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The German University in Cairo

MBA Program Winter 2012

Business Dynamics

Prepared By:

Contents
Introduction................................................................................................................ 2
Distribution Strategy.................................................................................................. 3
Causal Loops.............................................................................................................. 4
The Problem............................................................................................................... 6
Findings...................................................................................................................... 9

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Introduction
Henkel is a multinational company founded in 1876, its German based headquarters
in Dsseldorf manages over 50,000 employees worldwide and counts among the
most internationally aligned German-based companies in the global marketplace.
Henkel operates worldwide with leading brands and technologies in three business
areas: Laundry & Home Care, Beauty Care and Adhesive Technologies. It holds
globally leading market positions both in the consumer and industrial businesses
with well-known brands such as Persil, Schwarzkopf and Loctite. Some of the more
known brands in the Egyptian market are Pril, Fa, Taft and Pritt.
While the company hosts around 1,200 employee in Egypt working in all three
business areas, the most successful line of business is the Detergents achieving
around 1.5 Billion EGP annual sales.
The Cosmetics sector focus of this report achieves a mere 150 Million EGP
annual sales. While the figure may seem low compared to the Detergents sector,
most of Henkels cosmetics products rank either first or second in their respective
markets.
This report explores the Henkel Cosmetics delivery channels and identifies several
problems that may affect the companys future in the Egyptian market.

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Distribution Strategy
The main factor driving distribution in Henkel Cosmetics is the Sales In target, it is aimed at encouraging Henkel
sales staff to ship more goods to distributors and key accounts.

Figure 1 Distribution Strategy

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Causal Loops
Starting Point: Production starts with a Stock and Flows operation delivering
finished goods to the Production Inventory to maintain a desired Stock Level forming
a Balanced Loop [B1] which drives production whenever stock falls beyond the
desired level.
The Stock Level then influences Sales In which refers to sales made to distributors
as an intermediary in order to meet the sales target.

Figure 2 Initial Production


Sales In (1); Distributors: As the Sales In target shifts, it directly influences two
modes for Sales In. The first is sales made to distributors which results in shifting
their Stock Level. Since Sales to distributors is solely dependent on the Sales In
target and not on market demand, it triggers two undesired results; (1) it decreases
(inversely proportional) the percentage of Sales Out sales made by the distributor
to end customers. (2) It increases the distributors level of Slow Moving Stock and
Near Expiry which in turn decreases the percentage of Valid Stock (stock ready to
be sold to customers) again affecting the percentage of Sales Out made by the
distributor. As the percentage of Sales Out decreases, the money paid by the
distributor (Accounts Receivable) decreases.

Figure 3 Distribution Channels


Sales In (2); Key Accounts: The second mode triggered by the shift in Sales In is
distribution to Key Accounts the more larger distributors with more efficient Sales
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Out mechanisms. The result is an increase in the Stock Level of the Key Accounts,
which is then transformed to a larger percentage (directly proportional) percentage
Sales Out (due to their higher performance) which in turn increases the balance of
their Accounts Receivable.

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The Problem
Currently, the Organizations Capital is decreasing, this reduces the Organizations
abilities to purchase raw materials required for production. We have identified 3
main sources for the decrease in capital;
A. Distributors A/R
B. Distributors Valid Stock
C. Replenishment for Key Accounts

A. Distributors A/R
Henkel utilizes a 90-day collection period mechanism with distributors, however, as
the distributors percentage of Sales Out decreases, they are unable to meet the
payment terms. Accordingly the Organizations Capital is reduced by the decrease
in Accounts Receivables from the distributors behalf.

Figure 4 Distributor A/R


Normally, this would not be a problem as the loop [B2] is balanced, however, as the
Organization continuously raises the target Sales In, it does not wish to stop
shipping products to distributors, therefor [B2] is coupled with a reinforced loop [R1]
which continuously raises the credit limit for distributors as their A/R falls and
Overdues increases.

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B. Distributor Valid Stock


As products are shipped off to distributors to meet Sale In targets (regardless of
demand), the distributors Valid Stock decreases due to the presence of Slow Moving
goods and good Near Expiry. This causes the distributor to eventually return more
and more expired goods which may be at that point almost un-sellable. The
Organization then carries the burden of additional expenses due to Execution
Provision (cost for destroying expired goods) which in turn reduces its Capital.

Figure 5 Distributor Stock Level

C. Replenishment for Key Accounts

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As Key Accounts are better able to generate demand and sell more goods, their
Stock Levels decrease, as a result, the Organization is forced into re-acquiring goods
previously shipped to distributors and reship them to Key Accounts resulting in
added costs from Transportation and other administrative tasks.

Figure 6 Replenishment for Key Accounts

Findings
As a result of the current strategy, the Organization is continuing to struggle with
several direct and indirect financial burdens;
-

The percentage of Sales Out has decreased by 12% in relation to Sales In to


reach 66%.
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Sales returns of slow moving and near expired goods have increased by
about 40%, they currently stand at 26 Million EGP.
As a result of the increasing sales returns, the expiry provision has increased
by about 15% to reach approximately 3 Million EGP.
Stock replenishment costs have increased by 27% over the past year to reach
0.5 Million EGP.
Warehousing costs have increased to reach 0.36 Million EGP as distributor
stock levels increased to 250 days.
Cash inflows have decreased as distributors fail to meet their payment terms
and at the same time Henkel continues to raise their credit limit.

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