small to medium scale distribuation agency.pdf

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Pre-Feasibility Study

Prime Ministers Small Business Loan Scheme

(Distribution Agency)

Small and Medium Enterprises Development Authority

Ministry of Industries & Production

Government of Pakistan

www.smeda.org.pk

HEAD OFFICE

4th Floor, Building No. 3, Aiwan-e-Iqbal Complex, Egerton Road,Lahore

Tel: (92 42) 111 111 456, Fax: (92 42) 36304926-7

[email protected]

REGIONAL OFFICE

PUNJABREGIONAL OFFICE

SINDHREGIONAL OFFICE

KPKREGIONAL OFFICE

BALOCHISTAN

3rd Floor, Building No. 3,

Aiwan-e-Iqbal Complex,Egerton Road Lahore,

Tel: (042) 111-111-456

Fax: (042) 36304926-7

[email protected]

5TH Floor, Bahria

Complex II, M.T. Khan Road,Karachi.

Tel: (021) 111-111-456

Fax: (021) 5610572

[email protected]

Ground Floor

State Life BuildingThe Mall, Peshawar.

Tel: (091) 9213046-47

Fax: (091) [email protected]

Bungalow No. 15-A

Chaman Housing SchemeAirport Road, Quetta.

Tel: (081) 831623, 831702

Fax: (081) [email protected]

September 2013
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Pre-Feasibility Study Distribution Agency

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Table of Contents

1. DISCLAIMER ......................................................................................................................... 32. PURPOSE OF THE DOCUMENT ......................................................................................... 43. INTRODUCTION TO SMEDA .............................................................................................. 44. INTRODUCTION TO SCHEME ........................................................................................... 55. EXECUTIVE SUMMARY ..................................................................................................... 56. BRIEF DESCRIPTION OF PROJECT ................................................................................... 67. CRITICAL FACTORS ............................................................................................................ 68. INSTALLED AND OPERATIONAL CAPACITIES ............................................................ 79. GEOGRAPHICAL POTENTIAL FOR INVESTMENT ........................................................ 810. POTENTIAL TARGET MARKETS ................................................................................... 811. DISTRIBUTION PROCESS FLOW ................................................................................... 812. PROJECT COST SUMMARY ............................................................................................ 912.1 Project Economics ........................................................................................................ 9

12.2 Project Financing ........................................................................................................ 1012.3 Project Cost................................................................................................................. 1012.4 Space Requirement ..................................................................................................... 1112.5 Human Resource Requirement ................................................................................... 1112.6 Revenue Generation ................................................................................................... 1212.7 Other Costs ................................................................................................................. 12

13. CONSULTANS / EXPERTS ............................................................................................. 1214. ANNEXURES ................................................................................................................... 13

14.1 Income Statement................................................................................................... 1314.2 Balance Sheet ......................................................................................................... 1414.3 Cash Flow Statement ............................................................................................. 1514.4 Useful Project Management Tips ......................................................................... 1614.5 Useful Links ............................................................................................................. 17

15. KEY ASSUMPTIONS....................................................................................................... 19


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1. DISCLAIMER

This information memorandum is to introduce the subject matter and provide a general

idea and information on the said matter. Although, the material included in this

document is based on data/information gathered from various reliable sources;

however, it is based upon certain assumptions which may differ from case to case. The

information has been provided on as is where is basis without any warranties or

assertions as to the correctness or soundness thereof. Although, due care and diligence

has been taken to compile this document, the contained information may vary due to

any change in any of the concerned factors, and the actual results may differ

substantially from the presented information. SMEDA, its employees or agents do not

assume any liability for any financial or other loss resulting from this memorandum in

consequence of undertaking this activity. The contained information does not preclude

any further professional advice. The prospective user of this memorandum is

encouraged to carry out additional diligence and gather any information which isnecessary for making an informed decision, including taking professional advice from a

qualified consultant/technical expert before taking any decision to act upon the

information.

For more information on services offered by SMEDA, please contact our website:

www.smeda.org.pk
http://www.smeda.org.pk/http://www.smeda.org.pk/http://www.smeda.org.pk/


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2. PURPOSE OF THE DOCUMENT

The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs

in project identification for investment. The project pre-feasibility may form the basis of

an important investment decision and in order to serve this objective, the

document/study covers various aspects of project concept development, start-up, and

production, marketing, finance and business management.

