Hp Lubricants Sadman

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HPCL

PRAXIS BUSINESS SCHOOL A report Submitted to Prof. Srinivas Govindrajan In partial fulfilment of the requirements of the course Sales & Distribution Management On 15-11-2009 BY Apoorva Jain (B08004) Manoj Mani Iyer (B08014) Piyush Golus (B08022) Vineet Sekhani (B08042)

HPCL

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Executive Summary

The project involved studying the different components that form the distribution channel of the company. In this process we also analysed the channel design that the company adopts to ensure the physical flow of goods with the role and key deliverables of each channel member. Then we analysed various elements of channel member management which were monetary and nonmonetary methods adopted by the company to reward its channel members, target setting & monitoring mechanism of the channel members. Then we looked at the field force management and the transportation & logistics. Then we analysed the 20 variables and their impacts on the distribution channel of the company. We also analysed the role of IT in each level of the distribution. Further we did a comparison of the market spend of the company which were broken up into 2 components: Advertising spends and Sales & Distribution spend and drew inferences. For the above exercise we chose Hindustan Petroleum Corporation Limited (HPCL) and the product chosen was Lubricants. HPCL follows two pronged distribution channel based on the size of the order; one being Production facility – Warehouse – C&F agents – consumers and the second Production facility – Warehouse – Distributor – Dealer – Consumers. For the financial comparison the other company chosen was Indian Oil Corporation Limited (IOCL) – Lubricants Division. We compared the market spend of both the companies which were broken up into two components: Advertising spends and Sales & Distribution spend for the financial year 2009 and drew inferences based on the comparison.

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Table of contents 1

2

Introduction ......................................................................................................................... 4 1.1

Milestones ............................................................................................................................... 4

1.2

HP Lubes .................................................................................................................................. 4

Channel Design ..................................................................................................................... 5 2.1

Physical flow of goods ............................................................................................................. 5

2.2

Roles and Key deliverables ...................................................................................................... 6

2.2.1

Depots ............................................................................................................................. 6

2.2.2

Distributors...................................................................................................................... 6

2.2.3

Dealers ............................................................................................................................ 6

2.2.4

C&F Agents ...................................................................................................................... 6

2.3 3

Documentation ....................................................................................................................... 6

Channel Member Management............................................................................................. 7 3.1

Rewards................................................................................................................................... 7

3.1.1

Monetary Rewards .......................................................................................................... 7

3.1.2

Non Monetary Rewards .................................................................................................. 7

3.2

Target Setting Mechanism ...................................................................................................... 7

3.2.1

Distributors...................................................................................................................... 7

3.3

Monitoring Mechanism........................................................................................................... 8

3.4

Training ................................................................................................................................... 8

3.5

Use of IT .................................................................................................................................. 8

4

Field Force ............................................................................................................................ 8

5

Transportation and Logistics ................................................................................................. 9

6

Financial Aspect.................................................................................................................. 10 6.1

Sales and Distribution Expense ............................................................................................. 10

6.2

Comparison of the two companies ....................................................................................... 12

7

Variables affecting sales and distribution of HP Lubes: ........................................................ 13

8

Bibliography ....................................................................................................................... 15

9

Acknowledgement .............................................................................................................. 15

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1

Introduction HPCL is a Fortune 500 company, with an annual turnover of Rs. 1,16,428 Crores and sales/income from operations of Rs 1,31,802 Crores (US$ 25,618 Millions) during FY 2008-09, having about 20% Marketing share in India and a strong market infrastructure. Corresponding figures for FY 2007-08 are: Turnover of Rs 1,03,837 Crores and sales/income from Operations of Rs.1,12,098 Crores (US$ 25,142 Million).

1.1 Milestones 1952:

The Company was incorporated in the name of Standard Vacuum Refining Company of India Limited on July 5, 1952

1962:

On 31st March,1962 the name was changed to ESSO Standard Refining Company of India Limited.

1974:

Hindustan Petroleum Corporation Limited comes into being after the takeover and merger of erstwhile Esso and Lube India Undertaking

1976:

Caltex Oil Refining Ltd. is taken over by the Government of India and subsequently merged with HPCL in 1978.

1979:

Kosan Gas Company, the concessionaries of HPCL in the domestic LPG market, are taken over and merged with HPCL.

