DISTRIBUTION STRATEGY – THE CASE OF ASIAN PAINTS

Asian Paints (AP) is the market leader in the Indian paint industry, commanding a market
share of 38 per cent in decorative paints and 33 per cent overall in the organised sector.
Its annual sales turnover exceeds Rs. 1,300 crore, way ahead of all the competitors in
the industry. In profits too, AP is far ahead. AP’s market leadership in the decorative
paints segments can be grasped correctly when we take note of the relative position of
the various players in the industry. Whereas AP has a market share of 38 per cent, its
nearest rival, Goodlass Nerolac, commands a share of just 14 per cent. All others have
only less than 10 per cent. Such an achievement by a company that is wholly Indian in
capital, management and technology and in an industry historically dominated by
multinationals is certainly a commendable feat.

How did AP achieve this success?

AP’s success is the combined result of its strong corporate and marketing strategies.
Maximum credit should, however, go to its marketing strategy. Within marketing, it was
distribution excellence that took AP to the enviable position, that it holds today in the
Indian paint industry. This case study explains AP’s distribution strategy.

A STORY OF DISTRIBUTION EXCELLENCE

This case study, in fact, depicts the distribution strategy adopted by AP in the early years
of its operations. The interesting point is that this strategy serves AP well even today,
when the context has somewhat changed. In the earlier years, in the decorative paint
segment, a wide product range in terms of colour and pack size was a crucial factor for
success. AP literally leapfrogged and overtook all its competitors, and offered the widest
range of products. It also created the distribution outfit that was necessary for reaching
the wide range of products to customers in every nook and corner of the country. In later
years, technology came to the rescue of the players in this regard. Customers could get
the colour of their choice through mixing at the retail outlet. With the help of an
automated machine kept at the retail outlet, paint is given the desired colour by mixing
different shades and stainers in the required proportion. The paint companies need to
maintain only half-a-dozen basic colourants with retailers; mixing can create the other
variants. The new arrangement helps the campanies to manage with a narrow range of
paints. They can reduce the number of SKUs handled and cut down inventory holding
costs.

The above shift has no doubt reduced somewhat the importance of the physical
distribution task in the business, compared to the position in the earlier years. At the
time AP entered the Indian paint business, the physical distribution and channel
management task was the most crucial one in paint marketing. This context is
elaborated in one of the sections in this case study. We can appreciate the lessons of
the case study better, if we keep in mind this contextual position. Even now, physical
distribution and channel management continue to be crucial functions in the business.
In the matter of product range too, companies are not able to totally dispense with the
need for variety in view of the many practical limitations of mixing at retail outlets. It is
no easy task to provide mixing and computers. Before we actually go into AP’s
distribution strategy, let us have brief profiles of the company and that of the paint
industry, so that the contextual setting of the case is clear. Let us start with the industry.

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THE INDIAN PAINT INDUSTRY
The paint industry of India is 100 years old. Its beginning can be traced to the setting up
of a factory by Shalimar Paints in Kolkata in 1902. Till the advent of World War II, the
industry consisted of just a few foreign companies, and some small, indigenous
producers. The war led to a temporary stoppage of imports leading to many more local
entrepreneurs setting up manufacturing facilities. Nevertheless, foreign companies
continued to dominate the industry. Even now, they remain active contestants, though
their foreign shareholdings stand reduced, with two of them having become totally
Indian. Currently, the industry has a sales turnover of about Rs.3, 600 crore. In terms of
volume, it corresponds to 5 lakh tonnes. The industry is composed of two sectors, the
organised and the unroganised. The organised sector controls 70 per cent of the total
market. The remaining 30 per cent is in the hands of the unorganised sector, consisting
of 2000 odd small-scale units. The industry is not capital intensive. It is however working
capital intensive. The demand for paints is fairly price-elastic and is linked to economic
and industrial growth. Demand is somewhat seasonal in nature-low during monsoon
months, high during festival seasons.

