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: 650001

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2013

MINISTRY OF EDUCATION AND SCIENCE OF THE KYRGYZ REPUBLIC INTERNATIONAL ATATURKALATOO UNIVERSITY FACULTY OF NEW TECHNOLOGIES Department of Industrial Engineering

DIPLOMA THESIS: Collaboration of Companies in Bishkek to Distribute Their Products in order to Achieve High Efficiency and Low Cost

Prepared by: Nurtegin Rysbaev Supervisor of the thesis: ___________ Bedelbai Mamadiev _____ _____________2013

Approval of the Department

Head of Department

__________ Bedelbai Mamadiev _____ ________________2013

Bishkek - 2013

MINISTRY OF EDUCATION AND SCIENCE OF THE KYRGYZ REPUBLIC INTERNATIONAL ATATURKALATOO UNIVERSITY FACULTY OF NEW TECHNOLOGIES Department of Industrial Engineering

ABSTRACT Collaboration of Companies in Bishkek to Distribute Their Products Achieve High Efficiency and Low Cost in order to

Prepared by Nurtegin Rysbaev Supervisor Bedelbai Mamadiev

Product distribution is one of the most important part of business which directly affects to cost of the product. As it is clear, cost is the very important indicator of competitiveness and all companies want to decrease costs in order to be competitive in their market. For these reason, the main purpose of the thesis was to cut distribution expenses by collaboration of companies to distribute their products in Bishkek. So, it mainly about the collaborative distribution, which starts from the delivering of finished products from producers to final customers by using third party distribution center. In the second chapter of this thesis analyzed current situation of companies product distribution and expenses while distributing their products. In the next chapter, proposal of effective product distribution is given and calculated decrease of the distribution cost and price of product in market. Keywords: Collaboration, distribution channel, physical distribution, third party logistics center.

Thesis Supervisor:

Date: ___ __________2013

iii

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: iv

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KIRGIZCUMHURYET ETMVE LMBAKANLII ULUSLARARASIATATRKALATOO NVERSTES YEN TEKNOLOJLERFAKLTES Endstri Mhendislii Blm ZET Yksek verimlilik ve dk maliyet elde etmek iin Bikekteki irketlerin kendi rnlerini datmadaki ibirlii Hazrlayan Nurtegin Rsbaev Tez Danman Bedelbai Mamadiev

rn datm rnn maliyetini etkileyen en nemli rol oynayan blmlerin biridir. nk, maliyet rekabetin ok nemli bir gstergesidir ve tm irketler piyasada rekabeti olabilmek iin maliyetleri drmek istiyorlar. Bu nedenle, tezin temel amac Bikek'te rnlerini datmak iin firmalarn ibirlii ile datm giderleri kesmek oldu. Yani, esas olarak tez nc ahs datm merkezi ile bitmi rnlerin reticilerden balayp mterilere kadar dalm hakknda yazlmtr. Bu tezin ikinci blmnde Bikekteki firmalarn rn datm ve giderlerinin mevcut durumu analiz edilmitir. Bir sonraki blmde ise, etkili rn datm stratejisi nerilmitir ve rnler birleerek datlrsa, datm maliyeti yzde ka indirile bilir ve rnn pazardaki fiyatne kadar debilecei hesaplanmtr Anahtar Kelimeler: birlii, datm kanal, fiziksel datm, nc parti lojistik merkezi

Tez Danman: vi

Tarih: ___ __________2013

ACKNOWLEDGMENTS
I would like to thank for all of the people who have helped me to write this project. However, I would like to appreciate to Bedelbai Mamadiev who directed me to write this thesis. It was challenging work, but with the guidance of him it was possible to finish it successfully. It was the great chance to be student of such a bright instructor. Because, I am sure that knowledge which is given by him over the last five years will be important as much as oxygen which is very important to our life. I would also like to thank Jyldyzbek Jakshylykov that he gave me advises to develop my project. The most important thing was the motivation which has given by him to write this thesis work. I am very grateful to him that he always support me and motivated to study hard. I would also like to thank to administrators of Retail Store "BUSAJIDA" who helped me to collect data and familiarized me with the delivery processes of companies. Especially, I am appreciated to their assistance to talk with forwarders of companies to analyze distribution expenses of companies. Finally, I would like to thank to my group mates, friends and family for their social, moral and financial support during my student life.

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TABLE OF CONTENTS Chapter Page

ACKNOWLEDGMENTS .............................................................................................. vii TABLE OF CONTENTS ............................................................................................... viii ABBREVATIONS ........................................................................................................... ix LIST OF TABLES ............................................................................................................ x LIST OF FIGURES ......................................................................................................... xi CHAPTERI. INTRODUCTION ...................................................................................... 1 1.1 History of Product Distribution and Logistics ........................................................ 2 1.2 Logistics and Product Distribution.......................................................................... 5 1.3 Importance of Logistics and Product Distribution ............................................. 10 1.4 Third Party Logistics (3PL) .................................................................................. 14 1.5 Distribution Center ............................................................................................... 15 1.6 Collaboration Strategy .......................................................................................... 17 CHAPTERII. ANALYZING COMPANIES CURRENT PRODUCT DISTRIBUTION IN BISHKEK ..................................................................................... 24 2.1 Approximately distribution expenses of companies. ............................................ 28 2.2 Current product distribution example ................................................................... 30 2.3 Product Distribution cost as a percentage of price (Example) .............................. 32 CHAPTER III.PROPOSAL OF NEW METHODOLOGY ............................................ 34 3.1 Problems that companies facing during product distribution ............................... 34 3.2 Collaborative product distribution through 3PDC to solve problems and gain high efficiency ..................................................................................................... 35 3.3 Decrease of prime cost and price of the product ................................................... 40 CHAPTER IV. CONCLUSION AND RECOMENDATIONS ...................................... 42 REFERENCES: .............................................................................................................. 44

viii

ABBREVATIONS

3PL DC 3PDC CSCMP

: Third Party Logistics : Distribution Center : Third Party Distribution Center

: Council of Supply Chain Management

Professionals SC SCM CLM : Supply Chain : Supply Chain Management

: Consortium of Logistics Management

ix

LIST OF TABLES

Table

Page

Table 1.1: Logistics cost as a percentage of sales turnover ........................................... 12 Table 2.1: Rate of delivery & total prize of the products at retail store BUSAJIDA.....25 Table 2.2: List of delivered products to Busajida retail store 27 Table 2.3: Distribution expenses of companies in Bishkek with som28

Table 2.4: Number of employees and expenses for product distribution........................31 Table 2.5: Product prices of Aquafresh...32 Table 3.1: List of used resources in collaborative distribution strategy vs. used resources in current distribution expenses .........................................39 Table 3.2: Collaborative distribution strategy expenses vs. current distribution expenses39

LIST OF FIGURES

Figure

Page

Figure 1.1: 6 Phases of 3PL evolution.................................................................. 3 Figure 1.2: The Primary Channels of Distribution................................................. .8 Figure 1.3: The key components of distribution and logistics,showing some of the associated detailed elements 10 Figure 1.4: Logistics costs as a percentage of GDP for selected countries12 Figure 1.5:A typical physical flow of material from suppliers through to customers, showing stationary functions and movement functions, linked to a diagram that reflects the value added nature of logistics.14

