Applied Marketing - Article Example

Running Head: APPLIED MARKETING Applied Marketing [Name Of Student] [Name Of Institution] APPLIED MARKETING Introduction The objective of this project is to closely review the market channels of Industrial gases products, with a view to establish these channels that includes defining clearly the relationship with third party compression stations. Another objective is to clearly identify the cutoff points as to where the responsibility of BOC ends and the third party‘s responsibility starts. The project will also include the reviewing of all present agreements with different compressing stations and build consensus on a standard format to protect the interests of both BOC Pakistan and Third parties. This project would result in reduction of cost, greater profitability and determination of safety standards applications for overall improvement in cylinder filling integrity. Current Setup There are seven different channels to the market including direct and indirect sales of industrial Oxygen and Medical Oxygen. There is confusion in the minds of all concerned as to the clear definition and establishment of responsibilities of various parties and the stages where the ownership passes on to the various stake holders. Most of the compression and material handling activities are manual at this stage. New model will help in increasing efficiency and through put which will result in a leaner and safer operation. First we should closely look at the different scenarios by which our industrial gases reach the end-customers. Scenario 1: In the first scenario, the compression of both medical and industrial gases takes place at BOC site, and after compression BOC delivers the product to the end-customer. BOC is entirely accountable and responsible during all the phases in this scenario. This scenario is applicable to BOC Karachi, Lahore, Taxila & Gujranwala. Scenario 2: In this scenario, the liquid gas from BOC goes to Distributor; Distributor receives the empty customer owned cylinder from customer and tests them as well if required in his premises. Distributor fills these cylinders and delivers the compressed gas (including both industrial and medical) to the customer. This scenario is for all the 18 distributors currently working for BOC. Scenario 3: In this scenario, the BOC cylinders are filled / compressed by the Distributor and then BOC buys back the compressed gas (includes both industrial & medical) from distributor and delivers it to the end-customer. Testing is done by the BOC test shop. This scenario is in mainly those cities where we do not have a compression facility like Hyderabad (Maan Enterprises), Quetta (Rasheed Traders), and Faisalabad (Imran Weld). Scenario 4: In this scenario, empty BOC cylinders for Industrial gases are filled by the distributor and he delivers it to the end customer. Scenario 5: Same as Scenario 4 but for medical gases. Scenario 4 & 5 are applicable to: Karachi distributor (NGL, Superior, NLH, IIG) Lahore distributors (Classic, Star) Multan (Multan Chemicals) Faisalabad (J W Gases) Gujranwala (GOC) Peshawar (Shahid Waheed, Taj Gases) Rawalpindi (AIMG, KGL) Hattar (NIGL) Scenario 6:  In this case, the distributor does not have a test shop so he operates a compressing station without a test shop and fills customer owned cylinders with both medical & industrial gases and deliver it to end-user. This happens in Peshawar (Shahid Waheed). Although its not BOC responsibility/liability but running a compression station without any test shop is unsafe. All the above scenarios can be graphically summarized in to these four situations: Indirect sales: Currently there are around 18 bulk customer compressing stations operating nationwide and doing business with BOC. To get an idea of how much sales of LOX (liquid Industrial Oxygen) BOC does through distributors (Indirect sales), a list of the all the main distributors along with their Annual sales is shown in the following table. This gives the total liquid industrial oxygen BOC has sold to big distributors. Apart from the distributors, our competitors have also purchased LOX during their plant shutdown which is also shown as indirect sales by us. Table1 Distributor Region Annual Sales PKR Volume m3 (July 06 - Jun 07 ) National Gases Limited (NGL) South 13,072,005 648,734 Superior gases South 7,269,452 360,766 Newlight South 12,182,851 575,498 International Gases (IIG) South 26,766,168 1,242,804 Maan enterprises South 12,358,115 683,703 Classic Traders North 6,486,639 324,447 Aslam Industrial & Medical Gases (AIMG) North 5,335,770 217,493 National Industrial Gases Limited (NIGL) North 6,600,388 258,250 Shahid Waheed North 3,250,240 123,951 Kahuta Gases Limited North 2,980,912 130,550 Shahid Waheed West 3,250,241 123,951 Taj Oxygen West 5,785,637 220,762 Gujranwala Oxygen Gases (GOG) North 4,631,184 232,134 Imran Welding North 4,096,812 204,231 Competitors Multan Chemicals 4,492,210 203,626 Bawani Air Products 8,428,290 677,571 Fine Gases Limited 1,280,406 75,318 TOTAL 128,267,319 6,303,789 Equipment: We have also provided different equipment