THE MAIN SEGMENTS

The industry comprises two main segments decorative/architectural and industrial
paints. The decorative/architectural paint segment accounts for 70 per cent of the total
paint market while the industrial paint segment accounts for the remaining 30 per cent.
The industry is, however, expected to undergo a structural shift towards industrial paints
in the next few years, when its share is expected to go up to 50 per cent in line with the
global trend. Industrial paints thus holds greater growth potential in the coming years.
Actually, with the decorative segment gradually bottoming out, companies are already
increasing their focus on industrial paints. Industrial paints are technology intensive. The
industrial paints segment can be further classified into automotive paints, marine,
powder coatings, high performance coatings, and others. Original equipment
manufacturers (OEM) of products such as automobiles, furniture and white goods such
as refrigerators are prime consumers of industrial paint. The automobile industry
accounts for 50 per cent of the industrial paint market. A good part of the demand is
from shipping and heavy industry. Navy being the largest customer in shipping.

THE MAIN PLAYERS

Asian Paints, Goodlass Nerolac, ICI (India), Berger, Jenson & Nicholson and Shalimar
are the leading companies in the organised sector. The top six manufacturers account
for about 80 per cent of the market in the organised sector in value terms. AP is the
industry leader, with an overall market share of 33 per cent in the organised sector.
Threat of global competition is minimal in the industry. AP dominates the decorative
segment, with a 38 per cent market share. Goodlass, a Tata company, is number two
with a 14 per cent market share. Berger and ICI have 9 per cent and 8 per cent shares,
respectively, in this segment followed by Shalimar, with 6 per cent.

Goodlass dominates the industrial paints segment, with 41 per cent market share. AP is
a poor second here, with a 15 per cent market share. Berger, ICI, and Shalimar are the
other substantive players in the sector, with 10 per cent, 9 per cent and 8 per cent
shares, respectively. The dominance of Goodlass in industrial papints is largely the result
of its technical associated with the Japanese paint major, Kansai Paints, which has a
29.5 per cent equity stake in the company. Goodlass has a lion’s share of 70 per cent in
the OEM passenger car segment, 40 per cent share of two-wheeler OEM market and 20

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per cent of commercial vehicle OEM market. Goodlass also holds 20 per cent of the
white-goods segment.

The market shares of the five leading companies are shown in Exhibit 1

Exhibit 1 Market Shares of Five Major Players

Sr. Company Market Share (%)
Decorative Industrial Overall
1. Asian Paints 38 15 33
2. Goodlass Nerolac 14 41 18
3. Berger Paints 9 10 9
4. ICI Paints 9 9 9
5. Shalimar 6 8 7

THE COMPANY
As already mentioned, Asian Paints is India’s largest paints company and the market
leader in decorative paints. AP manufacturers and markets a wide spectrum of coatings
and ancillaries, which include decoratives, production paints and heavy-duty coatings.
The manufacturing facilities of the company for paint products are currently spread over
four locations- Bhandup, Mumbai, which was established in 1955; Taloja, Maharashtra,
where AP established its second unit in 1980; Ankleshwar, Gujarat, where operations
started in 1981; and Patancheru, Andhra Pradesh, where manufacturing started in 1985.
Asian Paints offers the widest range of paints in terms of products and shades, as well
as pack sizes. Availability of wide range of shades is in fact, one major critical success
factor in the decorative paints business. And AP scores high in this factor. AP
manufactures and markets more than 2,800 items of paints (SKU).

PERFORMANCE
AP has been consistently turning out a good performance over the years. For more than
two decades now, it has been the market leader. Besides, the company has also
consistently proved its excellence in operating performance. Exhibit 2 gives details of
AP’s sales performance during the last four years. Exhibit 3 gives some other important
details of AP’s performance. AP has set a target of gross sales of Rs 2,100 crore by
2003. It aims to be amongst the top ten decorative paints manufacturers in the world by
2003 and among the top five by 2005.

Exhibit 2: Asian Paints-Sales Performance : 1998-2001

1998 1999 2000 2001
Sales Value (Crore) 911 1,033 1,221 1,373
Sales Volume (Tonne) 116,942 132,284 162,110 181,271

Exhibit 3: Asian Paints – Select Performance Indicators (FY 2000)

• AP’s operating profits stood at Rs 191 • The net profit stood at Rs 97 crore as
crore in FY 2000, an increase of 37.7 compared to Rs 77 crore the previous
percent over the previous year. year, higher by 26.6 per cent. Net

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 Operating profits have grown at a
CAGR of 13 per cent in last five years,
much higher than the sales growth of
8.6 per cent
• The profit before tax (PBT) stood at Rs •
143 crore, an increase of Rs 49 crore
over the previous year. PBT has grown
at a CAGR of 12.35 per cent in last five
years.
profit has grown at a CAGR of 12.7 per
cent in last five years.
Return on net worth (RONW) improved
from 25.2 per cent in FY 1999 to 27.1
per cent in FY 2000. RONW has
remained close to 25-26 per cent in
last five years.
• Return on Capital Employed
(ROCE) improved from 26.6 per
cent in FY 1999 to 35.9 per cent in
FY 2000.