Figure 2.1: Most demanded products by number of deliveries.. 29 Figure 2.2: Current product distribution example.. 30 Figure 3.1: Collaborative distribution 36

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CHAPTER I. INTRODUCTION

Most of companies produce some kind of products and they are distributing in their market areas. Furthermore, the strategy and activity of distribution directly effect to cost and competition in a market. In case of capital city of Kyrgyzstan, every day in Bishkek products from different manufacturers make their way to the warehouses of the cities' largest retailers and small shops. Different products all going to the exact same location, but each following its own individual line of supply. However, in the process, as the result of every extra vehicle in the road making traffic jams worse and worse. Moreover, while delivering product they are burning fuel and emitting noxious gases that threaten the health of our planet. Its time to retire this outdated model. The way to do that is possible through collaboration of companies in order to distribute their products efficiently through third party logistic or distributive company. Thats when produced and packaged products are delivered to third party logistic company or distribution center and it stores all products in the same warehouse. Then these different products from different manufacturers loaded in the same truck as products from other companies whose loads are destined for the same retailer warehouse. In this model, everyone saves and the amount of energy used to transport the goods is substantially reduced, along with pollution and congestion. For instance, expenses like salary of workers, oil, and use of vehicle will be cut and the cost of the product in market will be lower, which is very important to consumers. As we seen, it is very good to society to buy their needs on low price and in case of manufacturer, they will decrease the cost of product, which is very important to survive in a market for long time with low cost.

1.1 History of Product Distribution and Logistics

Logistics and distribution is always been as a fundamental element of manufacturing and manufacturing activities had very long history, even BC. However, logistics and distribution recognized as a vital function within the business and economic environment very soon. The history of distribution is started ancient times. However, the best and great historical logistics and distribution example is Great Silk Road. The earliest and the best distribution at that time was through the Silk Road that the four great ancient Chinese inventions of papermaking, gunpowder, the compass and printing were distributed across the world. Not only these invention, but also amazing splendid silk production, Chinese tea and porcelain were also spread throughout the globe. (www.chinaculture.org 2011) After that, logistics is developed XX and XXI century. There are have been several distinct stages in the development of distribution and logistics according to Allan, Phil and Peter (2010, p: 7) In 1950s distribution systems were unplanned and unformulated. However, businesses are started to think about improvements and in the 1960s and 1970s the concept of physical distribution was developed. Later on large retailers to develop their own distribution strategies. Later, 1970s was an important decade in the development of the distribution concept. One major change was the recognition by some companies of the need to include distribution in the functional management structure of an organization. In these years companies also saw a change in the structure of controlling distribution. After that large retailers started to develop their own distribution strategies. Moreover, in 1980s rapid increase of costs and the clear definition of costs affect development of professionalism in distribution system. With this professionalism came a move towards longer-term planning and attempts to identify and pursue cost-saving measures. These measures included centralized distribution, severe reductions in stock-holding and the use of the computer to provide improved information and control. Once again this led to additional opportunities to improve customer service and reduce the associated costs. One major emphasis made during this period was that informational aspects were as important as physical aspects in securing 2

an effective logistics strategy. By the time, organizations faced huge challenges. Main cause of these challenges was the development of competition in business area. These competition was very beneficial, since it led to the development of new ideas in order to be competitive and gain more profit from their operations. With the cause of these new ideas the distribution systems were redesigned and developed effective strategies. One of the new strategy was developed and became essential. It was the strategy which called Third Party Logistics (3PL). Exact development and naming period of these term belongs to 1970's and 1980's. At these times outsourcing broadened and many organization started use third party service providers. In order to, exactly visualize evolution of 3PL PhD. of Centre for Transportation Studies in Massachusetts Institute of Technology Chrisoula Papadopoulou divided into 6 phases . Figure1.1

Figure 1.1 6 Phases of 3PL evolution

In 1990s, during the sixth phase fast growing of information technology especially computer technology and detail social partition push management technology and mindset to update rapidly, hence some new model management concept emphasizing external cooperation and coordination like supply chain and dummy enterprises emerged, which increase the complexity of logistics while raise higher requirements like zero inventory, on time system, rapid response and effective clients response, thus normal companies cannot undertake this kind of business, professional logistics service is required. party logistics emerged to meet this requirement. And the third

1.2 Logistics and Product Distribution

In order to understand what distribution means to a company, it is important to first know what distribution is. Distribution is defined as the method to store, process, and ship goods. This involves receiving inventory, storing it, repacking it for later shipment, and shipping. Another similar explanation to it is available from businessdictionary.com:

"Product distribution is the movement of goods and services from the source through a distribution channel, right up to the final customer, consumer, or user, and the movement of payment in the opposite direction, right up to the original producer or supplier."

In reality, going by business standards, distribution is part of Logistics. This relationship is explained by Alan, Phil and Peter (2010,p:4) One quite widely accepted definition that helps to describe one of the key relationships. This is as follows: Logistics = Materials management + Distribution An extension to this idea helps to illustrate that the supply chain covers an even broader scope of the business area. This includes the supply of raw materials and components as well as the delivery of products to the final customer. Thus: Supply Chain = Suppliers + Logistics + Customers Logistics and the supply chain are concerned with physical and information flows and storage from raw material through to the final distribution of the finished product. Likewise Council of Supply Chain Management Professionals gives broader definition to logistics:

"Logistics management is. . . the planning, implementation and control of the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customer requirements." CSCMP (2006)

When you deal with distribution of product, you are dealing with the logistics side of the business. This concerns how to get the product from point A to point B or from the supplier to the customer. In order for distribution to work correctly two major components of an organization's distribution strategy must be analyzed: distribution channels and physical distribution. Definitions to this terms are available from course materials of Pierce College online library: "Distribution channels are the paths that goods and title to them follow from producer to consumer. They are the means by which all organizations distribute the goods and services they are producing and marketing. In distribution channels there are marketing

intermediaries, person or any kind of firm that operate between producer and consumer. There are two main marketing intermediaries which are wholesalers and retailers. Wholesalers are people or firms that sell product to retailers, to another wholesaler or to industrial users. On the other hand, retailers, are persons or firms who sell the products to consumers for their own use, rather than resell it. At most time, consumer buys food products, every day used products, clothing, and other type of appliances from retailers. There are many types of distribution channels from which all producer's products pass through it. Almost all food products pass through wholesaler and retailers in order to reach end consumer. Some exclusive or expensive products like vacuum cleaners and other types of products sold directly to final customer. As various types of channels mentioned on course material of Pierce College online library: Channel selection depends on the circumstances of the market and on consumer needs. Channels for reaching the consumer may vary over time. For example, the channel for distributing beer has changed from taverns to supermarkets. Channels shift, and effective marketers must be aware of consumer needs so they can keep their distribution methods up to date. The primary channels of distribution are shown in Figure 1.2. The first four channels are typically used to distribute consumer goods and services, while the last two are commonly used for industrial goods and services.

