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Table of Contents

Introduction........................................................................................................................2
Scope of the project...........................................................................................................2
Structure of Sales & distribution system.........................................................................3
Role of each member of the distribution system.............................................................4
Terms & Conditions of different intermediaries............................................................5
Marketing Decisions..........................................................................................................5
Physical distribution..........................................................................................................6
Promotion Flow..................................................................................................................6
Information Flow...............................................................................................................7
Financial Transactions and Credit Terms......................................................................7
Basic Economics of business.............................................................................................7
Problems faced by ITC in the chain.................................................................................8
Exhibit 1: Operating Results 1994 – 2003.......................................................................9
Exhibit 2: Awards and accolades received....................................................................10
Exhibit 3: Distribution Network of ITC limited...........................................................11
Distribution management of ITC (Tobacco)

Introduction
ITC Ltd. is a large and diversified group of companies with operations in various
industry segments from cigarettes to hospitality to apparels. In terms of the size of the
business, it is one of India’s foremost private sector firms. Its annual turnover is of the
order of USD2.4 billion and a market capitalization of USD4.5 billion 1. ITC's FMCG
businesses have one of the largest retail networks in the country, consisting of over 2
million retailers.

The Economic Times ET 500 survey ranked ITC as the 8th largest firm in India on the
basis of market capitalization. Exhibit 1 gives details about past financials of the
company.
The areas it operates in are
 Cigarettes, its primary business
 Hotels, with its Welcome group of hotels
 Agri-business, the famous e-chaupal initiative
 Branded apparel, through Wills Lifestyle and John Players range of apparel
 Paperboards & specialty paper
 Packaging
 Packaged foods and confectionary
 Greeting cards; and
 Other FMCG products

Scope of the project
In this report, we have tried to study the sales & distribution network of the Tobacco
division. ITC is the market leader in cigarettes in India. It has a leadership position in
all segments of the cigarette market. Its brand portfolio includes hugely popular
names like Wills, Gold Flake, Capstan, India Kings, etc. ITC’s share of the filter
cigarette market is over 70%. Exhibit 2 gives details on the accomplishments of the
cigarette division.

1
Source: http://www.itcportal.com/
Distribution management of ITC (Tobacco)

Structure of Sales & distribution system
The distribution system of ITC Tobacco consists of four levels. These are
1. Factories
2. Godowns / Branches
3. Wholesale Distributor (WD); and
4. Retailers.
The Sales & Distribution system of ITC Ltd. can be represented as follows:

Bangalore Calcutta Saharanpur Munger

Factories (4)

GODOWNS
GODOWNS BRANCHES
BRANCHES
(19)
(19) (19)
(19)

Information
WHOLESALE Goods
WHOLESALE DISTRIBUTORS
DISTRIBUTORS
(60
(60 PER
PER BRANCH)
BRANCH)

SECONDARY
SECONDARY
RETAILERS
RETAILERS WHOLESALERS
WHOLESALERS

Figure 1Sales & Distribution Structure of ITC
Distribution management of ITC (Tobacco)

Role of each member of the distribution system
Factories:
ITC Ltd. Has four factories located at Bangalore, Calcutta, Munger & Saharanpur.
These factories cater to the demand of the entire country. These factories supply
goods to the 18 godowns located across the country.
Godowns and Branches:
Godowns are maintained at 18 locations across the country. Every godown is
managed by a C&F agent. This agent is paid a fixed monthly remuneration. ITC
doesn’t pay for the rent of the godowns. Exhibit 3 shows the location of the
godowns/branches and the factories.
The company has branches at each city where godowns are located. These
branches are owned & managed by the company & act as communicating links
between the company’s entities and WDs. An average Branch caters to 60
Wholesale distributors & employs 5 Area Managers & 20 Area Executives.
Wholesale Distributors:
The WD reaches out to all the retailers. He receives a margin of 2% of sales.
Every WD has a supervisor and a number of salesmen who travel on a cycle or
motorbike everyday to reach out to all the retailers the WD caters to.
If the WD cannot reach out to some areas, he sends the goods to a Secondary
Wholesaler, who is an ITC appointed entity, who is paid a fixed margin of sales.
Occasionally, the WD transfers its entire margin to the secondary wholesaler to
increase its volume of sales.
Retailers:
There are four types of retailers that ITC caters to:
• Grocery stores
• Convenience dealer (Panwallahs & small kiosks)
• Hotels, Restaurants & Cafes (HoReCa) – These are classified as places
where a bottle of soft drink sells for over Rs.25/-
• Supermarkets
Distribution management of ITC (Tobacco)

Terms & Conditions of different intermediaries
The ITC distribution system has been tuned to give the company the upper hand over
all the other members of the distribution system. This is illustrated by the fact that the
whole chain from the factory to the smallest retail outlets works on a zero overnight-
credit basis. One of the critical steps before sending out any truck from the go-down
is to check whether the WD has sent the payment. If not, the company does not ship
consignment to the WD. Similar is the case for links down the chain. Typically, a
salesman would supply each of the outlets by afternoon.

