIBU to cover additional cost of DSR and delivery van is much lower than for a dealer. CIBU rolled-out a mafia offer on ‘Minimum ROI Guarantee’ to their dealers to protect any down-side for them.
- Additional Off-season Products - CIBU further exploited the released working capital at a dealership as well as retailers by adding off-seasonal products like automobile oil, adhesives, cables, alternators etc. which can be sold during ‘off-season’ from the same retailers in the market-centers.
- In last two years, more than 150 distributors (about 30%) have already accepted the offer and rolled-out replenishment to retailer. Further rollout is still in progress.
- Six times increase in reach: CIBU has been able to create a network of more than 20,000 active retailers up from about 3200 span India two years ago.
- Even when the industry wide sale is continually declining, CIBU has been able to increase the sale and market share over last couple of years.
Subordination!!! what next?
In the area where CIBU is market leader, the replenishment offer has significantly increased the number of retailers keeping ‘Kirloskar’ Pump-sets, however, in the area where CIBU is a distant follower, many of the retailers have refused to keep due to very low demand for ‘Kirloskar’ brand.
Non-availability of CIBU pump-set at these retailers is taking away the opportunity for the customer to get desired pump-set. To ensure reach to these customers, CIBU is set to continue on the path of subordination by creating reference installations in the villages of such markets, thereby influencing the demand in the market. The demand coupled with replenishment will create ‘win-win’ situation for the retailers.
And, even sky is not the limit…!!!