Figure 1.2: The Primary Channels of Distribution Source: Pierce College online library.

Distribution strategy must be concerned with market coverage. Different types of products need different type of distribution coverage. There are three types of it which are intensive distribution, exclusive distribution, and selective distribution. For instance, Coca Colas goal is to have their product within 100 feet of every consumer. The intensive distribution strategy is used by the marketer who tries to place a product in nearly every available outlet. Tobacco products, chewing gum, newspapers, soft drinks, popular magazines, and other low-priced convenience products are available in numerous locations convenient to the purchaser. The opposite of intensive distribution, exclusive distribution occurs when the manufacturer gives a retailer or wholesaler the exclusive right to sell its products in a specific geographic area. Automobile companies probably provide the best examples of exclusive distribution in domestic markets. On the other hand, selective 7

distribution degree of market coverage somewhere between intensive distribution and exclusive distribution, selective distribution occurs when a limited number of retailers are selected to distribute the firm's product lines. Television and electrical appliances are often handled in this manner. (Pierce College online library)

The second major component of distribution strategy, physical distribution, is the actual movement of goods and services from the producer to the end user. Physical distribution covers a broad range of activities. These tasks include customer service, transportation, inventory control, materials handling, order processing, and warehousing." In order to see the relationship of these terms we can illustrate graphically which can be seen for the most organization in figure 1.3.

location of warehouses number and sizes of distribution depots

type of storage materials handling equipments

Storage, warehousing, and materials handling design of systems control procedures forecasting Information and Control
Packaging and unitization

unit load protective packaging handling systems

Transport

Inventory

mode of transport type of delivery operation load planning route schedule

what to stock? where to stock? how much to stock

Figure 1.3: The key components

of distribution and logistics, showing some of the associated

detailed elements Source: Alan and associates (2010)

All of these functions and sub functions must be planned in a systematic way. While planning it should be very carefully analyzed as locally, and also considering the strategies of distribution system as a whole.

1.3 Importance of Logistics and Product Distribution

Every product that is manufactured must be delivered to its' consumer and logistics and product distribution is also core part of business and economy as a whole. Logistics and distribution is very important activity making extensive use of the human and material resources that affect a national economy. Several investigations have been undertaken to try to estimate the extent of the impact of logistics on the economy. One such study indicated that about 30 per cent of the working population in the UK are associated with work that is related to logistics. Another study undertaken by Armstrong and Associates (2007) found that, for the main European and North American economies, logistics represents between about 8 per cent and 11 per cent of the gross domestic product of each country. For developing countries this range is higher at around 12 per cent to 21 per cent with India at about 17 per cent and China at 21 per cent. This is summarized in Figure 1.4. These numbers represent some very substantial costs, and serve to illustrate how important it is to understand the nature of logistics costs and to identify means of keeping these costs to a minimum. Countries with the lowest costs are those where there has been a longer recognition of the importance of logistics. It is to be expected that the logistics costs of developing countries will decrease over the next few years. About 25 years ago, if the same statistics had been available, these percentage elements would undoubtedly have been a lot higher in all of these countries. In the UK, records go back for 25 years, and logistics costs were then around the 18 to 20 per cent mark.

10

China India Mexico Brazil Spain Argentina Venezue Italy Canada U.K U.S. France Japan Gernmany 0,0% 10,0% 20,0%

Figure1.4: Logistics costs as a percentage of GDP for selected countries Source: Armstrong and Associates (2007)

However, figure above gives us general information about average distribution and logistics cost. In different organization these costs may be differ in various organization. Listed in Table 1.1 are some examples of logistics costs from different companies. These are taken from an industry cost audit carried out in the UK by Dialog Consultants Ltd. There are some quite major differences amongst the results from the various companies. One of the main reasons for these cost differences is that logistics structures can and do differ quite dramatically between one company and another, and one industry and another. Channels can be short (very direct) or long (have many intermediate stocking points). Also, channels may be operated by manufacturers, retailers or, as is now becoming increasingly common, specialist third-party distribution companies. In the examples shown in Table 1.1, the relative importance of logistics is, of course, measured in relationship to the overall value of the particular products in question. Cement is a low cost product (as well as being a very bulky 11

one!), so the relative costs of its logistics are very high. Spirits (whisky, gin, etc) are very high-value products, so the relative logistics costs appear very low.

Table 1.1: Logistics cost as a percentage of sales turnover

Cost as a percentage of turnover

Main Company Business Transpor t Cost Warehous e Depot Cost % 10,7 9,77 2,71 2,82 0,27 9,1 6,35 2,45 0,1 0,78 1,08 1,95 1,31 3,73 Inventory Investment/ Administratio Holding Cost % 0,87 0,66 0,44 0,56 0,07 7,1 1,53 0,02 0,29 0,09 1,21 0,2 0,33 0,85 0,49 0,05 2,19 0,1 4,6 0,19 n Cost % Overall Logisti c Cost % 14,77 11,98 5,68 13,74 0,81 46 9,96 11,98 0,88 1,52 3,25 9,87 2,02 7,72

Office equipment Health supplies Soft Drinks Beer (food and drink) Spirits Distribution Cement Automotive parts Gas supply (nonbulk) Computer maintenance Computer supply Healthcare Specialist chemicals Fashion Food Packaging

3,2 1,36 2,53 8,16 0,37 25,2 2,07

9,41

0,45 0,65 0,96 7,23 0,38 3,14

Source: Benchmark survey of UK companies by dialog Consultants LTD The different types of products are shown and logistics cost are evaluated at the 12

table above. There is also, of course, a cost incurred to enable the distribution operation to take place. The importance of this distribution or logistical cost to the final cost of the product has already been highlighted. As has been noted, it can vary according to the sophistication of the distribution system used and the intrinsic value of the product itself. Furthermore, the value or total product cost is highly related to logistics cost which is possible to understand from the Figure 1.5.

Figure 1.5:

A typical physical flow of material from suppliers through to customers, showing stationary functions and movement functions, linked to a diagram that reflects the value added nature of logistics

Source:

Alan and Associates (2010) The Handbook of Logistics & Distribution Management

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1.4 Third Party Logistics (3PL)