AP’s sound marketing has earned it strong brand equity. To quote AP’s managing
director: ‘We have been able to build strong brand equity for our products by focusing on
features that are appreciated by customers, ensuring that our products are of high and
consistent quality, offering a wide range of shades and packs, and ensuring that our
products are available wherever and whenever required, by building a strong distribution
system.’

Its brand Tractor, Apcolite, Uttav, Apex and Ace are well entrenched in the market. And
AP’s logo, ‘Gattu’, the impish boy, with the paint tin and brush, symbolises one of the
most recognised and most prosperous mascots in Indian business! All this has earned
the company a place among the world’s leading paint manufacturers. AP is the winner
of the 1995 corporate performance award by the Economic Times and Harvard Business
School Association of India. It actually received the award twice within a decade.

AP STRIKES A NEW PATH IN DISTRIBUTION

At the time AP entered the Indian paint business, distribution was the most crucial task
for any new entrant. Both physical distribution and channel management posed
formidable challenges. The foreign companies and their wholesale distributors
dominated the business. The foreign companies appointed a few traders as their
wholesale distributors and allowed them to perpetuate a situation of monopoly. Each
distributor was assigned a large territory and was given the right to operate as the
exclusive channel of the company in the assigned territory. The trade terms were also
very liberal. The companies also extended virtually unlimited credit to the distributors.
The credit outstandings for the supplies made throughout the year were required to be
settled by the wholesale distributors only at the year-end, at Diwali time.

These distributors had neither the compulsion nor the motivation to invest in distribution
infrastructure. They were not required to move out to semi-urban and rural areas. They
concentrated on big cities where they could make the sales without much investment in
distribution infrastructure and market development. Also, they were shutting the doors
on any new paint company seeking an entry into the business. In other words, these
distributors controlled the paint business and were making it impossible for a new paint
company to enter and establish itself n the business. AP sized up the scenario correctly
and formulated a unique distribution strategy. In the normal course, a firm entering the
industry in this scenario would have opted for the low risk strategy of gaining a limited
access to the wholesale traders and be satisfied with a small share of the existing

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business. But AP went in for a strategy that differed totally from the existing pattern.
AP’s strategy in fact, meant the polar opposite of the established/existing pattern.

Chart 1: Elements of AP’s Distribution Strategy

• AP bypassed the bulk buyer segment and went to individual consumers of paints.
• AP went slow on urban areas and concentrated on semi-urban and rural areas.
• AP went retail.
• AP went in for an open-door dealer policy.
• AP voted for nationwide marketing / distribution.

AP BYPASS THE BULK BUYER SEGMENT AND GOES TO INDIVIDUAL

CONSUMERS
Bulk buyer segment was the major segment of the paint business in the earlier days and
any paint company needed a share of this major segment for sheer survival. Though,
this segment was dominated totally by foreign companies and their wholesale
distributors, a new entrant to the business like AP would normally have rushed to this
segment and tried to garner a share of it. AP, however, had a totally different game plan.
Seeing that this segment was not a growth segment, though it was certainly the major
segment at that point of time, AP decided to ignore this segment for the present and go
to individual consumers. And that was a crucial decision. It influenced every
subsequent decision AP took in the realm of distribution. Over time, AP proved to the
paint industry that there existed a large and bottomless segment in the paint business of
India, outside the bulk buyer segment, comprising of individual consumers.

AP GOES TO SEMI-URBAN AND RURAL AREAS

Along with the decision to go to individual consumer segment leaving aside the bulk
buyer segment, AP also decided that within the individual consumer segment, semi-
urban and rural areas would constitute AP’s priority market. Prior to AP’s entry, the paint
business was by and large concentrated in the urban areas. All the major paint
companies and their wholesale distributors were content with the market that was
available in the urban areas. In contrast, AP clearly saw that a large market for paints
was emerging in the semi-urban and rural areas, and felt it wise to tap this market. AP
also understood that a new entrant like AP had also a compulsion to go to the semi-
urban and rural areas. The major companies and their wholesale distributors were not
giving any worthwhile opening in the big cities for new entrants. AP found it difficult to
attract the wholesalers in the cities to deal in its products. It had to necessarily turn to
the semi-urban and rural areas for support. AP wisely decided against committing all its
resources on a head on collision with the foreign companies and their big wholesale
distributors in the urban areas.