The purpose of this document is to facilitate potential investors in Distribution Agency

by providing them with a general understanding of the business with the intention of

supporting potential investors in crucial investment decisions.

The need to come up with pre-feasibility reports for undocumented or minimally

documented sectors attains greater imminence as the research that precedes such

reports reveal certain thumb rules; best practices developed by existing enterprises by

trial and error, and certain industrial norms that become a guiding source regarding

various aspects of business set-up and its successful management.

Apart from carefully studying the whole document one must consider critical aspects

provided later on, which form basis of any Investment Decision.

3. INTRODUCTION TO SMEDA

The Small and Medium Enterprises Development Authority (SMEDA) was established in

October 1998 with an objective to provide fresh impetus to the economy throughdevelopment of Small and Medium Enterprises (SMEs).

With a mission "to assist in employment generation and value addition to the national

income, through development of the SME sector, by helping increase the number, scale

and competitiveness of SMEs" , SMEDA has carried out sectoral research to identify

policy, access to finance, business development services, strategic initiatives and

institutional collaboration and networking initiatives.

Preparation and dissemination of prefeasibility studies in key areas of investment has

been a successful hallmark of SME facilitation by SMEDA.

Concurrent to the prefeasibility studies, a broad spectrum of business developmentservices is also offered to the SMEs by SMEDA. These services include identification of

experts and consultants and delivery of need based capacity building programs of

different types in addition to business guidance through help desk services.


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4. INTRODUCTION TO SCHEME

Prime Ministers Small Business Loans Scheme, for young entrepreneurs, with an

allocated budget of Rs. 5.0 Billion for the year 2013-14, is designed to provide

subsidised financing at 8% mark-up per annum for one hundred thousand (100,000)

beneficiaries, through designated financial institutions, initially through National Bank of

Pakistan (NBP) and First Women Bank Ltd. (FWBL).

Small business loans with tenure up to 7 years, and a debt : equity of 90 : 10 will be

disbursed to SME beneficiaries across Pakistan, covering; Punjab, Sindh, Khyber

Pakhtunkhwah, Balochistan, Gilgit Baltistan, Azad Jammu & Kashmir and Federally

Administered Tribal Areas (FATA).

5. EXECUTIVE SUMMARY

Small Scale Distribution Agency is proposed to be located at any densely populated

city such as Karachi, Lahore, Rawalpindi, Peshawar or Quetta to distribute consumer

goods such as Branded Tea, Powdered Milk and Confectionary Items to the Local

market. This business can also be done in all small 2nd tier towns in addition to

suburban towns of large cities.

This proposed distribution agency will distribute around 10 tonnes each of tea,

powdered milk, biscuits and Chocolate/ Toffees etc per month to the retailers. The

assumed sales force has the capacity to distribute around 60 tonnes of product and

initially they will be utilizing 67% of proposed capacity.

Total Cost Estimate of the project is Rs. 2,170,200 with Fixed Investment of Rs.

1,532,000 and Working Capital ofRs. 638,200

Given the cost assumptions IRR and payback are 41 % and 3.5 years respectively.

The most critical considerations or factors for success of the project are

1. Product and Brands to be distributed

2. Negotiation and Marketing Skills

3. Credit Recovery


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6. BRIEF DESCRIPTION OF PROJECT

Product: It has been suggested that for the proposed distribution business, the

company would act as a main institutional distributor for Fast Moving Consumer

Goods (FMCG) products. The business would distribute: one established tea brand,

any one of packaged Milk as new brands are growing in the market and any two of

confectionery products i.e. biscuits & toffee etc.

Location: Distribution Agency can be setup in any major city with significant number

of population such as Karachi, Lahore, Rawalpindi, Peshawar and Quetta. This

business can also be done in all small 2nd tier towns in addition to suburban towns of

large cities.

Target Market: The demand of distribution service providers is increasing which is

directly proportionate to the increase in consumer goods manufacturing companies

which is expanding substantially with the current economic growth and consumerism.

Therefore the potential Target market for the proposed setup is densely populated

cities such as Karachi, Lahore, Peshawar, Quetta, Rawalpindi, Islamabad and all 2 nd

& 3rd tier cities / towns of Pakistan.