Logistics is very important in order to be competitive with low product cost and high conformity. Since, it is known that logistics cost is directly influence total product cost. For these reason, traditional transportation enterprises are entering or have entered the field of third party logistics with todays flourishing modern logistics business, while these enterprises require necessary theoretical guide to get better development in the third party logistics field. Traditional transportation enterprises shall be based on actual situation and utilize social resources to perfect its third party logistics functions to provide satisfactory service to customers and finally to realize their growing. It is important to accurately understand the basic concept of third party logistics. For that, firstly it is essential to have background information of these terms. American Consortium of Logistics Management (CLM) in 1985 gave a definition of Logistics Management which is regarded as a classical one up till today that Logistics Management is a process that aiming at meeting customers requirement, organizing raw materials with high efficiency and economic methods, planning, executing and controlling the movement and storage of products and finished products as well as related information from supply to consumption. Third Party Logistics come from out-sourcing of Management, which indicates enterprises dynamically collocate its own and other enterprises function and services and utilize outsource resource to serve for its internal production. The third party logistics, also called contract logistics, emerged when out-sourcing is introduced into logistics management field. The enterprises who provide third party logistics service are normally previously engaged in logistics business like transportation and storage business as well as other related business. Third party logistics providers are independent companies

providing single or multiple logistics services to a purchasing company. Although they don't hold ownership of the product for distribution are legally bound and responsible to perform the requested logistics activities of the purchasing company. The relationship between the two parties is long-term and beneficial. If these process explained in other words it provide 14

full round logistics service from simple storage and transportation under the force of logistics demand from their clients, including organization, coordination and

management of logistics, design and proposing optimum logistics scheme, information collection and management of whole logistics process. Currently third party logistics is widely accepted by transportation companies in western countries. The emergence of third party logistics is the necessary result of market economy development and social work partition under continuous economic

development. Under new economic environment, all manufacturing enterprises put the main resources to their core business and out-source social service for other business to enhance their market competition and maximize their efficiency and benefits. Profession partition results in non-core business including logistics business separated from production. Fierce competition in logistics field pushes the development of third party logistics. With development of economic liberalization and trade globalization, polices concerning logistics are getting better which cause traditional transportation enterprises develop towards modern logistics industry, competition among logistics enterprises make these companies develop new business, which facilitate the emergence of third party logistics, and it is also the actual base for third party logistics.

1.5 Distribution Center

Distribution centers store products whose market demand is both constant and quite high. They are used retail chains, wholesalers, and manufacturers who need to break down large quantities of merchandise into the smaller quantities that stores or customer demand. Distribution centers are common in the grocery and food industry (Griffin, 1995). Distribution center is the principal link between suppliers and customers, and its management 15

must be conversant not only with the customers needs but also with the most efficient and cost-effective methods of meeting those need (Holste, 2009). Perrault and McCarthy state that a distribution center is a special type of warehouse which been designed to fasten the flow of goods and avoid unnecessary storing goods (Perrault and McCarthy, 2003).Since the 1980s, three supply chain trends have had a major impact on the distribution center (Higginson and Bookbinder, 2005): Reduction in the number of warehouse; Greater emphasis on the flow of goods rather than their storage; Increases outsourcing of warehouse, distribution center activities.

1.5.1 Difference of Warehousing and Distribution Center

Warehouse and distribution center (DC) are very important nodes in supply chain network; they perform valuable functions that support the movement of materials, storing goods processing products, de-aggregating vehicle loads, creating stock keeping unit assortments, and assembling shipments (Langevin and Riopel, 2005). The major challenge to DCs and warehouse, both today and tomorrow, is related to workforce issues, for example, staffing, training, scheduling and job design (Kotzab and Bjerre, 2005). Coyle (2003) present the definition of warehousing and distribution center that warehousing is the storage of goods, whereas distribution center precedes a post-production warehouse for finished goods held for distribution. Therefore warehousing and DC basically have the same function which is goods and products storage.

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1.6 Collaboration Strategy

This world is very challenging and complex. However, every part and every member of them have to survive and want to be successful. Unfortunately, most of them fail to be winner of this life for several reasons. One of the important reason of failure in business is that, company loses its competitiveness in market. In this case, some companies can combine their some services in order to gain competitive advantage. However, collaboration is not just should be used when there is a problem or inefficiency. It will give good result when it applied at right place, with right partner at right time. In most industrial sectors it has become commonplace for organizations to collaborate in order to achieve the goals they have established for themselves. Besides, we can interpret advantages of collaboration from Kyrgyz proverb like One brain is good and two brain is very good'. It means when some people or companies come together they can create better results by thinking more broadly and effectively. This is becoming very global in this accelerating pace of technological innovation and the ever hastening trend towards globalization, traditional adversarial relationships among business organizations are increasingly being swept away and replaced by enduring collaborative arrangements. If the following concepts are combined definition of collaboration will be like : 'Collaboration occurs when a group of autonomous stakeholders of a problem domain engage in an interactive process, using shared rules, norms, and structures, to act or decide on issues related to that domain. (Wood &Gray, 1991:146). If we provide such successful example which is known by all is about 'partnership' between Walt Disney and Mickey Mouse is one without secrets, one without misunderstandings, one could say that they are of a single mind. However, it is not like that, these two different organizations just combined and managed perfectly. Thats why relationship management is very important in these situations in order to achieve each companys objectives. Also, Leslie Wilcox & Sara Cullen at Warwick Business School said that "Relationship management can create 20% to 40% difference on 17

service, quality, cost and other performance indicators." This is enormous effect to achieve companys goals and to gain competitive advantage through high quality with low cost. On the other hand, writers on the subject of collaboration seem to agree on is that collaboration is difficult (Huxham, 1996). Indeed, many empirical studies have reported spectacularly high failure rates of collaborative initiatives. According to Spyriadis(2002), empirical studies show that over half of all collaborative relationships are ultimately unsuccessful. (Spyriadis 2002 cited in Fyall&Garrod 2005). Then comes question:

1.6.1 Why collaboration is hard?

Many manufacturers manage their collaboration efforts to gain some kind of efficiency, however, there are basic factors that make collaboration problematic. Some of these factors will be familiar to any organization that's involved in such kind of processes. Companies may, for example, lack the commitment they need from senior management to drive the collaborations, or miscommunication while the message that the collaboration is important may be "lost in translation" as it passes down through the organization, with the result that middle managers or front-line teams don't show the same enthusiasm and commitment as their leadership does. Sometimes companies fail to provide collaboration efforts with sufficient resources to make them work, or they spread limited resources too thinly over too many initiatives. It is also fact that organizations which are in collaboration never share their savings. At the result collaboration effort will fail and some organizations may don't trust "others". They think that why they should work and why they should collaborate. This occurs if there are unclear expectations, insufficient data sharing,

miscommunication, or the organizations may be incompatible. These issues are difficult enough to overcome, but they are compounded by the fact that collaboration initiatives must align two separate organizations. To make the collaborations work, the players involved must navigate differences in organizational design 18

and culture. At the same time, a history of difficult relationships can make partners reluctant to share important information, leading them to work on their parts of the "collaboration" in separate silos a recipe for suboptimal solutions. Finally, the incentives of the different parties involved in the collaboration may be fundamentally misaligned, making it difficult even for enthusiastic, committed staff to make the collaboration work while still fulfilling their other targets. These misaligned incentives arise because different players in the supply chain may see the world in very different ways. A manufacturer, for instance, might want to grow its market share by improving its own offerings relative to competitors, whereas a retailer might be interested in increasing sales or margins across the category, not in changes to product mix. However, if these parties will be in one area or have common objectives, collaboration can be managed successfully. In another word, two manufacturers both have to deliver their products to retail stores and for those they need distribution department with several vehicles and workers. In this case, these two manufacturers can create collaborative distribution strategy in order to achieve low cost and high efficiency. All in all, how should be successful collaboration look like?