The company requires the WD’s to appoint supervisors who monitor the performance
of the sales force in terms of territory coverage, sales volume etc.

Relationship and expectations of ITC from WD:
The primary expectation of ITC from the suppliers is that under no circumstance
should cigarettes get stolen/pilfered from the trucks used for transportation. The
other expectation is to enlarge business by increasing reach and sales to various
outlets. The supplier expects regular and prompt supply of the goods as and when
the payment is made. Occurrence of shortages of goods leads to loss of business
for the supplier.

Marketing Decisions
Promotion decisions are made at two levels

National level
These decisions are taken by the brand manager in consultation with branch
managers. This leads to creation of national promotion plans, which includes
sponsorships, and event organizations.
Branch level
At the branch level two kinds of decisions are made. First is regarding local
promotions at popular locations in the city. This involves only the branch. The
other decisions involve the WDs and looks after small level promotions, like
posters at dealer locations and hoardings.
Distribution management of ITC (Tobacco)

Physical distribution
Demand is estimated by the branches on a monthly basis and the order is placed at the
factories. E.g. in Gujarat, ITC primarily has two types of dealers for cigarette business
viz. grocery stores and convenience dealer (panwallahs). The salesman and sales
supervisor estimate the demand in their areas with the help of these dealers. As the
demand does not follow any seasonal pattern, it is estimated on the basis of last
month’s sales and possible growth opportunities. The sales supervisor gives this
estimate to the area executive who approves the plan. Area manager collates the data
and sends to the branch headquarter at Ahmedabad.

Once the demand for whole branch is known, order is placed in the ITC ERP system.
The order is placed once a month for every week of the following month and the
delivery is made weekly. It takes a maximum of seven days for the delivery to reach
C&F agent from factories. The orders are delivered to C&F only when it is of the size
of one full truck from one factory, which is normally the case. Branch office has
supplied a route plan to C&F for sending goods to dealers. A sales invoice for each
WD is generated by the branch which is given to C&F agent so that he can send the
goods to the dealer. Goods are transported by trucks from factory to C&F.

From C&F to WDs, the goods are transferred by small vehicles (jeeps, three
wheelers). Salesmen and sales supervisor (WD employee) daily take the goods
(usually on scooter or bicycle) to the convenience dealers. The frequency for grocery
stores depends on the sales of the store. Some stores are supplied daily by the
salesman and some are supplied twice a week.

Promotion Flow
ITC does not offer any volume discounts to its channel members. This can be
attributed to its monopoly position in the cigarette business. Since all sales are made
on cash payments there is also no scope for cash discounts. Salesman and sales
supervisor is an employee of WD and not of ITC. His salary comprises of a fixed
component and a variable component which is based on the sales made by him.
Distribution management of ITC (Tobacco)

Information Flow
The major information source for the company is the wholesalers who act as a
conduit between retailers and Branches and keep the branches posted about the
trends. The Area Executives pass on the information to the plant/ head office.

The ITC ERP system is a major conduit for information flow from branches to
factories. All orders are placed using this system only.

Financial Transactions and Credit Terms
The Company follows 0 day credit policy as in, for the goods delivered in the
morning the payments are required to be made by the evening. The WD makes sure
that none of the retailers default in payments and if there is any delay, the supply of
goods is frozen to that retailer till clearance of dues. Though the policy seems to be
strict but since the company has to cater to more than a million of retailers which
include small groceries/panwallahs, it is must for the company to keep a rigorous
control to ensure minimum defaults. Besides, with strong brand equity and high
demand, the company is in a strong position to bargain.

The money is collected by the wholesalers and sent across to the branches on daily
basis. The retailer deducts his commission upfront and pays the differential amount to
the wholesaler. Payments are made to the wholesaler separately by the company and
he is required to deposit the complete amount back to the company at regular
intervals.