HPCL thus comes into being after merging four different organisations at different points of time.

1.2 HP Lubes HPCL also owns and operates the largest Lube Refinery in the country producing Lube Base Oils of international standards, with a capacity of 335 TMT. This Lube Refinery accounts for over 40% of the India's total Lube Base Oil production. HP Lubricants are borne out of an intense and unrelenting R & D effort which aims at producing quality products that enhance automotive performance standards. The range of HP Lubes is comprehensive and catering to the most minute needs; from new generation cars to ploughing tractors and industrial machinery. The range conforms strictly to OEM specifications, often taking the initiative in customization of products.

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2

Channel Design Production Facility

Company depot/Warehouse

C&F agents

Consumers (Automotive/ Industrial)

Distributors

Dealers (Petrol Pumps, Showrooms, etc)

Consumers (Automotive/ Industrial)

2.1 Physical flow of goods The channel design for physical goods is as follows: Firstly the goods are delivered from the production facility to the company owned depot or warehouse. Then, from the warehouse they are delivered to the C&F agents and to the distributors. Then from the distributors it goes to the dealers (which may include Petrol pumps, showrooms, Service Centre & Open Market, etc) and finally to the consumers. On the other hand the goods from the C&F agents are generally distributed to the consumers directly. Another point to be noted here is that when there are large orders, the company directly sells to the customers via the C&F agents. While in case of small orders it follows the other channel i.e. via the distributors and the dealers.

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Particulars Production Facility Warehouse/Depots Distributors C&F Agents

Number 4 60 210 65

The consumers are of two types:  Automotive  This segment includes those consumers who use the lubes for the automobiles which include cars, trucks, motorbikes, etc. It also includes the automobile service centres which use the lubes (this may generally be the B2B sales) for e.g. Maruti Suzuki service centres.  Industrial  This segment includes those consumers who use the lubes for the machinery. These include capital intensive industries.

2.2 Roles and Key deliverables 2.2.1 Depots The depot has to make sure that the stock is available. It has to ensure inventory management. Delivery and warehousing the stock are its major roles. The delivery of the products could be done in two ways  Paid delivery – Goods delivered directly from the warehouse  EXI – Delivery at a particular location 2.2.2 Distributors The distributors have to maximize the sales. They collect the goods from the warehouse. They have to decide the credit in terms of no. of days as well as the amount which could be given to the dealer. Also they have to increase the cliental base for the company and maintain the relationship with clients. 2.2.3 Dealers The dealer same like distributor has to maximize sales. Ensure the availability as well as proper visibility of the products. 2.2.4 C&F Agents C&F agents act as an interface between the company warehouse/depot and the end consumers like the automotive and the industrials. They ensure availability of the products. They also take bank guarantee for the goods.

2.3 Documentation The documentation for the flow of goods and stock taking is done by the different channel members in a format given by the company. HPCL

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Channel Member Management 3.1 Rewards 3.1.1 Monetary Rewards Monetary rewards are rewards given in cash to the channel member to boost sales. 3.1.1.1 Depots

As the personnel at the depot are employed by the company, they have performance based appraisals and allowances are given accordingly. 3.1.1.2 Distributors The distributors are rewarded on the basis of the target achieved .They are rewarded either on

monthly or quarterly basis by Re.1 or Rs.2 schemes 3.1.1.3 Dealers The rewards are given by the distributor based on the performance of turnover achieved 3.1.1.4 C&F Agent C&F agents are paid commission which is 2-3.5% of the turnover. If the sale has been made on discount basis to a customer then the commission would be around 2 % and if the sales are made on a premium to the customer then the commission could be as high as 3.5 %. Also if C&F agents sell goods on their bills i.e. taking possession of the goods like distributors then they are eligible for incentives which would not be the case if they sold it on company’s bills. 3.1.2 Non Monetary Rewards Non monetary rewards are rewards given in kind over and above the monetary rewards to boost sales.

3.1.2.1 Depots The personnel at the depot are given rewards by the company. 3.1.2.2 Distributors  Gifts  Holiday packages for family  Recognition in corporate parties 3.1.2.3 C&F Agent No non monetary benefits given to C&F agents.