1.6.2 The ideal Collaboration

All of the members want to be successful on this new strategically important activity. However, there are several concepts that are should be done in order to gain good results from collaborative work. For instance, both parties in this relationship have to understand why they are partnering. Companies have to understand what they will gain from this relationship and how it essential to company. This activity mainly bring mutual benefit to both members of this relationship. Mainly, with ideal collaboration companies will achieve customer satisfaction through effective execution that saves time and money. It is real to achieve lower interaction costs, if members will share their resources and help to each other while transferring knowledge. However, as mentioned above approximately half of the collaboration activities fail. For these reason, in order to completely understand main aspects 19

of collaboration, companies should ask themselves several questions. In more detailed way Kathryn Hawkins in 2011 wrote an article at Intuit Small Business Blog about four question to ask first, before partnering". First of all everyone thinks own interest from this collaborative work strategy and it first question will be like: Do company stand to gain as much as my partner do? Most times, a company will try to create an alliance that weighs heavily in its own favor. Its companies' job to see if theres any real benefit to its' own bottom line. For instance, it may sound appealing if a photographer offers to company, which deals with photo gallery, a 50 percent commission to advertise his/her photos on gallery site, but if she/he never makes any sales, that company is simply providing her with permanent free advertising and taking up space that could use for something more productive. Second, really important thing is to know if partners services truly complement companies. If one company is a hair salon, it may be a natural fit to create a discount package with a formal dress boutique after all, women buying dresses for formal events are likely to get their hair professionally styled as well. But if, say, an exterminator offers to cross-promote his services with hair salon, hair salon probably better off avoiding the association. Third thing to think on is, if organization who is trying to collaborate carefully thought the plan through with partner's business in mind? Some companies will try to build alliances with any company that will have them. Any organization probably doesn't want to be part of that: If a collaboration is going to work, organization want to know that the other business owner has put time and effort into planning it out. Before agreeing to collaborate organization should insists that the potential partner sends to his partner a written plan discussing the collaboration idea. Many of them dont even bother doing that and if they cant even follow through on a simple request, its unlikel y such companies will serve its' partner well in a partnership. Finally, fourth important thing to be considered is, if organization can get out of it easily? It can make sense to say that the partnership really does look like an ideal match. 20

Nonetheless, organization could still find that it doesnt get along with the other business owner, or that the alliance isnt helping organization nearly as much as managers thought it would. If company decides to form a partnership, always should draw up a contract, start out with a trial period, and give itself an easy escape route. All in all, in order to build strong relationship and trust between partners all the data should be reliable and open. Moreover, their strategies to achieve effectiveness and low cost in market should be at the same direction. If the above challenges considered and achieved highly effective collaboration through mutual understanding and setting beneficial goals, there will be several positive values are created. One of the main value created from collaborative strategy is that, there are will be improved customer experience like easy access to multiple products or services from one organization. For instance, in a company store of confectionary company Tattuu exists products of Coca Cola Company for sale. It means that these companies above are made agreement and there are products of Coca Cola in Tattuu's store. From this cooperation both partners are gaining advantage and it is very good for customers. Due to buying biscuits there is big possibility that this customer will by some drinks. Second, great thing from collaborative strategic activity is that, there are will be more effective execution which saves time and money. In business, there is saying that "Time is money". From this it is clear that organization can decrease huge amount of expenses from resource sharing, lower interaction costs, knowledge sharing and through faster decision making. As the result, organization can be competitive, even can be winner in market. One more important created value is that, there are will be higher motivation and morale which comes from the greater trust among partners and the sense of belonging to a multiple organizations and working toward shared goals. Moreover, it also plays great role to social morale of every employee who are part of this collaborative strategy. Definitely, it also important advantage in order to be successful. 21

Dewar and associate's (2009) research indicates that companies with better collaborative management capabilities achieve superior financial performance. Moreover, academic research shows that the ability to collaborate in networks is more important than raw individual talent to innovativeness; it also boosts employees overall performance and loyalty. Yet a 2005 McKinsey survey revealed that only 25 percent of senior executives would describe their organizations as effective at sharing knowledge across boundaries, even though nearly 80 percent acknowledged such coordination was crucial to growth. As a summary of principals to achieve ideal collaboration or if it be considered and analyzed according to main topic, Mike Bargmann and Dee Bigs at the FMI\GMA Supply Chain Conference in 2011 introduced 10 main collaborative distribution thinking points: 1. Executive support, top/down and horizontally across functional groups 2. Internal preparedness, all participants need to be ready and committed 3. Select the right trading partners, starting with a small group where are priorities are aligned and mutual trust is strong. 4. Focus efforts on end to end shared supply chain aligning goals, and strategies, systems people, and processes on win/win solutions. 5. Conduct collaborative planning session to openly review opportunities and reach consensus on scope of work and expected results. 6. Make certain the right resources connected and accountable. 7. Ensure IT systems can deliver timely and accurate information that can be shared between trading partners. in each organization are available, committed,

22

8. Document responsibilities for result including common goals and measures 9. Review performance versus plan in a collaborative, consistent and timely manner, including swift data supported action. 10. Create an open environment for all involved share ideas, knowledge and key learning's to celebrate, continuously improve and build on successes.

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CHAPTER II. ANALYZING COMPANIES CURRENT PRODUCT DISTRIBUTION IN BISHKEK

Bishkek is the capital city of Kyrgyzstan and the most manufacturing companies are situated in or near the city. Mainly, if look through overall manufacturing in the Kyrgyz Republic, then there are metalworking, machinery (mainly in the North), mining, light industry, food industry, building materials industry and electric power industry. In addition light industry is at second place after agriculture. Besides, food industry and every day production companies also plays essential role in overall economy. Moreover, majority of them situated near the Bishkek or in the city. Because, it is the biggest city in Kyrgyzstan with population near one million people. That means companies which are situated near the city will have that much of consumer and it will be cheaper to deliver products to them. Every product that is produced should be sold. Mainly, in order to be sold producer should deliver it to retail store. There are thousands of stores which are different in size and 4 huge market (bazar) in Bishkek. For instance, Dordoi market is at north side of city, Orto Say market is situated at south, Alamedin market is at the east, and Osh market is situated at west side of city. In these markets all kind of products are available and almost all wholesalers are working in it. Besides that, at every corner of the city, there are retail stores which are small, medium and large like retail store network Narodnyi, 7dney, or Beta Stores. Almost all production and manufacturing companies distributing their products to retail stores by their own distribution channel. Retailers are very important and terminal link in the distribution channel. As retailers normally the only channel members who directly deal with customers, it is essential that they work with final consumers and taking part of the environment that customers exist. For these reason, retailers are most important part of any production company. If they work with suppliers and consumers in a systematic way, the needs, wants and expectations of customers will be clear and company which producing that

24

product will remain competitive in market. That was the main reason of choosing retail store in order to analyze the distribution of products in Bishkek. In this analysis, domestic and international companies' distribution costs and effectiveness are analyzed. These companies distributing their products in Bishkek and also to retail store Busajida which is medium in size and resells food products, drinks, self-care and every day used products. As determined in survey, approximately 140 different wholesalers and producers brought their products in one month. However, the number of companies which mentioned above is determined only according to existence of consignment note starting from 13 of March till 17 of April. During this period total of near 248 deliveries were done. This data is available in more detailed way on following Table 2.1.