AP GOES RETAIL
Going directly to retail dealers was the next major strategic decision of AP in the realm of
marketing and distribution. Here too, AP totally broke with the prevailing distribution
practice. As mentioned earlier, the foreign companies, who were the main players, were
practising a wholesale distributor-dependant marketing system. AP did not see any
great merit in the system. It totally bypassed the well-entrenched wholesale distributors
and went directly to the retailers. While AP’s competitors remained content with their
linkage with a handful of wholesale distributors, AP preferred direct contact with
hundreds of retail dealers.

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AP GOES IN FOR AN OPEN-DOOR DEALER POLICY
AP followed an open-door policy in the matter of adding retail dealers to its network. The
prevailing trend in those days was to limit the number of dealers to the barest minimum.
AP broke this trend and chose to use practically everyone in the trade, who was willing
to function as its dealer. It was as a combined result of the policy of going directly to
retailers and the policy of open door to dealership that AP’s dealer network swelled
rapidly. Even after achieving stability and maturity in distribution, AP continued to follow
a policy of continuous expansion of dealer network. By 1990, AP was having a 7,000
strong dealer network. By the year 2000, the number had swelled to 12,000. And even
now, on an average, AP is adding 200 to 250 new dealers every year.

AP VOTES FOR NATIONWIDE MARKETING/ DISTRIBUTION

AP took yet another important and strategic decision in the realm of distribution. Those
days nationwide distribution/marketing was not the standard practice in the paint
business. On the one side, there were the 1,000 odd small paint companies who, as a
class, believed in marketing their paints in limited territories in and around their point of
production. On the other side were the big companies, who as a class, believed in
limiting their distribution to the big cities. In contrast to both these existing practices. AP
voted for a nationwide distribution/marketing. It wanted to have an active presence
throughout the country, in all the geographical zones, states and territories.

THE IMPLICATIONS OF AP’s DISTRIBUTION STRATEGY

AP’s distribution strategy described in the preceding paragraphs had its associated
implications. AP had to take due note of them and face them squarely.

GOING TO INDIVIDUAL CONSUMERS IMPLIED WIDE PRODUCT RANGE AND

COMPLEX DISTRIBUTION
Had AP concentrated on the bulk buyer segment, it could have managed with a limited
product range, at least, in the initial years. But, AP’s decision to turn to the individual
consumers necessarily meant a wide product range. In the nature of things, the
individual consumer segment involves a very wide choice in terms of products,
materials, shades and pack sizes. On top of this, AP believed in making products based
on the preferences of consumers. It gathered feedback from the consumers and turned
out products, shades and pack sizes on the basis of such feedback. This policy resulted
in a further burgeoning of the product range.

SMALLER PACKS PROLIFERATED THE PRODUICT DEPTH FURTHER

At the time of AP’s entry, paint companies were supplying paints in containers of 500 ml
or larger. AP saw that there was a felt need in the market for paints in smaller packs. All
end uses did not require a large quantity. Moreover, it was common practice for
consumers to buy paint initially in a larger quantity and supplement it with small size
purchase to complete the job. AP decided to harness the business opportunity and
started supplying it paints in small packs- in 200 ml, 100 ml and 50 ml packs. This
proliferation in pack sizes also contributed to AP’s growing product range. AP was by
now manufacturing and marketing as many as 2,000 distinct items of paints, none of
which was strictly a substitute for the other.

WIDE PRODUCT RANGE IMPLIED EXPENSIVE DISTRIBUTION

The policy of having the widest range of products, colours and pack sizes had its
implications on AP’s distribution. When 2,000 different items had to be made available

6
to the consumers, it automatically meant that the company had to be prepared for high
inventory holding in its various depots/retail outlets. Accounting and sales arrangements
had also to be provided for on a matching level. Naturally, distribution was becoming
more complex and expensive for AP.