facilities to different distributors. The main equipments include VIE (Vacuum Insulated Evaporator), Pump, Vaporizer, Manifold & cylinder testing equipment. The equipments given to different distributors are shown in table2. Table 2 Distributor Region Equipments VIE Pump Vaporizer Manifold Cyl Testing National Gases Limited (NGL) South √ Superior gases South √ Newlight South √ International Gases (IIG) South √ x Maan enterprises South √ √ √ √ √ Classic Traders North √ Aslam Industrial & Medical Gases North √ National Industrial Gases Limited North √ Shahid Waheed North √ Kahuta Gases Limited North √ Gujranwala Oxygen Gases (GOG) North Multan Chemicals North Imran Welding North Shahid Waheed West Taj Oxygen West Territories: Currently there are no territories defined for any distributor and he can sell products in any part of the country. It is the main reason of conflict among the distributors. If a distributor is unable to achieve his sales target in his area, he goes to other areas and sells the product at a cost lower than what the other distributor is offering in that area, resulting in variable retail prices and BOC has no control over it. No clause is defined regarding territory assignment in the contracts with the distributor. As a result, BOC is unable to evolve robust market price strategies. Standard prices are normally not maintainable and therefore our system is flooded with customer specific special prices. Why this project ? With changing business environment and competition BOC needs to be a more competitive player in the market. With respect to this vision BOC requires a cost efficient and productive operating model that would enhance its potential to capture the market. Due to the adhoc practices and lack of future vision, many issues have come up in the PG&P distribution network which are adding to its costs and making it inefficient. At present, there are seven different channels through which our products reach the consumer. There is lack of standardization of procedures. There are no set criteria as per agreements with the distributors. Each distributor has an exclusive contract with BOC and it is difficult to keep track of various clauses that exist. The policies and procedures are silent about the ownership of goods once it changes hands in this distribution network. This raises various accountability issues in case of accidents and mishaps as well as commercial controls. Another issue is of the variable retail prices. There are instances where different distributors charged consumers differently for the same product. There has been no assignment of territories for a particular distributor and he is free to sell anywhere in the country. There has been lack of checks and balances regarding BOC assets that these distributors have i.e. the cylinders. A lot of data has not been updated which has caused discrepancies in cylinder quantity with BOC and physically with the distributor at the time of verification. A CAM (Cylinder Asset Management) exercise needs more focus to resolve these differences. Our own compression facilities need upgrade to bring them at par with international BOC standards. This will result in more efficient operations and improvement in customer care and turnaround time. A separate project of PG&P efficiencies is in hand to further improve this aspect in tandem with the recommendations which may come out of the present project. All of this needs to be corrected and streamlined. The procedures have to be standardized and updated. Hence modifying the operating model is inevitable. Main Issues The main issues that should be addressed and kept in view in order to make an ideal operating model are: Safety Commercial sense Medical Compression (strategic decision to outsource medical compression) Customer service Market strategy Marketing Hardware Territory allocation Stake holders concerns Safety BOC is very conscious about safety and their aim is to keep the accident counter to zero. In order to avoid any accident in their premises they take every possible safety measure and distributors are also asked to take these safety measures. Unfortunately these safety instructions are not strictly followed at the distributor end. To ensure safety at distributors end we should look in to following questions: Does the distributor have enough knowledge regarding safety measures? All his equipments are safe for operations or not. Cylinders are tested according to international standards or not? His cylinder testing setup is safe or not Transportation of equipment is done according to standard procedures or not? His vehicles are safe and tested or not. Access to distributor site is appropriate and safe or not. Recommendations: Following steps can be taken to ensure safety at distributor end. Review the training material and check whether it conforms to our IMSS (International Management of System & Standards). A person should be assigned the task of training distributors and he should maintain a file of distributors who have been trained. Previously it was the responsibility of Reliability Manager but since that