Table 2.1: Rate of delivery and approximately total prize of the products at retail store BUSAJIDA

Rate of delivery at Retail Store "Busajida"

Types of products Number of deliveries Cosmetics and Detergents Foodstuffs Drinks and chocolates All Rate of delivery for one day 69 79 100 248 10 Total price of delivered products 369563 118455 127312 615329,6

As it is shown on this table during the research enormous amount of deliveries done by different companies. However, only companies who work with consignment are determined. In fact, there are many producers who work without any consignment. Usually, 25

smaller ones work without of that. As an example to that, bakeries and who work with agricultural products work without any legal papers. For these reason, the number of deliverers to one retail store can be more than 350. Nevertheless, if only considered fact based ones it is approximately 248. It means that, in one month 140 vehicles and approximately 200 drivers and forwarders made 248 deliveries from 140 different companies. It is a big number and challenging work to retailers. Because, they have to work individually with every of them and of course it takes huge amount of time and stress. As it is mentioned in table above if rate of deliveries in one day calculated:
248 24

= 10.3 deliveries made in one day

When calculating rate of delivery, only working days are counted because, usually there is no deliveries made on weekends. Due to the survey, it is determined that seller spent average of 10 minutes for every deliverer. For this reason, the large number of deliveries is not beneficial to retailer. Because, if 10 deliveries made in one day, it means 100minutes retailer need to spend to receive delivery and examine consignment. If we take one full day of retailer, they work 14 hours in one day. In another word, store works from 8-00 till 22-00. However, 12 percent of sellers time spend for receiving deliveries. As it is clear this is really huge expense of time. On the other hand, if seller used more time to customers it will be better to both retail store and also to companies. Because, at that time seller can sell more product and bring more profit to both sides. The other really important and expensive expense is oil usage, while distributing their products. All that products brought with some kind of vehicles and they need gasoline to distribute. Usually, as it is seen on Table 2.2 the amount of delivered products is not large and most of them even cheap.

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Table 2.2: List of delivered products to Busajida retail store (cosmetics and detergents)

1 2 3 4 5 6 7 8 9 Reach

Company

Product type
tooth brush hair varnish,shampoo

Product amount

Unit

Cost of products

Date

20 pcs 13 pcs 11 9 24 15 20 19 10 20 10 18 31 65 pcs pcs pcs pcs pcs pcs pcs pcs pkg pcs pcs pcs

TG Company Tan Farma Bimax Borisenko Veet

skin cleaner napkin, powder automate powder Solo Ultra napkin, smart sticks Fairy, Mr.Propper skin cream air freshener toilet paper cream, soft soap automate powder Powder "" Air freshener & cleaner candy tea candy flour Sto reseptov Bulyon condensed milk tea " " sunflower oil margarine

14.03.1 400 3 15.03.1 2066 3 18.03.1 1384 3 1745 5095 1166 19.03.1 3 1277 1366 3423 21.03.1 2370 3 1005 2600 6040 22.03.1 3 3707 2075 5035 18.03.1 3 112 2080 790 1290 456 19.03.1 420 3 1815 1436 580 709

10 TG Company 11 Bittirofa Sofiat 12 13 14 TG Company Press 15 Arnest 16 17 Alokozay 18 19 20 21 22 23 24 25 26 Planeta Konfeta Artezian

34 pcs 17,5 kg 1 pcs 4 16 15 192 10 33 2 1 23 pcs pcs pcs pcs pcs pcs pcs pcs pcs

Him Treid TG company Press Rimi

As shown on the table some companies drive all the way through and brought just one piece of product which costs 112 soms. It is not efficient and it is better not to bring as it can't cover its' expenses. All in all, there are so many companies which are suffering from high expense 27

of product distribution. When product demand is low, it became even worse. For this reason there are should be other more productive solution.

2.1 Approximately distribution expenses of companies.

If there are companies distributing their products, that means there are expenses for distribution which is important when setting product price. For these reason, all companies want to decrease their all kind of expenses and of course distribution expenses in order to be competitive in the market. During the research, approximately average expense of several leading companies are calculated on Table 2.3

Table 2.3: Distribution expenses of companies in Bishkek with som

Company Vehicle expense Oil. 1 day # Work day 10 Oil/ month loader driver forwarder Total

1 2 3 4 5 6 7 8

Huggies Nivea Fea Bella Aquafresh Coca Cola Shoro Gilette 4000 12(10,15) 4000 10 (8,12) 4000 12(10,15) 4000 400 10 24 24 10 4500 9000 11000 4000 15000 15000 12000 20000 15000 15000 20000 15000 20000 3000 + % 4000 4000 10 10 4000 4000 12000 12000 20000

35000 32000 28000 35000 25500 69000 66000 34000

Average distribution expenses of companies in Bishkek 41813

This expenses are calculated according to data which is taken from forwarders of these companies. However, vehicle maintenance expenses is set as a fixed cost, in order to approximately calculate average distribution expenses of companies. As it is determined 41813som is average in Bishkek and this is really huge expense. It is not applicable to small businesses whose selling capacity is too low. For these reason, companies who can't handle 28

that much of expenses distributing their products over wholesalers. However, when there is intermediaries in distribution channel the price of product is getting higher and higher. Result of it is failure in market competition or ineffective work. All of the products are used or somehow needed in daily life. Some of them are used when we are cleaning, eating, caring ourselves etc. However it is interesting to know which products are demanded more at retail stores in Bishkek. If its' demand is high then delivery rate of that product also must be high. On the following Figure 2.1 real demand to particular products are shown which is taken from survey at retail store Busajida.

Most demanded products by number of deliveries

12 10 8 6 4 2 0 10 9 8 8 8 7 6

Number of deliveries

Figure 2.1: Most demanded products by number of deliveries It is clear that dairy products are mostly demanded product. But shorter shelf life (life cycle) also main cause of more deliveries. Because, it can be stored for only few days and it must be brought more often. For this reason, mainly food products are more challenging to distribute. Moreover, most of them need special tools in order to store. Otherwise products 29

can be damaged by hot weather and even can poison mass number of people. Other products like cleaning staffs are also most demanded ones because every day people clean and wash their clothes and other things.

2.2 Current product distribution example

Every companies market area or region may be different and also everyone is using own distribution channel. However, the destination place of almost all products are same. Distribution strategy of major companies is to distribute to every corner of the city. In order to visualize distribution in Bishkek, 4 companies are taken as an example and drawn distribution network as an example on Figure 2.2.