GOING TO SEMI-URBAN / RURAL MARKETS FURTHER ENLARGED

DISTRIBUTION
The decision to go to the semi-urban and rural markets instead of confining to the urban
markets also meant enlargement of the distribution function. AP had to go in for more
dealers in order to serve the scattered semi-urban and rural market. The decision also
meant that AP could not opt for a simple, centralised distribution of its products from its
factory. It had to go in for a decentralised, field-focussed distribution, with a network of
depots located all over the country/marketing territory. Without such extensive and
intensive distribution network, it would not have been possible for AP to cover the semi-
urban and rural markets.

Chart 2: Main Steps in the Implementation Process

• AP created a large network of dealers • It successfully resolved the cost-

• It established a network of company
depots to service the dealers
• It created a marketing organisation that
matched its distribution
service conflict in distribution
i (i) A strong commitment to
ii distribution cost control, without
iii compromising service level
(ii) Effective inventory
management
(iii) IT initiatives in distribution cost
iv control

GOING RETAIL IMPLIED DEEP INVOLVEMENT IN CHANNEL MANAGEMENT

Through its decision to go retail, AP was getting deeply involved in physical distribution
and channel management. In the system chosen by AP, the physical distribution-cum-
channel management task was far more demanding, compared to the wholesaler-
oriented system practised by the other paint companies. While, for companies that
embraced the wholesaler-oriented system, it was enough to service a handful of
distributors, AP had to service a network of thousands of retail dealers. Having taken the
decision to go retail, AP necessarily had to create and service a vast dealer network. It
also had to create the physical distribution facilities required for servicing such a large
network.

National Marketing Necessitated Nationwide Organisation

Extent of marketing territory and complexity of distribution organisation are interrelated.
The moment AP voted for nationwide marketing, it was getting into intensive as well as
extensive physical distribution and channel management. AP thus had to create a
nationwide distribution-cum-marketing organisation.

DISTRIBUTION BECOMES AP’S SHOWCASE FUNCTION

AP’s strategies made distribution the most important element of its marketing mix. And,
AP gave to distribution all the inputs that were demanded by it. In fact, the rest of this
case study is essentially a description of how AP managed its distribution activities –
how it chalked out its distribution programmes, how it implemented them, what problems

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it encountered in this task, how it tackled them and how through distribution success, it
achieved marketing and corporate success.

THE IMPLEMENTATION PROCESS

We shall see how AP went about the actual management of the distribution function. The
main steps in AP’s implementation process are shown in Chart 32.2. Let us see the
details.

AP Creates a Large Network of Dealers

An extensive network of dealers and a matching physical distribution infrastructure play
a crucial role in the decorative paints segment. This is essential for ensuring easy
accessibility of the product to customers. In this, Asian Paints scored over its competitors
with a massive network of 15,000 dealers spread over 3,500 towns across the country.
AP has the largest distribution network among all the players. Goodlass has a network of
8,000 dealers.

AP Established a Network of Company Depots

AP established a large chain of company operated depots/stock points throughout its
vast marketing territory, from where the retail dealers could conveniently pick up their
requirements. AP’s basic strategies explained in the earlier sections necessitated a
liberal approach in the matter of stock points/depots. It also meant that the depots had to
be company operated. After all, AP did not have any wholesale distributors to whom the
responsibility for operating the stock points could possibly have been assigned. AP
established a network of 30 company-run depots, spread through out the country and
serviced its retailers from them. The number of depots varied from city to city. For
example, Bangalore had just one depot while Mumbai had four depots. The depots
typically supplied to about 200-300 dealers.

AP creates a Marketing Organisation that Matched its Distribution Intensity

Effective control of the large number of depots, each having substantial stocks of 2,000
odd distinct items necessitated a matching marketing organisation structure. AP set up a
marketing organisation consisting of four regional sales offices, 35 branch sales offices
and a large number of sales supervisors and sales representatives spread all over the
country. The marketing organisation of the company is presented in Exhibit 4. It can be
seen from the chart that a very extensive structure has been created in the consumer
division. It is primarily meant for taking care of the massive distribution task involved in
this sector. Each branch sales office has its own depots and the various items are
stocked in the depots under the control of the concerned branches. The branches
service the dealers and customers in their territories.

These are supported by six regional distribution centres, which cater to 55 depots. Each
depot has a branch manager for supervision of several salespersons who cater to more
than 14,500 dealers in the more than 3,500 big and small cities all over the country. AP
faced many challenges. Of these, the cost-service dilemma was no doubt, the most
important one. And, that is the aspect in which we are mainly interested in this case
study.

