The Curious Case of the Failed Entrepreneur
– Puneet Kulraj
Amit Gade’s cheque bounced! Again!
Sunil Sinha, the Business head at Sentinel filters Pvt. Ltd was startled by this unexpected turn of events. When it happened two months back in the month of May, it was dismissed as a one off aberration till it happened again; this was the third in as many months! Now for the better part of July, his account was blocked and no billing could happen as his payments were all overdue.
“Had the company’s business model failed?” Sunil thought. The company had very successfully implemented the TOC thinking process to manage the company. Failure of even a single distributor would mar the track record of the company. This was neither professionally nor personally acceptable to him!
Sentinel Filters Pvt. Ltd
Established in 1987, Sentinel filters Pvt. Ltd is a leading Indian manufacturer of heavy duty air, fuel, lube and hydraulic filters, air intake systems coolants and chemical products for on and off highway application. Sentinel is a Cougar group company with a turnover of Rs.5600 million. It is a supplier to renowned automobile companies and industrial engine and equipment manufacturers.
Sentinel Filters also has an extensive pan-India presence in the automotive and industrial components After Market through its 125+ distributors and 20000+ retailers. The company enjoys the loyalty of these channel partners for making its products available across the country, right upto the mechanics and end users.
Sentinel and Theory of Constraints
Sentinel has adopted Theory of Constraints philosophy and thinking in its management and follows the replenishment system or the “pull” system of distribution throughout its supply chain. This ensures near 100% availability of all parts at different links in the chain at minimum levels of inventory. Because of this distributors and retailers of Sentinel products enjoy unparalleled Return on Investment (ROI) and high availability at all times and do not have to bear the pressure of carrying high stocks. The supply chain is also backed by strong demand generation activities carried out both at the level of Mechanics and End-users. To do so it has on its rolls an experienced Sales Force of 40+ Area Growth Professionals, 200+ Distributor Sales Representatives and 220+ Mechanic Sales Representatives.
Since implementing TOC, the distribution business grew over 12 times in seven years and their distributors worked with less than 10 days of inventory while enjoying near 100% availability. The market credit of distributors is limited to 15 days; consequently, the distributors enjoyed an ROI of over 100%. This model of low capital requirement, low risk and high ROI spawned a unique and interesting tradition at Sentinel; Sales managers of the company quit their job and become distributors of the company!
Over the past three years, there have been about 10 such cases. The company welcomes such entrepreneurial moves as it sees a win-win. Every time such a “shift” happens, the company gets a dedicated distributor who is wedded to them for life as no other company offers such a low risk- high return business model. The “new” distributor faithfully follows the SOPs of the company further boosting its sales and in turn creating yet another successful story which motivates others to start thinking of their entrepreneurial move.
Amit Gade’s Entrepreneurial Venture
About seven months back, in January, yet another sales manager approached Sunil, the business head, asking to be given an opportunity to become a distributor in his home town. He had been contemplating this move for some time and had numerous discussions with his family. His father was a career bank employee and he would be the first entrepreneur in his clan. So they had very strong reservations about Amit giving up a reasonably well paid job and venturing into business. He had several debates on the risks and possible wisdom of this move with his family but after considerable perseverance, he finally won them over and his father agreed to provide the seed capital of 10 lakhs by borrowing from his provident fund account.
Now that Amit was ready to begin, he approached the company to allocate him an area to operate in. The company was supportive and started him off in right earnest, giving him an exclusive demarcated area of three adjoining districts.
Business was good and growing.
About three months later, the first signs of trouble appeared, his cheque deposited at Sentinel bounced! Again in June and again in July!
The Dilemma of a Failed Business
In the beginning of August, Amit sought a meeting with Sunil, the business head. After an initial hesitation, he opened up and confessed that after some really heated debates in the family, they had decided that entrepreneurship was probably not their cup of tea since finances were stretched beyond comfort. He had acquiesced to his family’s wishes with great reluctance. He felt that under the circumstances he had no choice. Amit was heartbroken but he now sought help from the company to close down his business and requested for re-employment if possible or good references with other companies in case his rejoining was not possible.
Sunil saw this was a bolt from the blue. After Amit left, he called in his sales head, Sreejit and the marketing head, Ramesh, for a meeting. They were as shocked and aghast as he was. It was unheard of that the business model of the company could fail. So initially, they toyed with the theory that Amit could have siphoned out money to invest in other businesses or for other personal uses. But this thought process was put aside and a decision was made that Sreejit would objectively audit the distributor’s operations.
In due course, Sreejit, the sales head, compiled his findings and submitted it to his business head. A gist of Sreejit’s report is presented here.
- The distributor was doing about 25 lakh rupees per month in business.
- His stock holding was roughly 9 days and the net market outstanding was 18 days. All in all about 27 days of capital invested in the business.
- Initial investment of 10 lakhs was borrowed from his father’s PF account. Amit had to infuse more money into the business as it grew. He borrowed from friends and relatives and ploughed back whatever he was making into the business.
- The SOPs were being faithfully practiced- The required number of DSRs were provided, all retailers were being faithfully visited on a weekly beat (in the major market centres he was providing twice a week service) and all material was door delivered FOC to the retailers. He was entertaining only small quantity orders with no scheme or discount to retailers for large orders.
- Amit, at this point, had no money and no access to any more to restart the flow of material.
With the report in hand, Sunil speculated as to how this Gordian knot could be unraveled. Everything seemed to be in place and yet something was fundamentally wrong. On the one hand it seemed a clear, that Amit could not continue business in his current circumstances while but he was extremely uncomfortable with the thought of explaining the situation away by saying “Business is not everyone’s cup of tea”. This seemed absurd, especially since the business model had proven again and again to be a perpetual money making machine for everyone!
So he decided to push ahead with his thinking of not accepting the conflict or a compromise and find a breakthrough solution. He was spurred on by the motivation that the company needed to continue creating win-win cases and even one failure would spoil the track record of his company. However, he was also very aware that he could not make any exceptions on the company’s SOPs for this distributor as it would set a bad precedent. So extending extra credit or giving a higher margin to Amit was not an option.
Sunil sat together with Sreejit, head of Sales, and Ramesh, the head of Marketing, determined to find the silver bullet. They opened the SnT Tree quite certain that the solution lay hidden there………
What course of action would you advise him to take?
Beating the Recession Blues
Management consulting industry and all IT vendors in enterprise space, promising productivity improvement have a business cycle well aligned with the overall economy.Read more- Satyashri Mohanty
Sailing the Last Mile
The pull system comes into play the moment manufacturing companies or suppliers start with small quantity supplies of new range of SKUs releasing the capital of the distributor. However, to make this reality there are two important paradigms of supply chain that needs to be addressedRead more- Sudheer S
Analyzing Mysteries of Implementing Replenishment
I think, the best of internalizing new knowledge is by analyzing case studies. So instead of just posting insights, I would like to share a case with you and some questions to ponder at the end of it…Read more- Puneet Kulraj