Figure 2.2: Current product distribution example

30

In this Figure 2.2 four companies taken to give an example of current product distribution which are similar to each other; however, there are not competitors. These companies are Aquafresh, Huggies, Gillette, and Nivea. According to figure if to suppose that these companies' warehouses are at the point which are shown on figure. Let us assume: 1 Aquafresh2Gilette3 Nivea 4 Huggies So, these companies have to distribute their products in Bishkek. In the figure city divided into four regions: Pervomaysky District, Leninsky District, Oktyabrsky District, and Sverdlovsky District. This four districts must be all supplied by these four companies. For this reason, they have to cover all the demand in each region. In a same way all four of them work 10 days in a month and simply they move their products as it is plotted on the map. While distributing, if to suppose that each company has only one product distribution team and they can cover all the regions. They will have approximate expenses which are shown on Table 2.4. Table 2.4: Number of employees and expenses for product distribution

Company

Number of Vehicle 1 1 1 1

Num-r of forwarder 1 1 1 1

Number of Driver 1 1 1

Total expenses (som) 35000 34000 32000 35000

1 2 3 4

Aquafresh Gilette Nivea Huggies

Total

136000

31

As it is shown on the table, in order to distribute four companies' products they need 4 vehicles, 4 forwarders, and 3 drivers who worked 10 days. Total of their product distribution expenses will be 136000 soms.

2.3 Product Distribution cost as a percentage of price (Example)

As it is considered earlier, distribution expenses are directly related to price of the product. If it is not effective and challenging, the price of the product will be higher. For instance, in developed cities this system is improved and set in a systematic way. Thats why distribution expenses at those cities too low. In order to know product distribution costs in Bishkek one product was chosen and calculated approximate expense as a percentage of price. Aquafresh is one of the leading brand which is well known as one of the best toothpaste and toothbrush. Aquafresh distributes its product to almost all retail stores in Bishkek. If to suppose that it sells 3000 toothpastes and 1000 tooth brushes in one month. While distributing them it uses one vehicle, one driver, and one forwarder. From the previous data it is known that Aquafresh spends 35500soms in one month for distribution. Table 2.5: Product prices of Aquafresh
Product Prime cost1 50 35 Price to retailer 58 40 Price to end user 70 50

1 Toothpaste 2 Tooth brush

Prime cost is the total of direct material costs, direct labor costs, and direct expenses

32

On the Table 2.5 product costs and prices at different points are shown. Prime price includes all expenses to produce the product and also included distribution costs. After determining prime cost of products, company will add own profit and sells to retailers. Then in the same way retailer add own profit and set new price. At the end users will pay for toothpaste 70 som and to toothbrush 50som. It is interesting to know that what percent of prime cost is spend for distribution.

If Aquafresh produce 3000 50 = 150000 Toothpaste 1000 35 = 35000 Toothbrushes Total amount of prime cost in one month will be 150000 + 35000 = 185000som From this prime cost we have to calculate percentage of distribution cost by using monthly expense of Aquafresh for distribution. Monthly expense is 35500som.
35500

Then percentage of distribution cost is:

100 = 185000 100 = . %

This percentage means that price of the each product in market increasing by 9,6and 6,7som relatively because of distribution costs. This is really huge expense which must be analyzed and look for better solution with low distribution costs.

33

CHAPTER III. PROPOSAL OF NEW METHODOLOGY

Extended supply chains, reduced inventories, and shortened product lifecycles are just some of the factors making disruption of supply chain operations more likely and more expensive than ever. Economic losses from such kind of disruptions increased 46.5% between 2009 and 2011 (2013 3pl study). For this reason, many companies are looking for new solutions and new methods to distribute products in cheaper way. If there are will be low expense for the product, that product will be competitive in a market. Thats why companies always look for cheaper distribution channel. However, it is not easy problem to overcome. For that, new collaborative product distribution is recommended to solve many challenging problems in product distribution.

3.1 Problems that companies facing during product distribution

This world is created and all creatures are one of the parts of this world. As the world and life in this world is great challenge that each person facing every day. In the same way there are hundreds of problems in product distribution in Bishkek. One of the main challenges is to decrease distribution cost which is very important during competitiveness in market. Because as calculated in previous chapter, while analyzing percentage of distribution cost in terms of prime cost it was 19.2%. This is really high which is essential to decrease. Second problem is expense of time while distributing products. As it is known to all the people, time is very important in business. Especially, one of the most time consuming activity is product distribution. It is very hard work to drive all through the city and to deliver products to almost every store. It is not just time consuming process to deliverers: however, receiving products from different companies is also time consuming activity to retailer. As determined in survey, approximately 10 different companies will come to retail store in one day in order to deliver products. So, if retailer will spend 10 minutes to each, he/she needs

34

100 minutes to receive products. However, retailer cant serve customers during this time and it will be loss of money and time. Third main problem is enormous energy needed to deal with distribution. This activity is one of the most stressful activities and it needs several people with several vehicles to distribute one companys produced products. The management should make seriously high afford, in order to control, track, and check this product distribution system. So, this is also big problem of company. Nevertheless, this company may use this energy to improve other sides of business.

3.2 Collaborative product distribution through 3PDC to solve problems and gain high efficiency
Collaboration is really good solution in many problematic situations. At the same time it could be very effective in product distribution when appropriate companies collaborate. As mentioned in theoretical part of this thesis half of the collaboration fails. For these reason, all aspects must be analyzed and should follow certain steps to build strong relationship and successful business. One of the most important thing must be considered is compatibility of companies to work together. Some companies can't work together. Because, they may be competitors or one can copy partner's products or ideas. For those companies data sharing is impossible. For these reason, all things must be considered before starting to collaborate. In order to achieve high efficiency and low cost through collaboration, companies should understand why they are partnering and what are they expecting from this collaborative distribution. Main purpose of collaborative product distribution also to reduce costs and gain more advantage from this relationship. If some companies collaborate while distributing they will achieve lower cost, more time, and motivation to other main working processes. For this reason, if this strategy managed in a true way, companies who are taking part on this collaborative distribution can gain enormous advantage.

35

Collaborative distribution really good strategy but it is challenging to manage. For this reason, it is recommended to companies to create third party distribution center (3PDC). This center should be built at appropriate place from where easy to drive to four districts of a city. While creating 3PDC companies should share their resources. In other words, they will each gives vehicle, materials, and financial support to build this system. According to their support to build distribution center they will be owner of 3PDC share. This organization will be created, but it should be separate from those companies. It will have own management and own CEOs; however, board of directors will be companies who are creating this center. In order to give an example of collaborative distribution, 4 companies are chosen which were also mentioned as an example in previous chapter. These companies are Aquafresh, Gillette, Nivea and Huggies. They are compatible to each other and they fit to build good collaboration. Because, Aquafresh sells toothpaste and toothbrushes, Gillette sells men's safety razors, Huggies sells diapers, and Nivea sells self-care cosmetics. As it is explained they are all self-care products but they won't compete with each other. Their target products are different and all are well known as a good brand in a market. Moreover, selling capacity and demand is also almost same which creates very good advantages to build ideal collaborative product distribution. So, how this method will work? Firstly, the working process of sales persons won't be changed. As always, they will go to retail stores and will receive orders to particular product. Then these orders will be brought to sail department of a company and from there all orders will be prepared and consignments prepared. According to real demand company will just deliver demanded amount of product to 3PDC. From there, after receiving products and order information of other companies also, they will plan how to effectively distribute. Then according to plan different products will be loaded to one vehicle which will go to one region and distributes all four companies' products at once. In this situation there are will be enormous reduction of expenses. In order to visualize this process simple distribution network is plotted on Figure 3.1.