Exhibit 4: AP’s Marketing Organisation

General Manager
(Marketing)

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 Sales Manager Manager Sales Manager
(Trade) (Export) (Industrial)

Regional Sales Managers Product Product

(1) (2) (3) (4) Manager Manager Product
(1) (2) Manager
Zonal Managers (4)

Branch Managers Product Product

or Executives (6) Executives (6)
Depot Executives (35)

Sales Supervisors (13) Service

Representatives (4)

Sales Representatives (168)

Sales Representatives
(Industrial Paints)
(27)

AP Successfully Resolves the Cost-Service Conflict in Distribution

Managing the cost-service conflict was the main challenge that AP faced in the
implementation of its distribution strategy. AP met this challenge successfully.

We have seen that AP has over 15,000 dealers in 3,500 towns in India. AP caters to all
of them directly. As a result, for AP, the distribution task gets tremendously extended and
distribution cost becomes a significant business parameter.

Demand for decorative paints is characterised by seasonality. Demand drops during

monsoons and picks up around a mouth-and-a-half before the festive season. Major part
of the sales take place in the second half of the financial year. Manufacturers have to
carry huge inventories during the lean period. As a result, distribution cost becomes all
the more significant.

Naturally, distribution cost emerged as a major hurdle that AP had to cross. The strategy
adopted by AP necessitated expensive distribution. In addition, AP took another basis
decision. It went in for a very high service level in distribution. Service level is measured
in terms of the number of stock keeping units (SKUs) available in stock as a percentage
of the number of SKUs that should have been in stock. AP’s service level is more than
85 per cent whereas that of other large paint companies falls between 50 and 60 per
cent. This meant a further rise in AP’s physical distribution costs. AP had to resolve this
cost-service conflict.

In the chapter on Physical Distribution and Logistics Management, we had seen that a
cost-service dilemma is inherent in any physical distribution situation. A high service
level in physical distribution-in transportation, warehousing, order processing and

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inventories necessarily means a high level of costs. Every firm has to face this cost-
service dilemma and work out a compromise. AP voted for a high service level and
without compromising this service level, it tried to contain the distribution costs.
Interestingly, AP succeeded in this endeavour.
When we go in to the details as to how AP actually resolved the cost-service dilemma,
four factors stand out:

• A strong commitment to distribution cost control, without compromising service level

• Effective inventory management
• Effective control of credit outstanding
• IT initiatives in support of distribution cost control

Strong Commitment to Distribution Cost Control

While following a totally customer-oriented distribution strategy. AP could not afford to
ignore the cost angle. AP was in no position to pass on any additional costs to the
consumers. AP’s marketing philosophy demanded that the consumer price of its paints
should be on the lower side, so as to suit the pockets of the average Indian. Moreover,
AP’s business growth demanded more and more investment in manufacturing and
distribution. AP had to find the resources. This apart, the intensity of competition had
also been on the increase. Naturally, profitability was coming under greater strain in
these circumstances. AP had to control its distribution costs in order to maintain its
profitability and market leadership. The question was how to control the costs without
sacrificing the service level.
EFFECTIVE INVENTORY MANAGEMENT
Effective inventory management is the first major component of AP’s strategy on
distribution cost control. And, AP achieved high efficiency in this regard. Actually, in
inventory cost, AP took the lowest position in the industry. AP’s average inventory level
equals only 28 days sales, while the industry average is 51 days sales. This right away
provided a 45 per cent edge in inventory costs to AP compared t its competitors. AP’s
stock of finished goods was just 7 per cent of its net sales while for the others in the
industry it was nearly twice that level. What is particularly striking in this achievement is
that AP offered customers and dealers a high level of service in product delivery
compared to its competitors and yet kept the inventory costs down by 45 per cent
compared to the competitors.

CONTROL OF CREDIT OUTSTANDINGS

Large credit outstandings, running beyond two months or more, was a natural
concomitant of the distribution strategy chosen by AP. The dealers are required to
maintain stocks of all the SKUs that are on demand in the territory. It pushes up
inventory levels at the outlets. They need credit. AP allowed 15-21 days credit for
dealers located in the major towns and 22-30 days credit for dealers in upcountry
regions.
AP had to pull off a smart credit control strategy for survival. It resolved the thorny
problem through an innovative dealer incentive scheme. AP stipulated that each of its
dealers should pay for the supplies within a specified tme norm and offered them as
attractive incentive scheme for doing so. It consisted of two components:

(a) A special discount of 3.5 per cent. This was referred to as the discount for perfection
in payments. It was passed on at the end of the year, provided each and every
payment throughout the year was made within the stipulated time norms.