post has been abolished; now it’s the responsibility of Operations Manager to depute a person for this task. Conduct Safety audits of the distributor every six months. Re-train the distributor every year. The objective of these steps is to have the same safety level at the distributor end as it is at BOC end. Commercial sense: In order to design a cost-effective operating model, we should look in to the option of outsourcing our compression facility to some third party. A detailed study was done for outsourcing our industrial oxygen compression which clearly showed that the outsourcing option would be much cost effective than operating it ourselves in the current scenario. The summary of the analysis is in table3: Table 3 Industrial oxygen Expenses JAN 07 - JUN 07 Expenses of current setup       Total volume compressed 135202 m3 Compression cost ** (calculations in table 4) 5.6 PKR/m3 Cylinders compressed 19,883 Total Compression Cost 757,131 PKR Cylinder handling cost Cylinder handling Platform 385,417 PKR Test Shop 183,011 PKR Truck Delivery (Decanter) 302,221 PKR Total cylinder handling cost 870,649 PKR Transportation Cost per cylinder 35.2 PKR Total Transportation cost (Sardar Transporters) 699,869 PKR TOTAL Cost 2,327,649 PKR OUTSOURCE Expenses   Total Volume compressed 135202 m3 Compression cost (NGL rates) 2.9 PKR/m3 Total Compression Cost 392,086 PKR Transportation charges / cylinder 45 PKR (if you ask them to provide the Delivery man as well) Total transportation cost 894,719 PKR TOTAL 1,286,805 PKR This shows we can save around 1.04 million in 6 months if we outsource only industrial oxygen The period taken for this analysis is from Jan 2007 to June 2007. This analysis is done specifically for industrial oxygen which is 32% of the total oxygen compressed at Karachi station. The total volume of industrial oxygen compressed in this period is 135202 m3 which means 135202/6.8 = 19883 cylinders. Compression cost per m3 at our facility was found to be Rs.5.6 /m3. The analysis behind this calculated compression cost is shown in table 4 and will be explained later. The total cylinder handling cost in table 3 was calculated by adding the expenses of 6 employees on platform, 5 truck delivery men, 3 on test shop and then taking 32% of the total expenses because these people are working for overall oxygen operation and industrial is 32% of the total oxygen compressed. Average transportation cost to us for a cylinder is Rs.35.2 /cylinder. Contract for transportation is given to Sardar Transporters. The other option is of outsourcing the compression facility to third party/distributor. In 2005, NGL used to charge us Rs.2.9 / m3 for oxygen compression. The transportation cost per cylinder would increase to Rs.45 because now they will also be providing an additional person who will do the documentation at the time of delivery and will also help in unloading. Table 4 (Jan 07- Jun 07) Total volume 135,202 m3 Variable Expenses (in PKR) Material 7,184 Power cost 5,566 Total Variable cost 12,750 Variable cost 0.095 PKR/ m3 Fixed Expenses Fixed Power 3,480 Employee cost 517188 Maintenance cost 6,352 Depreciation 89952 Total fixed cost 616,972 4.6 per m3 Allocated costs 126720 0.9 per m3 Total Compression Cost 756,442 5.6 PKR/m3 This clearly shows that a saving of around 2.1 million can be done annually if we outsource only industrial oxygen. In all we have three options for cost cutting in compression operations: 1. Increase the volume of the gas we are compressing. 2. Decrease the manpower in order to cut down employee expenditures. 3. Outsource part of platform operations (like only industrial oxygen compression). Option 1: Increasing the volume of the gas we are compressing will result in less cost /m3. This will cause the fixed cost to distribute over a large volume, thus less cost per m3. If we double the volume, the compression cost will be about half (from 5.6 to 2.8 /m3). Let’s take a look at the amount of compression that we have done in the last 10 years. Table 5 Oxygen Compression in (000) m3 Year Industrial Medical Breathing Total (Oct-Sept) 1998-99 722 322 39 1083 1999-00 503 325 34 862 2000-01 412 370 38 820 2001-02 422 390 34 846 2002-03 377 293 37 707 2003-04 350 334 38 722 2004-05 278 311 41 630 2005-06 280 427 33 740 2007*(expected) 260 507 50 817 We can see the current requirement for medical oxygen is around 507,000 m3 and we used to compress 1083,000 m3 of oxygen in 1998-99, so if we can increase our compression level to 1083 K and compress industrial oxygen around (1083) – (507) - (50) = 526, 000 m3 annually We will decrease our compression cost from 5.6 to Rs.2.9 /m3 which is equivalent to the compression rate that a third party will charge. The calculations can be redone by putting the total volume compressed = 526,000/2 = 263,000 (as its for half year) in table 4. Constraints: The biggest constraint is the Hardware. We don’t have enough cylinders in which we can fill this increased volume. Secondly, we can not fill every cylinder that comes to us. It should be in accordance with the standards of BOC. So much of the market gas