3.2 Target Setting Mechanism The target set by the company is region specific and is set after forecasting the demand for each region. 3.2.1 Distributors The target sales to be achieved by the distributors are set by the company based on the following factors: HPCL

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 The historical performance for the region and what percentage growth the company wants to achieve in future they divide the sales to be achieved by the distributor for different quarters or  The company gives a month on month target to the distributor 7 days before the 1st of every month

3.3 Monitoring Mechanism The monitoring of the flow of goods is done by using ERP.

3.4 Training There is technical training sessions held at regional office once every quarter. There is one regional office in every state.

3.5 Use of IT The company has implemented JD EDWARD ERP software in all its offices and also at the warehouses/depots and for C&F agents. For the distributors the company is providing them with WINGS software. This helps in daily update of the status of stocks.

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Field Force There is a presence of sales force in each Business Segment which is employed by the company itself.

Field Force

Automotive

Industrial

Functions of the Field Force: Automotive: Following are the functions of the field force in the Automotive Segment: Short term  Maximize sales  Fulfilling the targets  Sales promotions

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Long term  Brand building  Increase the market share Industrial Following are the functions of the field force in the Industrial Segment:  Conduct Technical Sessions  Give Quotations to the Clients

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Transportation and Logistics Production Facility Company owned Trucks

Company depot/Warehouse C&F owned vehicles

Distributor owned vehicles

C&F agents C&F owned vehicles

Consumers (Automotive/ Industrial)

Distributors Distributor owned vehicles

Dealers (Petrol Pumps, Showrooms, e tc) Consumers

Dealer owned vehicles/ purchased by consumers

(Automotive/ Industrial)

The flow of goods from the production facility to the company depot/ warehouse is done through the company owned vehicles. From the warehouse to the C&F agents and then to the consumers, the goods are transported through the C&F owned vehicles. From the warehouse to the distributors and from the distributor to the dealers, the goods are transported through the distributor owned vehicles. The transportation cost borne by the distributor is reimbursed by the company to some extent. HPCL

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From the dealer to the consumer the goods are either transported through the dealer owned vehicle or purchased by the consumer from the dealer’s location.

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Financial Aspect 6.1 Sales and Distribution Expense

Bifurcation Of Sales & Distribution Expenses

HPCL

IOCL

Discount paid

1.88

0.00

Commission expenses on sales Distribution Expenses

0.00 6.24

37.67 3.07

Expenses - HPCL (in Rs. Cr.) 13.19

14.00 12.00 10.00

8.19

8.12

8.97

7.80

8.00

7.20

6.00 4.00 2.00

0.21

0.44

0.36

0.39

0.37

0.48

0.00 2009

2008

2007

Advertisement Expenses - HPCL

2006

2005

2004

sales & Distribution Expenses

Inference From the above graph it can be inferred that over the year the advertisement expenses for lubes have gone down whereas the sales and distribution expenses have been fluctuating. It can be concluded that over the brand has been investing around Rs. 8 crores on Sales & distribution for the past 6 years from 2004-2009 and around Rs 0.35 crores, also there has been a dip in the advertising expense in 2009 as compared to 2008 of around Rs. 0.23 crores which clearly suggests that the company has been able to create a brand awareness over the years and thus the amount of advertising is going down.

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11 | P a g e Sales and Distribution expense as a % of sales 2.90% 2.80% 2.70% 2.60% 2.50% 2.40% 2.30% 2.20% 2.10% 2009

2008

2007

2006

2005

2004

Sales and Distribution expense as a % of sales

Advertisement expense as a % of sales 0.16% 0.14% 0.12% 0.10% 0.08% 0.06% 0.04% 0.02% 0.00% 2009

2008

2007

2006

2005

2004

Advertisement expense as a % of sales

Assumption The expenses figures provided in the annual report were for the company overall and the amount spent for lubes were not mentioned thus we have taken the expenses in proportion to the revenue contribution of lubes to the total sales. Observations & Conclusions  Sales and distribution expense as well as the advertisement expenses as a percentage of sales have gone down over the years.  Sales & distribution expenses as a percentage of sales have been up and down over the years which are a result of fluctuating sales.  This could also be a result of varying efficiency of the distribution team.

