Need to evolve a new sales model
The current 'del-credere agent' sales model is unfavourable for the distributor and it offers a paltry margin to the distributor while exposing him to the risk of default by the customers.
Jailesh Dalal, Managing Director, Jaycee Buildcon (India),
comes up with a sales model which seeks to protect the interests of the distributor.
India is the second-largest cement market in the world, accounting for 7-8 per cent of global cement production. The total cement capacity in India now exceeds 300 million tons per annum, with global cement majors like Holcim (ACC and Ambuja Cement - have largest combined capacity), Lafarge, Heidelberg, Vicat, Italcementi making strong headway into the market, along with home-grown players like Ultratech (single largest cement manufacturer), Binani, etc.
The demand for cement is driven by real estate and infrastructure growth and exports. The recent policy paralysis has stinted demand growth, but it is temporary and would bounce back. From an economic standpoint, cement production of one million tonnes is estimated to generate downstream employment for 50,000 people. This reflects the significance of the cement industry in India.
Even though the manufacturing facilities in the industry are world-class and the supply-chain is efficient, there is still a considerable amount of evolution that has to happen in the sales model.
Sales Model in the cement industry
All cement manufacturers in India invest significantly on marketing, branding and technical support. While some of them sell directly to B2B customers (large consumers) and some sell on direct credit through cement distributors (sales agents), most of the manufacturers have adopted a modified version of the "del-credere agent" (DCA) model for sales.
In this, the distributor acquires new customers, generates orders and coordinates for despatches. In addition, he pays the full invoice value to the manufacturer within 7-10 days from despatch, while offering open credit to the customer as the case may be.
The distributor might receive payment from the customer as per agreed credit terms. But in case the customer doesn't pay on time, the distributor has to pursue him and in the worst case, face bad debts.
For B2C sales (retail), the manufacturers have adopted a simple trading model in which distributors purchase from manufacturers and sell to customers. However, all other aspects including logistics and pricing are managed by the manufacturer in all cases.
Even though the distributor takes all the risk for a paltry operating margin of 1.5 per cent, his business growth is limited by the funding available with him as he is also playing the role of a financier.
The current sales model gives customers the liberty to delay payments and default in some cases, considering the weak legal system in India and little recourse to payment default on open credit terms. The distributor has to bear the interest cost for delayed payments and risk of bad debts, both of which are significant.
While ideal for the manufacturer, the current sales model is not sound and efficient as a whole. Effective steps need to be undertaken to protect the interests of distributors as well, which are an integral part of the business and an asset to manufacturers.
Evolution of the Sales Model
Some ideas to improvise the current sales model and quickly implement changes are:
1. Well-defined due diligence process for all new customers acquired by distributors. This should be standard across the industry, similar to the process employed by banks before they approve any credit limits.
2. Tri-party, legally binding sales contract between manufacturer, distributor and customer for all orders (standard across the industry), with clear clauses and action in case of payment delays and defaults.
3. Manufacturers should set thresholds for open credit terms offered by distributors to all customers compulsorily, so that the industry works in an organized and synchronized fashion and customers do not take undue advantage of distributors.
4. Full support and assistance to be provided by the manufacturers in case of payment defaults by customers. The above would go a long way in preventing fraud.
5. In case of large, reliable customers, the manufacturers should extend support to distributors and help them increase sales by offering special credit facility with respectable sales margins.
6. Increase commission on sales reasonably for distributors (to at least 5 per cent) to keep the business interesting and profitable for them, as they invest funds and take all the risk.
7. Increase the payment period between distributor and manufacturer to a minimum of 15 days to enable distributors use their funds more effectively.
8. Not hold distributors accountable for any short-weight as they are not involved in logistical aspect (loading, transport, unloading) and there would always be differences in calibration and precision of weigh bridges.
9. Exploit the potential of distributors by supporting them in using innovative ways to sell and add value to the transaction, rather than treating them only as financiers. And implement strict policies to avoid under-cutting of prices by distributors. This would create healthy competition amongst distributors and in turn, help achieve better sales and customer service.
10. Manufacturers and distributors should form a common platform to fight payment defaults and bad debts, while publicly blacklisting customer companies involved in the same. A powerful law firm could also appointed on this platform, to fight all such cases. This would help preventing fraud and filtering unethical consumers in the industry.
If the cement industry works cohesively, a lot of efficiencies could be created which would culminate into higher economic gains for all involved. Improvising the current sales model would be an important step forward, and the cement manufacturers should come together and implement standardized policies and procedures in the market for long-term, sustainable growth.
(The author is the Managing Director of Jaycee Buildcon (India) Pvt. Ltd., a 29 year old company and leading player in the cement distribution, cementitious products and ready mix concrete industry in Western India. He can be reached directly on firstname.lastname@example.org)