Employment Generation: The proposed project will provide direct employment to 15

people. Financial analysis shows the unit shall be profitable from the very first year of

operation

7. CRITICAL FACTORS

Critical success factors that affect the decision to invest in the proposed business setup

are:

i) Products and brand

Product and Brands to be distributed would act as a key success factor for the proposed

distribution business. Greater the brand awareness in the market, higher would be the

chances of business success. It is suggested that prospective entrepreneur should

obtain distribution agreement for at least one successful brand.

ii) Background Experience

Background experience plays an important role in operating a Small to Medium Scale

Distribution Agency specially when dealing with customers and deciding on the


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business development activities to be carried out and negotiating on commercial terms

and conditions, etc.

iii) Marketing Skill

Critical to the business success is that the entrepreneur must have effective PR &

marketing skills. These marketing skills should enable the entrepreneur to carryout

business development activities to target his potential customers and also to maintain

his existing client base.

iv) Strong Sub-distributor

A strong sub-distributor network also plays an important role in generating additional

business. Such a network is imperative in developing a strong customer base which

might remain restricted if operated singly.

v) Skilled & Experienced ManpowerThe knowledge and experience of the entrepreneur is not sufficient to run the business

smoothly. A major proportion of the business development activities and accounts

receivables are managed by sales personnel employed by the agency. Therefore it is

crucial for the distribution agency to hire experienced and skilled sales staff that can

bring in new business with them and retain the existing customer base.

8. INSTALLED AND OPERATIONAL CAPACITIES

For the proposed project it is assumed that 480 tonnes / annum of various consumergoods will be distributed across the city where the distribution company is setup with 7%

sales volume growth assumption. For this purpose a staff of total 15 persons will be

justifying their job description in various capacities.

It has been suggested that for the proposed distribution business, the company would

act as a main institutional distributor for Fast Moving Consumer Goods (FMCG)

products. The business would distribute: one established tea brand, any one of

packaged Milk as new brands are growing in the market and any two of confectionery

products i.e. biscuits & toffee etc.

Products for the distribution have been selected for the proposed business by

foreseeing their high potential and anticipated expansion in the manufacturing of these

products. However, as these products are perishable, efficient distribution operations

would be necessary. In order to leverage the opportunity for further business expansion,

intensive distribution practice would be followed which means that the business would


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place its products and services in as many outlets as possible employing the FIFO

method.

It is proposed that Milk would not stay in the warehouse more than 03 days, whereas,

tea and confectionery would take 07 days at most. However, it is suggested that time for

a product to leave the warehouse and be distributed should be as minimum as possible.

9. GEOGRAPHICAL POTENTIAL FOR INVESTMENT

The growing trend of consumerism and increase in population has increased

opportunities for the consumer goods distribution business in Pakistan. And the influx of

rural population into urban areas has also increase the demand of consumer goods,

therefore proposed Distribution Agency can be setup in any major city with significant

number of population such as Karachi, Lahore, Rawalpindi, Peshawar and Quetta. This

business can also be done in all small 2nd tier towns in addition to suburban towns of

large cities.

10. POTENTIAL TARGET MARKETS

Pakistan has a domestic market of above 185 million consumers with growing incomes

& changing consumption habits. Population growth, increase in per capita income, and

urbanization have led to demand of distribution agencies. Consumerism and

introduction of new products have fuelled the demand. The target market for the

proposed setup is densely populated cities such as Karachi, Lahore, Peshawar, Quetta,

Rawalpindi, Islamabad & all 2nd & 3rd tier cities / towns of Pakistan.

11. DISTRIBUTION PROCESS FLOW

Manufacturing or trading companies dealing in consumer goods when interested in

appointing a distributor for their products, advertise in the newspapers and call for

expression of interest from the local companies interested in the distribution.

Companies evaluate following capabilities of the interested distributors:

Location of distributors business premises;

Financial position and credit standing of the distributor;

Knowledge and experience of the distributor;

Storage and showroom facilities of the distributor;


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Ability of the distributor to secure adequate business and to cover the market;

Capacity of the distributor to provide after sale service;

General reputation of the distributor and his sales force;

Willingness of the distributor to handle the entrepreneurs products;

Degree of co-operation and promotion service he is willing to provide; Nature of other products, if any handled by the distributor.