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Bifurcation of of Sales & Distribution Expenses - HPCL

Discount paid

1.88; 23% 0.00; 0%

Commssion expenses on sales Distribution Expenses

6.24; 77%

Bifurcation Of Sales & Distribution Expenses - IOCL 3.07, 8%

0.00, 0%

Discount paid Commssion expenses on sales Distribution Expenses 37.67, 92%

6.2 Comparison of the two companies The type of expenses considered as Sales & distribution expense were as follows:  Discount paid  Commission expenses on sales  Distribution expenses HPCL  HPCL incurred majority of its sales & distribution expenses through distribution expenses – Rs. 6.24 crores which is around 77% and through discount paid – Rs. 1.88 crores which is around 23%. Expenses on commission on sales were nil.  The reason for a high distribution expense percentage can be attributed to the fact that HPCL has a large channel with many levels of intermediaries unlike IOCL.  Thus we can conclude that HPCL gives margins to its channel member to encourage sales. IOCL  IOCL incurred majority of its sales & distribution expenses through distribution expenses Rs. 3.07 crores which is around 8% and commission on sales is Rs. 37.67 crores which is around 92%. Expenses on discount paid were nil.

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13 | P a g e  The low distribution expense can be attributed to the fact the IOCL works with only 3 levels of intermediaries (Refineries to warehouse to retailer to consumer).

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Variables affecting sales and distribution of HP Lubes: 1. Number of consumers Types of consumers:  Scooters and motorbikes  Three vehicles and four vehicles  LCVs and HCVs  Industrial heavy machines All the above categories are huge in numbers, thus it is necessary to use intermediates. And the distribution channel has got many layers. 2. Geographic dispersion of consumers POP points are:  Petrol pumps  Automobile spares shops by side of highways and roads  Hardware stores POP points are geographically dispersed across India including rural and urban areas. Since above mentioned requirements points are large and geographically dispersed, HP needs to have very good connectivity through a large and robust channel. And thus transport and logistics needs to be very efficient 3. Higher frequency of purchase  For automobiles frequency is high and volume per purchase is low.  Consistent demand by industrial machines. Frequency is low but volume is high per purchase. 4. Tendency to postpone purchase  Tendency to postpone purchase is possible to an extent. Because user thinks without change of lubes he can use machine/automobile for some more time. 5. Level of familiarity/ knowledge product about the product  Users are familiar of benefits of product. Thus importance of field force is limited to the extent of making the product available. 6. Degree of brand loyalty  Brand loyalty for product is medium. Many times decision is taken by service provider and machine maintenance person. Thus margins to channel member are important and POP merchandizing is important.

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7. Purchase on impulse  No, purchase on impulse, the product is bought only when it is required. 8. Level of involvement  Level of involvement is medium. Thus supply of information is not critical to consumer. 9. Purchase as a basket of goods  Yes. It is bought with other automobile accessories and spares along with refueling of vehicle. Thus the product has to be available at all such points. 10. Speed and complexity of decision making process  Speed of decision making process is high and complexity is low. Thus importance of expertise of field force is low. 11. Presence of expert influencer in the decision making process  Mechanics are expert influencer. Thus, knowledge and awareness to mechanics is important as they may influence the buying decision of the consumer. 12. Element of crisis purchase exists  Yes, so the product has to be available. 13. Element of risk aversion exists  Yes, user may think usage of bad brand may damage their vehicle thus; channel member may un-sell the brand. 14. Perishability  No the product is not perishable, thus dimension of speed in transportation & logistics is not important. 15. Time band associated with the purchase of the product  Generally usage is consistent. Thus last-mile supply need not be very critical. 16. Fungibility  The product is low on value and small in volume thus IT can’t replace a channel member to make product available. 17. Importance of search costs  Search cost is low as consumer does not spend much time on searching information about product. 18. Degree of customization possible  No. The product is highly standardized and cannot be customized for the end consumer.

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19. Negative or positive reinforcing  Neither negative nor positive reinforcing. As consumer uses it to avoid wear and tear of machine also they know that it increases mileage of the machine. Ambience is not important while purchasing the product. 20. Value / volume ratio of the product  Value/ volume ratio is low thus there is transport cost sensitivity and importance of cost effectiveness is required.

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Bibliography  www.hpcl.com  Annual report HPCL  Annual report IOCL

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Acknowledgement We would like thank Mr. Amit Gupta, Distributor, HPCL Lubricants, Kota (Rajasthan)

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