A winning strategy; competing through partnerships

By Rusiru Perera, Janaka Galahitigama and Sandiya Shanmugam

Coca Cola Beverages Sri Lanka Ltd (CCBSL), was placed fifth at the CIMA Case Study Awards 2011 for their case study pertaining to the theme ‘Winning Strategy; competing via Partnerships.’

The below article is a summary of the case study submitted by CCBSL.

The CIMA Case Study Awards is a competition where leading corporates in a variety of industries analysed and documented the learning they gained from their past, and share that learning with the wider business community by using the business analytical skills and knowledge of CIMA graduates within their companies.

Supply chain management is a new area of business which is getting growing importance at the strategic decision making level in companies throughout the world.

We examine how a struggling Coca-cola bottler in Sri Lanka used contemporary frameworks of supply chain management in developing its distributing partners and downstream distribution system to enhance its stakeholder value.

This article specifically investigates the issues faced by a FMCG company as its inefficient distribution system was threatening to bring to a close its very existence and the measures it took to turn this threat in to an opportunity in developing an advance distribution system benchmarked by its competitors.

As the study gives an insight to a contemporary area of business which is unfamiliar to many local businesses; it is safe to assume that it will indeed aid the local decision makers to re-think their business strategies in developing sustainable business models.

The ‘Coca-Cola’ system

The Coca-Cola Company, based in Atlanta which owns the brand rights does not produce beverages in many parts of the world where it operates.

The bottling partners, who are responsible for the production, partner with the company’s regional divisions and buy the concentrate required for production of the beverages.

The bottling partners may or may not be partially owned by the Coca-Cola Company, but they always work in collaboration.

For Coca-Cola the critical success factors are marketing and promotion, creating the demand and pushing the products down the supply chain, making products available in abundance for the end consumers. Hence having a sound distribution system is critical for its competitive success.

Struggling distributors

CCBSL (Coca-Cola Beverages Sri Lanka) works with third party distributors who act as the middlemen connecting the company with its enormous number of retailers.

These distributors account for more than half of the sales of CCBSL. Hence they are a critical element in the company’s competitive success.

The inefficient distribution system CCBSL had in the past meant that exorbitant cost levels were experienced at distributor point. This made it difficult for them to survive as they were under enormous pressure to meet their sales targets as well. This as well as other reasons lead to CCBSL experiencing a large number of distributor closures in the past few years worsening the overall performance in the company.

When further investigated, it was identified that one of the main reasons for distributor closures and bankruptcy was poor financial stability of the distributors. i.e. distributor starts the business without proper initial investment resulting in a weak financial capacity to manage their working capital requirement.

In addition, when the distributor gives a high level of market credit to retailers in order to achieve sales targets, it open the doors for increasing bad debts, where his cash flow is negatively affected and thereby creating a liquidity crisis.

Also due to the credit based sales, the cash flow and the working capital cycle of CCBSL gets affected, resulting in increased bad debts, higher interest paid and high levels of gearing.

The accumulated outcome of these issues came to a point where it threatened the sustainability of the business model. CCBSL suffered huge amounts being written off as bad debts, these issues started to reflect on their financial statements, where the company took notice of this increasing threat and sought measures to mitigate the quandary.

Facing the challenge

A new, sustainable and leaner distribution process was sought. The company had to review the overall sales and distribution process to identify non value adding cost drivers, and it also investigated its downstream supply chain partners to optimise the processes involved with the aim of enhancing its distribution system fuelling sales growth.

The company understood that in the contemporary dynamic market environment, one is only good as the weakest member of its supply chain. Hence CCBSL examined its downstream supply chain partners with the intention of increasing their capacity and effectiveness in partnering the company for its growth.

Partnering and capability development

When Coca-cola bottlers entered the third world countries, one of the main challenges it faced was the effective distribution of their products. Their objective was to make the products available in every street corner, every by road which is vital for the brand sustenance.

The problem was there weren’t many streets to begin with. The infrastructure in third world countries was poor hence they found it difficult to have the same operational procedures applied in the west to be applied in this part of the world. They had no local knowledge and had little insight into local culture which made matters worse.

They saw an opportunity, to tap into local knowledge through partnering with local businesses, in developing a new distribution strategy. Today it has been so successful that we can see Coca-Cola products even in the most remote places in the countries they operate, even at places without electricity and basic infrastructure.

Even though the partners have local knowledge, they have little knowledge on record keeping, and financial management.

This led to cost overruns, and stock mismanagement etc, where the company undertook an initiative to train and develop the distributors’ capabilities. The areas they focused were basic business skills and store room management.

The selection of distributors is a critical element in distribution strategy of the company. Throughout the island, sales volume is not evenly distributed.

For an example, urban sector accounts for 43% of the sales while the western province contribution remains as high as 40% of the total sales volume.

But out of the all the distributors only 20% are based in the western province. This meant that those distributors handling much larger volumes have a big strategic importance in the competitive success of CCBSL.

Hence the company realised the need to give priority treatment to its distributors who are strategically more important for its competitive success and manage them with care by building a more collaborative partnership.

The company investigated and studied how the successful distributors were conducting their business, what they were doing right, and these best practices were disseminated among other distributors to follow.

Credit management

As per the earlier approach customers/distributors were given a credit period of 21 days. The distributors give either the same period or more to the retailers. This creates the situation where CCBSL is indirectly financing a third party. When the distributors have difficulty in recovering debts from the retailers, it affects the cash flow of the company as well, resulting in accumulated doubtful debts, higher finance costs and litigation issues.

To support these credit sales, the company had to borrow from banks. The distributors found it difficult to make the actual sale to the end consumer and found themselves in financial turmoil and CCBSL’s bad loans mounted. This cycle continued and worsened, as mounting losses from distributors and heavy liabilities on banks built pressure on its balance sheet.

The new approach required the distributors to pay for the goods when they purchase it, no credit period was given. This was facilitated by online banking facilities provided by the commercial banks .The company checks the accounts online and if the distributor has enough cash deposited, it releases the order. One problem that the company encountered was getting the distributors to agree to the new terms of trade.

The management realised that credit to cash transformation itself will not solve all the problems. To further enhance distributor capacity it wanted to create more financial value for its supply chain partners.

The company analysed its cost structure and found out that it could pass on some of the financial gains by moving away from credit sales to the distributors in terms of higher margins, in reality the reduction in credit sales would reduce the need for borrowing and hence cost of capital, working capital requirement and interest payments.

Part of these gains was passed on to distributors which meant they would have more leverage to deal with the retail outlets, and thereby this initiative increased the value for all the downstream supply chain partners.

CCBSL also took measures to increase asset utilisation in its downstream operations, recognise and reward its best performing distributors and collaborate with the downstream parties with a long term view. These new strategies have helped CCBSL to turn around its weak distribution system to an industry benchmarked solution. While the company is currently reaping the benefits of this strategy in terms of better financial and market performance, it’s still looking for opportunities to improve, and stay ahead of its competition.