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How technology can be a valuable aid in the cost optimization of FMCG distribution

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The adverse fallout of the Covid pandemic has forced business leaders to identify areas where they can control and optimize cost to improve their situation. One such area, where all organizations with large distribution networks have been trying to optimize, is the distribution cost of business, where spends can vary from ~1% – 7% of sales. Know about some transformative solutions that can be deployed to optimize this cost.

The Covid pandemic may be receding but it has left many after-effects and consequences. For one, businesses are struggling to return to normal. With global supply chain disruptions and skyrocketing input costs, the cost pressure is mounting every day. Not all costs are transferable to the end-customer; hence profit margins are depleting and testing the sustainability of businesses. 

This adverse fallout has forced business leaders to go back to the drawing board to identify areas where they can control and optimize cost to improve their situation. One such area, where all organizations with large distribution networks have been trying to optimize, is the distribution cost of business.

Distribution cost is a combination of various cost factors like storage, labour, packaging, logistic, general expenses and damage & leakage costs. We are seeing a lot of disruption in terms of efforts made to manage these cost components. Take, for example, logistic cost, which can have several components like AI algorithm-based load management, labour cost through analytical man power planning, flexible employment models, etc. 

However, one cost component, which is still managed in a very traditional manner, is the damage and leakage costs. FMCG and consumer goods companies are paying hundreds of million dollars towards damage claims submitted by their trade partners annually. This spend can vary from ~1% – 7% of sales, depending on robustness of the processes at an organization. A lot of organizations are still relying on traditional tick-in-box stock audit to derive comfort on this cost, which is just not delivering the expected value. Some of the challenges in traditional approach are:

  • Inability to validate claims due to high volume and spread across country
  • potentially high % of leakages due to limited validation 
  • absence of a scalable and cost-effective model to conduct standard validations across location 
  • High cost of audits and with high percentage chances of errors due to largely manual audit processes 

We are now seeing some transformative solutions being deployed to optimize this cost. In addition to that, some extremely useful trade insights are being generated, which helps the business team to take more risk intelligent decisions. Here are some key highlights of the solution driving this transformation:  

  • Leveraging technology platform for conducting and generating standard outputs across locations 
  • Intelligent technology platforms are built with checks and balances to plug some inherent risks of these validations and ensure accuracy and authenticity of the data. E.g., Location Geo Tag audit unlocking, data and time stamps on audit evidences, controlled data entry options etc.  
  • Use of RPA and OCR technology to read large volume of damage claim data and convert into analysable data library
  • Leveraging Data analytics engine to crunch large volume of data generated to identify variations, outliers and key trends

Following up on the above measures can help in generating great savings and business intelligence like: 

  • Restrict and control leakages by identifying unauthorized and incorrect damage claims – ~12 – 18% reductions depending on maturity of existing processes
  • Designing of more proactive solutions at policy and controls level, identified through effective root causing
  • Generate some useful business insights like SKUs trends having higher market returns, markets / regions / sales rep with maximum damage trends, near expiry products having higher return % etc. 

In these times, where every penny matters, companies are now rethinking their existing validation models and moving away from the traditional ways of controlling the damage claim cost and adopt some of the new transformational solutions to drive business objectives.    

The writer is Nitin Jain, Managing Director, Protiviti Member Firm for India