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(b) A cash discount of 5 per cent. This was paid for all outright cash purchases. It was
given whenever payments were received within 24 hours of the supply/invoice. In
respect of outstation accounts, the payment have been made in advance by draft in
order to be eligible for the cash discount.

The scheme was a grand success. AP’s credit outstandings always stood below 25
days, while the outstandings of the other major companies were in the range of 40 days
and above. Systematic computerisation also helped AP maintain the credit outstanding
within limits.

IT INITIATIVES IN DISTRIBUTION COST CONTROL

AP’s IT initiatives in respect of distribution-inventory control and control of credit
outstanding, in particular-helped it to control distribution costs without lowering the
service level. AP went in for a fully computerised distribution system. AP did this not
only with an eye on distribution cost control, but also for the sake of distribution
effectiveness per se. But for such an approach, AP’s distribution management would
have gone haywire. Here was a situation where 2,000 different items of paints,
manufactured at four different plants, had to be distributed to 15,000 dealers in 35,000
towns spread all over the country, through 55 depots. AP accomplished this, maintaining
the average service level at 85 per cent, a clear 25 per cent above that of competition.
The IT initiatives also ensured prompt billing, accurate customer accounting and
effective control of credit outstanding.

Computerisation also enabled AP to process recent sales data for the 100 fastest
moving SKUs. This analysis was used to project sales of specific products, which
helped plan production and raw material purchases. With computerisation, AP was able
to analyse past trends to arrive at a 90 per cent accurate sales forecast. Corrections
were made every month between the sales projections and actual sales. Production
was thus evened out month-to-month. Sales statistics were maintained, classified by
product, month, salesman, branch, region and dealer. Such computerised planning and
control of production, sales and inventories helped AP cut distribution costs without
compromising on the high level of service sought by it in physical distribution.

AP later hired from the Department of Telecommunications, satellite time and got all its
offices in the country networked. They transmit data daily to the corporate head office in
Mumbai, which uses it for sales and production planning. AP has consistently improved
its IT systems over the years. It has linked al its factories and 55 depots through C-SAT
terminals, and derived big benefits in terms of streamlined distribution. More recently,
AP has implemented supply chain management software from 12 technologies. AP
plans to upgrade its communication infrastructure through VSAT leased lines and ISDN
lines all over India. It is also implementing an ERP solution from SAP to be completed in
2001.

AP ACQUIRES A COMPETITIVE ADVANTAGE THROUGH ITS INVENTORY

MANAGEMENT AND CREDIT CONTROL.
One can grasp the full import of AP’s success in this sphere only when due note is taken
of the fact that AP has achieved the lowest distribution cost as well as the highest
differentiated position in the industry. AP’s ‘Apcolite’, the largest selling brand of paint in
the country, is available in 151 different shades and in eight different pack sizes. Being
in the business of ‘colours’, AP utilised colour to achieve differentiation, and none of its
competitors could match AP in this aspect. Simultaneously, AP also achieved the lowest

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cost position in the industry. Normally, when a firm consciously opts for the
differentiation route with a wide product line, it automatically points towards higher
inventory levels and consequently higher inventory and other costs. But AP, through its
effective distribution management, inventory management and control of credit
outstandings, in particular, managed to retain its inventory size and inventory costs at
the lowest possible level.

AP actually saved so much on inventory carrying costs that it almost earned its
promotion budget through these savings. This is again praiseworthy because AP
spends as much as 10 per cent of its sales on promotion, the highest in the industry. It
has to spend so much in order to maintain its differentiation advantage. But strikingly, it
has kept its total marketing costs the lowest in the industry. The two factors together-the
lowest cost position as well as the highest differentiation position-has conferred a
significant competitive advantage on AP.

LEADERSHIP THROUGH DISTRIBUTION EXCELLENCE

The story of Asian Paints is a story of distribution excellence. AP achieved an enviable
leadership position through the distribution route. While AP did not ignore any of the
other functions of marketing, it was by mastering the distribution function that AP’s
gained a distinct and powerful competitive advantage. AP’s distribution strategy was
truly innovative; it broke new ground in every aspect of distribution. In the final analysis,
excellence in distribution led the company to marketing and corporate excellence.

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