needs could not be fulfilled through our system. This was the main reason that these distributors were created as they could fill even those cylinders which were not of BOC standards. Filling arrangements for these increased number of cylinders needs to be improved. It is believed that more the filling operations, more the chances of accidents and mishaps. So more safety steps need to be taken in order to ensure no accidents. Option 2: The second option is to cut down the manpower. The expenditures on employees at platform is major part of platform expenses and downsizing would obviously make the compression operation cheaper. As Project “Predict” suggests that our platform operations at Karachi can be run by 50% of the current manpower. This clearly shows that our current team at platform is highly unproductive and the 34 worker army should be reduced to a 17 worker team. The biggest constraint in this solution is the union and legal issues. It’s very likely that union would retaliate in response to this decision and removing permanent union employees who are working here for more than 15 years will not be an easy task. Solutions: Although VSS has been offered once to all the employees in Pakistan but none of the employee at the platform in South took it. So a more lucrative VSS should be offered to them after the ongoing negotiation with the union is over. Retrenchment (Remove the entire compression facility from this place and ask them to leave. This is totally legal, since no work is being done here then no workers needed). Remove all the temporary staff working at the platform. This will reduce the compression cost to some extent. Option 3: Last option is to outsource our compression operations. We can outsource a part of it like outsourcing only industrial oxygen compression. Again the constraint in outsourcing would be union & legal issues. Apart from this constraint, outsourcing has its own pros and cons. Advantages: Less cost (refer to table 3). No hassle A better customer service is also possible through outsourcing. Disadvantages: Direct interaction with the customer almost finishes. Distributor becomes more powerful. Have to maintain a strict check on the distributor as he may start giving gas to the customer from some competitor. Control over prices decreases. Safety standards are usually not strictly followed at the distributors end. Medical Compression In the previous section, we discussed in detail the option of outsourcing along with its quantitative and qualitative analysis. The next question arises how much we should outsource? Should we outsource compression of Medical oxygen or not? Medical oxygen is treated differently because human life is directly involved in it and stakes are definitely high here. Precautionary measures should be followed more strictly in this case. This is the reason that we can not rely on anyone for this operation and want to continue doing it ourselves for safety and quality control purposes. BOC wants to introduce GMP (Good Manufacturing Practices) everywhere around the world. But to reach GMP: We will incur higher production costs. Cylinder preparation costs increases. And we have to recover these costs as well which means higher prices for the end consumer. Thus price of medical oxygen should be at least 50% more than the industrial oxygen. To remain competent in the market with premium prices, we need support from Government and it should recognize GMP and enforce it as a requirement for companies giving Medical oxygen to hospitals. This will also cleanup the market and the practice of selling industrial oxygen as medical oxygen will also decrease. Constraint: After implementing GMP with support of Government, the medical oxygen will be treated as a DRUG. As a result, the Government will interfere in the price setting and controls. Secondly, Govt. drug inspectors would come for the inspection of plant and may create problems for the company. Recommendations: Medical oxygen compression should be done by BOC and should NOT be outsourced. By not outsourcing it, we will be in direct contact with hospitals and can work more easily on our potential sales. Hospitals buy not only medical oxygen from us but also Anesthesia (Nitrous oxide), medical equipments like oxygen concentrators & ventilators plus we can also sell refrigerants to them as well. Implement GMP with Govt. support as the advantages of GMP outweigh the consequences of its implementation. Customer Services The work flow at the CSC is very slow. From the time customer enters the BOC premises till he gets his cylinders filled the time taken is almost three to four hours which is too long. The problem basically lies with the efficiency of the platform i.e. how quickly and efficiently do they fill these cylinders. At times the customer does not know that his credit limit has ended. They are informed about their credit issue just before their cylinders are going to be filled i.e. after waiting for an hour or two. This creates immense customer dissatisfaction and dissonance. Furthermore; unavailability of the product affects effective and