36

Figure 3.1: Collaborative distribution There are a lot of advantages of this new distribution method. As it is shown on the figure 3.1 with the help of 3PDC movement of products reduced two times. When product movement decreased, of course there are lower expenses. If earlier companies used several employees and vehicles, in new method companies just bring their products to 3PDC. Besides, time used to distribute products earlier can be used other important activities or just to discover new market places. There are a lot of positive effects of collaborative product distribution. In more visualized differences between current product distribution and new collaborative product distribution is given at comparison of Figure 2.2 and Figure 3.1.

37

Figure 2.2: Current product distribution

Figure3.1: Collaborative distribution

As it is seen from these figures above, collaborative distribution is simple and easy. According to figure 2.2 while distributing 4 companies moving their products 16 times, whereas in new method it decreased to 8. There are even more advantages of this proposal. For instance, companies achieve customer satisfaction through effective distribution that saves time and money. Moreover, in business area there are saying that which says "Time is money". If time is equal to money then with new method companies saving two times money. So, through collaborative distribution we can decrease distribution expenses by two times. One more important benefit of this method is improved customer experience like easy access to multiple products or services from one organization. In other words retailer will work with only one 3PDC instead of dealing with four companies' forwarders. Moreover it saves enormous time of retailer. If earlier retailer needs minimum 40 minutes to receive products of four companies, now he/she will need maximum 20 minutes to receive all products. For this reason, this approach is very affordable and effective. Collaboration in product distribution can decrease large amount of expenses. For instance, earlier four companies that is taken as an example in this thesis are spent 136500 38

som in one month. However in new strategy this expense decreased to 60000 som. If there are misunderstanding of decreasing more than half distribution cost, these are shown on Table 3.1 and Table 3.2.

Table 3.1: List of used resources in collaborative distribution strategy vs. used resources in current distribution
Company Number of Vehicle 1 1 1 1 Num-r of forwarder 1 1 1 1 1 1 1 Number of Driver Total expenses (som) 35000 34000 32000 35000

1 2 3 4

Aquafresh Gillette Nivea Huggies

Total 3PDC

4 1

4 1

3 1

136000 60000

Table 3.2: Collaborative distribution strategy expenses vs. current distribution expenses
Company Vehicle expenses Oil. 1 day(liter) # Work day 10 10 10 30 10 15 Oil/ month Loader driver forwarder Total

1 2 3 4

Huggies Nivea Aquafresh Gillette Totally 4000 4000 4000 12000 4000 10 12(10,15) 400som 4000 4500 4000 12500 6000 15000 12000 12000 15000 39000 15000 12000 15000 15000 42000 20000

35000 32000 25500 34000 136000 60000

3PDC

39

3.3 Decrease of prime cost and price of the product

The main purpose of this collaborative distribution is to decrease the distribution costs. When there are lower expenses, typically the price of the product will be lower too. However, everyone wants to pay less for the product which he/she needs and if the price of the particular product will be lower, it will bring high satisfaction of customers. If customers satisfied with the price, immediately they become loyal to that companies' product. On the other hand, there are different possibility to manage this gaining from lower expenses. For instance, the price of the product will remain same and company can add this earning to its' profit. In this way company that collaborates can be more profitable from producing particular products. All in all, how much distribution expense will decrease? Let's calculate.

If four companies used in calculation which are given as an example in previous chapters. These companies are Aquafresh, Huggies, Gillette, and Nivea. If consider that all 4 partners selling capacity is same and they spent 136500 for distribution. After the collaborative distribution they will have just
. 4 60000 4

= 15000som distribution expense for each.

Then in order to see price decrease it will be compared and calculated in terms of Aquafresh which is given in Chapter III. If previously percentage of distribution expense in terms of monthly sold products prime cost: 35500 100 = 100 = . % 185000

40

Then after distributing its' products through third party distribution center percentage of distribution expense will be: 15000 100 = 100 = . % 185000

So, with the help of new methodology Aquafresh decreasing its' distribution expense by 11.1%. It means that the prime cost of the toothpaste and toothbrush will decrease 5.6 and 3.9 soms relatively as following:
. 11.1% = 50 = . 100 100% . 11.1% = 35 = . 100 100%

As the result of the reducing distribution expenses, the prime cost of the products will be lower. If prime cost of the product low, the price of the product at the retail stores will be also comparatively lower. Therefore, with the help of collaborative distribution through 3PDC the products of Aquafresh will be sold at 65som for toothpaste and 45 som for toothbrush. Actually these products' price was 70 and 50 som at retail stores earlier.As the result of proposed method, the price of the products can be decreased by 7% for toothpaste and 10% for toothbrush. This percentage is great saving and it will be very beneficial to all society.

41

CHAPTER IV. CONCLUSION AND RECOMENDATIONS

Product distribution is the most important aspect of business. Because, the strategy and activity of distribution directly effect to cost and competition in a market. If the price of the particular product is lower in market, obviously, there are high possibility to win its competitors. Moreover, through execution of effective distribution, company can become leader of the market. Therefore, collaborative distribution through third party distribution center recommended in this thesis work. This new proposal will give enormous advantages and cost saving to companies which are part of the collaboration. As it is known that, almost every new strategy created in order to minimize costs. Similarly, main purpose of collaborative product distribution also to reduce costs and gain more advantage from this relationship. If some companies collaborate while distributing they will achieve lower cost, more time, and motivation to other main working processes. For this reason, if this strategy managed in a true way, companies who are taking part on this collaborative distribution can gain enormous advantage. In this model, everyone saves and the amount of energy used to transport goods is substantially reduced, along with pollution and congestion. For instance, expenses like salary of workers, oil, and use of vehicle will be cut and the cost of the product in market will be lower, which is very important to consumers. As we seen, it is very good to society to buy their needs on low price and in case of manufacturer, they will decrease the cost of product, which is very important to survive in a market for long time with low cost. In order to achieve high efficiency in collaborative distribution, companies should carefully analyze itself and and should follow certain steps to build strong relationship and successful business. One of the most important thing must be considered is compatibility of companies to work together. Some companies can't work together. Because, they may be competitors or one can copy partner's products or ideas. For those companies data sharing is impossible. For these reason, all things must be considered before starting to collaborate. In general collaboration should start among small groups or between small businesses. Because, 42

important things like data sharing, communication is effective among small groups or companies. Moreover, in order to achieve high efficiency and low cost through collaboration, companies should understand why they are partnering and what are they expecting from this collaborative distribution. Collaborative distribution really good strategy, but it is challenging to manage. Thats why, it is recommended to companies to create third party distribution center (3PDC). This center should be built at appropriate place from where easy to drive to four districts of a city. While creating 3PDC companies should share their resources. In other words, they will each gives vehicle, materials, and financial support to build this system. According to their support to build distribution center they will be owner of 3PDC share. This organization will be created, but it should be separate from those companies. All in all, collaborative distribution is very effective, if companies are suitable and management of collaboration is systematic and planned. For these reason, while distributing their products, companies should look for their potential partner and should try to create collaborative distribution.

43

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