In a country like Pakistan one needs an effective distribution system that provides

market coverage and is economical. The choice of a channel by traders or

manufacturers depends upon the nature of the product e.g. for low priced consumer

products like soap, a vast network is needed and manufacturers prefer to higher the

services of a independent distributor rather than having their own distribution setup

which is a high cost option. For industrial goods, a direct channel or a very short

channel is considered to be appropriate. The nature of the product- whether it is bulky

or perishable for instance as well as the cost and efficiency of the distributors are someother factors that manufacturers and traders consider while selecting a distributor.

12. PROJECT COST SUMMARY

A detailed financial model has been developed to analyze the commercial viability of

Distribution Agency under the Prime Ministers Small Business Loan Scheme. Various

cost and revenue related assumptions along with results of the analysis are outlined in

this section.

The projected Income Statement, Cash Flow Statement and Balance Sheet are

attached as appendix

12.1Project Economics

All the figures in this financial model have been calculated for distribution of 40 Tons /

Month of Packed Tea, Powdered Milk, Biscuits and Confectionary Items. Monthly Sales

of these items based on certain assumptions such as Distributors price and quantity of

sales are calculated to be Rs. 12.9 million.

The following table shows Internal Rate of Return, Net Present Value and Payback

Period.


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Table 1 - Project Economics

Description Details

Internal Rate of Return (IRR) 41%

Payback Period (yrs) 3.5

Net Present Value (NPV) 6,442,089

Returns on the scheme and its profitability are highly dependent on effective

management of Logistics, General reputation of distributor and its sales force.

12.2Project Financing

Following table provides details of the equity required and variables related to bank

loan;

Description Details

Total Equity (10%) Rs.217,020

Bank Loan (90%.) Rs.1,953,180

Markup to the Borrower (%age/annum) 8%

Tenure of the Loan (Years) 07

12.3Project Cost

Following requirements have been identified for operations of the proposed business.

Table 1: Capital Investment for the Project

Capital Investment Amount (Rs.)

Renovation Office & Godown 50,000

Security Deposit 500,000

Furniture 50,000

Delivery Vehicles 02 Nos. (Used) 700,000

Rent Deposit 100,000

Office Equipment 82,000

Preliminary Expenses 50,000Total Capital Costs 1,532,000

Initial Working Capital 638,200

Total Project Cost 2,170,200


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12.4Space Requirement

Space required for Distribution Agency is 2000 Square ft. where 200 Sq. Ft. will be used

for Management Office and 1800 Sq. Ft. will be used Godown.

Table 2: Space Requirement

Description Area

Sq. Ft.

Monthly Rent

Charges (Rs.)

Yearly Rent(Rs.)

For Office & Godown 2000 20,000 240,000

Total Rent 20,000 240,000

Table 3: Office Equipment & Furniture Costs

Description Quantity Cost Amount

Computer & UPS 1 40,000 40,000

Printer 1 10,000 10,000

Fax & Telephone 1 12,000 12,000

UPS & Battery 1 20,000 20,000

Furniture 1 50,000 50,000

Total 132,000

12.5Human Resource Requirement

Table 4: Human Resource Requirement

Description Nos. Salary per month Total Salary

Owner Manager 1 25,000 25,000

Sales Staff / Outdoor Booking 4 12,000 48,000

Store Keeper 1 12,000 12,000

Billing Staff 1 12,000 12,000

Cashier 1 15,000 15,000

Deliveryman 2 10,000 20,000

Driver / Loader 3 10,000 30,000

Security Guard 2 10,000 20,000

Total Staff 15 106,000 182,000


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The table above provides details of human resource required to run a Distribution

Agency of Small and Medium Scale. Salaries of all employees are estimated to increase

at 10% annually.

12.6Revenue Generation

The revenues are based on assumption of monthly Sales Proceeds of Rs. 12.9 Million

of Branded Tea, Powdered Milk, Biscuits and Confectionary items with an annual sales

volume growth rate of 5% and Price Growth Rate of 10%. On an average distribution

margin is 2% of total sale proceeds.