goal directed customer service. There are times when enough product is not available to meet customer requirements. The issues of late deliveries and incomplete order fulfillment are a source of concern for the customer. This problem is due to various underling factors. Firstly, unavailability of vehicles is a major problem. We have limited vehicles for transportation of cylinders, which is not enough to meet our requirement, and even out of them; some are occasionally unavailable due to habitual absenteeism of drivers and decanters. This leads to limited delivery options hence customers orders are not completely fulfilled. In case of shortage of products, the division of cylinders among customers is done on intuitive basis. The customer is not aware of the number of cylinders he is going to get till it reaches his door step. Lack of hardware is also a major issue. We do not always have enough cylinders to meet customer needs completely. Recommendations: Hardware availability should be improved. In ideal scenario, when customer comes the empty cylinders should be taken from him and already filled cylinders in the stock should be given to him immediately. The more cylinders we have, the better we can implement this strategy and serve our customers quickly. A proper check on absenteeism of workers should be maintained and habitual absenteeism should be discouraged and penalized. It should be made mandatory on all call in customers to inform the BOC CSC department before reaching the premises so that adequate arrangements can be made in order to minimize delays. Communication with the customer should be improved. If his order is not being completely fulfilled he should be informed, after the allocation process, that why he will not get his full order, what is the issue and when the remaining batch will be sent to him or whether he needs more or he has a minimum requirement in mind that needs to be fulfilled immediately. Facility of credit should not be given to very small customers. Customer with sales of lets say less than Rs.20,000 per month should be asked to pay cash. Customers who pay on time should be given a discount. Or customers who exceed their credit period should be penalized. As a corporate social responsibility, we should deliver oxygen cylinders for patients at home. Market Strategy Medical: As discussed in the previous sections that we would not prefer to outsource medical oxygen compression and would interact directly with all the medical customers. Secondly, GMP should be implemented with Government support and safety rules and procedures for their production and handling would be standardized. Industrial: BOC should also opt to go directly to the consumer if we have enough hardware (cylinders). If we do not have enough hardware, then we have to involve 3rd party. Unfortunately we do not have enough cylinders and we can not fill some of the cylinders at our premises. This was the reason that distributors started to fill cylinders, back in 1992, with our gas and give it to consumer. We can not import used cylinders as it is against Govt. policies and importing new cylinders would be very costly for us and not at all cost effective. We cannot completely takeover the market as we do not have sufficient number of cylinders and we can not outsource all as we will loose control over prices and sales plus customer interaction will finish and safety problems will also increase. So the solution should be hybrid, combination of both. Recommendation: Target the elite customers/ bigger industries where consumption is at least 5-10 cylinders per day. We should deliver them directly and remove 3rd party in between. We can distribute it industry wise. For e.g. BOC should be dealing with industries like Pharmaceuticals, automotive, Glass and Ampoules, Oil refinery & Chemicals while small industries like small fabrication shops and automotive repairs should be given to distributors/3rd party. Marketing hardware The marketing hardware in this business is cylinders & valves. Cylinder business can not be run without keeping track of your cylinders. The more cylinders you have, the more you can penetrate the market and gain market share. Unfortunately, BOC has not kept track of their cylinders and is currently facing a severe shortage of cylinders. This shortage has made BOC more dependent on the distributors. The distributor’s power is in the huge number of cylinders they have. BOC Pakistan has 52,000 cylinders on books but only around 30,000 cylinders are in circulation in BOC network. A project called CAM (Cylinder Asset Management) has already been initiated for this purpose. In this project, first we will review our records and look for those customers who have finished business with us and didn’t return our cylinders. After finding these dead accounts, we can use the money these customers had given as cylinder deposits. Secondly, we should check the number of cylinders that have been issued to our current customers and compare it with the number of cylinders they currently hold. The customer is then asked to pay in case there are missing