Guest blog by Professor Youssef Boulaksil (United Arab Emirates University)
Many large Fast Moving Consumer Goods (FMCG) manufacturers and distributors, such as Unilever, P&G, Nestlé, and Danone, struggle with how to efficiently supply the thousands of nanostores that one typically finds in large cities in developing countries. Although each nanostore generates a negligible amount of sales, the cumulative sales of all nanostores in these markets is usually much more than the sales generated from modern channels such as hypermarkets. Hence, the nanostores form a serious sales channel that cannot be ignored. Distributing goods to them is a complex task due to several reasons. First, these stores do not keep track of inventory levels or historical sales, they do not actively order from their suppliers, they operate under very tight cash constraints, and there is a high turnover in stores with frequent closures.
Therefore, the distribution strategy that many FMCG distributors apply is the van-sales strategy. Under this strategy, a van or a small truck is filled with the products and visits the nanostores one after the other. When visiting the nanostore, the truck driver inspects the inventory of the item and tries to collect an order. If that happens, the delivery and payment occur on the spot. Under this strategy, the risk of not getting paid by the nanostore is eliminated, but it has some serious drawbacks. First, the truck driver is not a sales person by nature, and therefore, the generated sales may not be satisfying. Second, the truck driver may lose lots of time to find a parking bay, especially since the majority of the nanostores are located in densely populated neighborhoods with narrow streets.
An alternative distribution strategy is the pre-sales strategy. Under this strategy, the order collection and order fulfillment processes are decoupled. A pre-sales agent collects the orders from the nanostores by visiting them on a motorcycle, and the delivery and payment occur at a later moment. This strategy is obviously more expensive; as skilled pre-sales people need to be hired and some additional investments are required to implement this strategy. Distribution can be more efficient, since typically an additional helper serves on the truck, and only stores that actually have ordered products are visited.
In collaboration with Valencia, a successful Moroccan fruit juice manufacturer and distributor, we conducted a study in Casablanca, where the van-sales strategy was applied in one district and the pre-sales strategy in a similar district. Detailed data related to the distribution process (such as the number of stores visited, the traveling time, the collected orders, time spent in the store, etc.) were collected at a daily level during 3 months that allowed us to compare the performance of the two strategies. The result was that under the pre-sales strategy, the sales volumes were much higher, while the distribution cost was about 25% lower.
This result inspired us to develop a mathematical model that would provide insights about which distribution strategy to choose in general. Using the model, we show that the distance between the nanostores is the main parameter that determines which distribution strategy is optimal, given the difference in sales between the channels. We derive an expression for the critical distance between the nanostores, which is mainly dependent on the cost structure, hit rates, and the level of congestion in the city. If the actual average distance between nanostores is below the critical distance, then the pre-sales strategy is optimal. Otherwise, the van-sales strategy becomes optimal. This means that in densely populated neighborhoods where nanostores are close to each other, the pre-sales is the best strategy to apply. At country-sides or suburban areas where the distance between nanostore is larger, the van-sales will prevail.