Distribution of Items Monthly SalesCommission

on Sales (2%)

Incentives on

Sales

Branded Tea 5,000,000 100,000 40,000

Powdered Milk 5,000,000 100,000 80,000

Biscuits / Cookies 1,300,000 26,000 28,600

Candy / Toffee / Chocolates 1,600,000 32,000 28,800

258,000 177,400

Total Sales 435,400

12.7Other Costs

An essential cost to be borne by the company is maintenance of vehicles as delivery

vans has to cover a number of remote areas in different part of the city. On an average

Rs. 15,000 is assumed to be monthly vehicle maintenance expense.

13. CONSULTANS / EXPERTSFollowing are the few significant distributors with Sub distribution options:

Universal Distributors Limited (UDL)

International Brands Limited (IBL)

Burque Corporation, Premier Distributor

Muller & Phipps (M & P)


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14. ANNEXURES

14.1 Income Statement


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14.2 Balance Sheet


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14.3 Cash Flow Statement


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14.4 Useful Project Management Tips

Technology

List of Machinery & Equipment

Computer & UPS

Printer

Fax & Telephone

UPS & Battery

Furniture

Energy Requirement: Should not be overestimated or installed in excess and

alternate source of energy for critical operations be arranged in advance

Machinery Suppliers: Should be asked for training and after sales services under

the contract with the machinery suppliers

Quality Assurance Equipment & Standards: Whatever means required

products quality standards need to be defined on the packaging and a system to

check them instituted, this improves credibility

Marketing

Sales & Distribution Network: Expert's advise and distribution agreements

are required with.

Price - Bulk Discounts, Cost plus Introductory Discounts: Price should never

be allowed to compromise quality. Price during introductory phase may be lower and

used as promotional tool. Product cost estimates should be carefully documented

before price setting. Government controlled prices shall be displayed.

Human Resources

List of Human Resource

Owner

Sales Staff / Outdoor Booking

Store Keeper

Billing Staff

Cashier

Deliveryman


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Driver / Loader

Security Guard

Adequacy & Competencies: Skilled and experienced staff should be

considered an investment even to the extent of offering share in business profit.

Performance Based Remuneration: Attempt to manage human resource

cost should be focused through performance measurement and performance based

compensation.

Training & Skill Development: Encouraging training and skill of self &

employees through experts and exposure of best practices is route to success.

Least cost options for Training and Skill Development (T&SD) may be linked with

compensation benefits and awards.

14.5 Useful Links

Prime Ministers Office

www.pmo.gov.pk

Small & Medium Enterprises Development Authority (SMEDA)

www.smeda.org.pk

National Bank of Pakistan (NBP)

www.nbp.com.pk

First Women Bank Limited (FWBL)www.fwbl.com.pk

Government of Pakistan

www.pakistan.gov.pk

Ministry of Industries & Production

www.moip.gov.pk

Ministry of Education, Training & Standards in Higher Education

http://moptt.gov.pkGovernment of Punjab

www.punjab.gov.pk

Government of Sindh

www.sindh.gov.pk


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Government of Khyber Pakhtoonkhwa

www.khyberpakhtunkhwa.gov.pk

Government of Balochistan

www.balochistan.gov.pk

Government of Gilgit Baltistan

www.gilgitbaltistan.gov.pk

Government of Azad Jammu & Kashmir

www.ajk.gov.pk

Trade Development Authority of Pakistan (TDAP)

www.tdap.gov.pk

Security Commission of Pakistan (SECP)

www.secp.gov.pk

Federation of Pakistan Chambers of Commerce and Industry (FPCCI)

www.fpcci.com.pk

State Bank of Pakistan (SBP)

www.sbp.org.pk

Pakistan Institute of Fashion Design(PIFD)

www.pifd.edu.pk

Pakistan Fashion Design Council (PFDC)

www.pfdc.org


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15. KEY ASSUMPTIONS

Item Assumption(s)

Sales Volume Increase 5 %

Sales Price Increase 10%

Increase in Cost of Sales 10 %

Increase in Staff Salaries 10 % per year

Increase in Utilities 10 % per year

Increase in Rent 10 % per year

Increase in Office Expenses 10 % per year

Debt / Equity Ratio 90 : 10

Depreciation: Premises Renovation 10 % per annum (Diminishing Balance)

Furniture 10 % per annum (Diminishing Balance)Lease Period 7 Years

Lease Installments Monthly

Financial Charges (Lease Rate) 8 % per annum

Bad Debts 3% of Sales

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