cylinders. Recommendations: Import second hand cylinders by getting special permission from Government. We imported second hand cylinders previously in 1995. Focus more on CAM project especially in the South region. Territory allocation Assigning territories to your distributors is a normal practice in FMCG and other industries but in our business it is very difficult. If a distributor is unable to achieve his sales target in his area, he goes to other nearby areas and sells the product at a cost lower than what the other distributor is offering in that area, resulting in variable retail prices and BOC has no control over it. Prices from manufacturer to distributor to retailer are quite controlled but it is from retail to end consumer where all the opportunity prices lie. One off customer s like small hospitals who buy couple of cylinders in a month are not that price sensitive and they charge them more. So the question is why territories? The answer is simple: We want control over retail prices and to avoid conflicts and competition among the distributors. Let’s take a look on the hurdles in the implementation of this strategy. In older plants, there is a 10% loss of gases which have to be left in the air if you have no storage like a big balloon or cylinders. Small companies treat these gases as a bonus and ready to fill this gas in any substandard cylinder at a price anything above their cost. For e.g. there are areas like Gujranwala and Sialkot near Lahore and a small plant operating in Gujranwala would be giving this gas at a very cheap rate to Lahore and Sialkot. Since retailers are not very loyal and are ready to change the manufacturer for even a rupee per m3, our sales go down. Even if we bind a retailer to buy products from us only and distribute them in the assigned district, a strict check on him can not be maintained. For instance we can bind a retailer with one branch but a retailer with four to five branches and operating it as a family business as his brothers and sons are in to it, you just can not stop them. Even if a person is in exclusive contract with you, he is buying from your competitors and selling in other territories through their family network which is shown as a separate business. We also need these distributors because we do not have enough hardware (cylinders) and distributor’s power is in the cylinders they have. IIG (Moosa Khan) has more than 6000 cylinders and that’s why he is the one who is doing highest volume of compression and business. It is easy to compete in organized sector but very difficult to compete in unorganized sector. In this unorganized sector cylinder business, no documentation is done, small companies gets tax discounts by showing less sales. They even steal electricity in order to be cost effective. So it is difficult to compete in this sector and maintain customer loyalty. Although making territories is desirable but it is almost impossible to get good results out of them. Recommendation: We should at least put a clause in contract with distributors of territory restriction and assign a district to them. This will resolve the problem to some extent. Stakeholders Due to changes in the operating model, all the people involved within the company would also be affected. All the departments within the BOC like Operations, CSC, Distribution, Finance, Labor union, Sales, Marketing etc. are stakeholders when changes are made in this operating model. Operations of these departments would change with the changes in operating model. For instance: We should see whether CSC is happy if, let’s say, their 200 customers are diverted to the distributors. Will it improve their performance? If we are outsourcing compression then distribution department would be greatly affected. Instead of Suzuki pickups for delivering cylinders, they would need trucks to deliver liquid. So are they comfortable with these changes? Finance has to collect money now from one distributor rather than from 100 small customers. Number of Labor union workers would have to be cut down in case of outsourcing platform operations partially and some would be asked to leave with lucrative VSS package. So are they happy with it? Similarly all the stakeholders should be consulted and consensus among them on these changes is required before we can finalize and implement the modified operating model. Conclusion After discussing the current setup with their flaws, it is quite clear that it is high time to modify our operating model which will help us in making our operations smoother. The modifications that need to be done are summarized as follows: Marketing channels should be reduced from six to two. Only scenario 1 & 4 should be in operation (refer to pg .3). Only industrial and not medical compression should be outsourced. Hardware should be increased either by importing or by focusing more on CAM. Safety and Territory clauses should be introduced in the contract. Proper Training of distributors especially regarding safety should be done. Equipments provided to distributors should be unified. Implement GMP with Govt. support. Read More