Basic Economics of business
The major advantage the company has is in the form of daily collections which
minimizes their working capital requirement from this front. Besides, the trucks are
not dispatched till it is loaded fully and the routes are efficiently planned by the
branch managers to ensure maximum coverage. The demand for the company’s
product is nearly assured with not much fluctuation.
Distribution management of ITC (Tobacco)

Problems faced by ITC in the chain
The following problems have been identified in the channel
Shortages in the supply system

Every year the WDs hoard on stocks close to the budget. This is in anticipation of
a rise in excise duties on cigarettes. Due to this an artificial shortage is created in
the markets. This affects the image and revenues of the company.

To solve this problem would require a stricter monitoring policy during the period
close to the budget. WDs should not be sold stocks in case there are reports of
shortages in their areas of operation. The company needs to reiterate that the
customer is paramount and that the WDs cannot hold them to ransom.
Pilferage of stock during transportation from godowns to WDs

It is hypothesized that the problem of pilferage is due to improper action on part
of the WDs. Most of the WDs have been with the organization for almost 50
years. They have very strong relationship with the senior management and use
this influence to maintain their stronghold over their region. The branch managers
are not in a position to control the WDs.

The solution would probably lie in timely reporting of such incidents by the
branch manager to the management so that the WDs who are causing troubles can
be identified and subsequent actions may be taken in terms of modification of
terms of contract to include stiff penalties.
Distribution management of ITC (Tobacco)

Exhibit 1: Operating Results 1994 – 2003
OPERATING RESULTS 1994 - 2003
(Rs. in
crores)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
GROSS INCOME 4280 4708 5188 5991 6924 7701 8069 8827 9982 11194
Excise Duties etc. 1859 2170 2580 3078 3694 4063 4134 4475 4781 5159
Net Income 2421 2539 2608 2913 3230 3638 3935 4353 5202 6035
Cost of Sales 1931 2015 2024 2143 2271 2443 2475 2516 3156 3712
PBDIT 490 524 584 770 958 1194 1460 1836 2046 2323
PBDT 376 440 500 650 877 1040 1347 1740 1979 2294
Depreciation 26 38 48 63 86 102 119 140 198 237
PBIT 464 486 536 707 873 1092 1342 1696 1847 2086
PROFIT BEFORE TAX 350 402 452 587 791 938 1229 1600 1780 2056
Tax 144 140 191 240 265 315 437 594 591 685
PROFIT AFTER TAX 206 262 261 347 526 623 792 1006 1190 1371
Dividends 101 134 61 108 * 121 * 150 * 225 * 270 * 334 419
Retained Profits 105 128 200 239 405 474 568 736 856 953
Earnings Per Share - Basic (Rs.) 17.38 ** 10.77 10.64 14.14 21.44 25.40 32.29 41.00 48.07 55.41
Earnings Per Share - Adjusted @ (Rs.) 27.81 34.46 34.05 45.25 68.61 81.28 103.33 131.20 155.14 178.81
Dividend Per Share (Rs.) 8.50 5.50 2.50 4.00 4.50 5.50 7.50 10.00 13.50 15.00
Market Capitalisation (Rs. Cr.) *** 8244 6921 5571 8792 17523 23633 18038 19987 17243 15581
Foreign Exchange Earnings 791 787 619 635 759 650 688 697 948 1294

* Including Income Tax on Dividend.
Distribution management of ITC (Tobacco)

Exhibit 2: Awards and accolades received
ITC's Cigarettes business has won numerous awards for its quality, environmental
management systems and product excellence:
• The Saharanpur factory has won the "GOLD" Award, 2003 on
Occupational Safety from The Royal Society for the Prevention of Accidents
(RoSPA), UK.
• The Kolkata factory was the first cigarette factory in the world to receive
the ISO 14001 accreditation for their environmental management systems.
The Saharanpur and Bangalore factories have also received the ISO 14001
awards.
• The Munger, Saharanpur and Bangalore factories have received the
prestigious Sword of Honour Award from the British Safety Council for
highest standards of safety.
• All cigarette factories have ISO 9002 quality certification. ITC's Tobacco
Technology Centre at Peenya, Bangalore has the distinction of being the first
independent R&D centre in India to get ISO 9001 accreditation.
The Kolkata factory has won the Rajiv Gandhi National Quality Award (Best in Eastern
Region) for 1998.
Distribution management of ITC (Tobacco)

Exhibit 3: Distribution Network of ITC limited