CREDIT SHRINKAGE

Distributors did not give enough notice...

The implementation of the shrinkage in credit happened without prior notice
from the distributors. So we were working and placing orders with that in mind.
Payments became overdue and this put pressure on us for over a month and a half.
We had to consolidate funds from a number of sources to be able to fulfill our
commitment to the distributor. It is the distributors who are responsible for
this state of the market as they were the ones to extend credit days to begin
with.

We are not opposed to the idea...

We expected the distributors to give us some more notice before actually
implementing the order because in principle even we were not opposed to the
idea. With a longer notice period we could have managed well.

Initially sales were hit...

Customers were initially apprehensive about credit limits and credit days´
reduction and sales were hit. And we even had to refuse doing business with
customers who were adamant in their demand for 30 days credit.

We now have to step up efforts to expand our market and consequently end up
spending more resources on marketing. But I must admit that the customer has
come to realize the fact that shorter credit periods have become a reality and
situation now has improved.

Loopholes still exist...

There are instances where some channel partners are still being offered 21
or 30 days credit. Though most of these are those that deal with the corporate
houses directly. And corporates and government work on 30 days, so that support
from the distributors is expected. But what if the goods somehow make way into
the channel, then we will be in trouble.

Another aspect is that the cost of extended credit is generally factored in
the price quoted, so there is no need for the distributors to extend this
differential policy. In effect this means that as long as the distributors
interest are safe they will make an exception.

Ramp up the support...

The distributors and vendors should ensure that the support extended to us
is ramped up. In the current business scenario it would be incorrect to measure
profitability on the basis of margin per product. But then vendors should work
out schemes and back-ends to ensure that the return on capital employed becomes
healthy.

Credit shrinkage was long overdue...

Shrinking the credit limits and the credit period had long been overdue
because the market had become overly undisciplined. More and more partners were
over-trading and this could largely be attributed to the fact that they did not
have their capital at stake. Over-trading led to under-cutting and margins came
under undue pressure.

This step has led to the market getting re-organized to a certain extent.
This will mark the return of healthy practices back into the market.

Business processes must be first improved...

We have been working with our channel partners to help them smoothen their
business processes for the last three to four months. We don´t give our
partners any product that gives them ´financial indigestion´. Almost all our
products have a very fast sell-through rate. This means that they don´t have
any credit issues.

Channel should educate the end customer...

It is largely the responsibility of the channel to educate the end-customer
about credit issues and not that of the distributor or the manufacturer. This
need does not arise when we are selling to the end-user in a retail environment
as all transactions happen in cash.

No exceptions should be made...

The key to ensure that a distributor does not make an exception in its
credit terms for any one partner is to spread your channel. Credit should be
passed out to a partner only after due diligence and no partner should be given
credit more than his capability.

The distributors should also not look at flooding the market with excessive
goods. Resellers also should look at striking a balance between box moving and
value-add products.

Develop new markets and credit will take a backseat

Credit is not the only driver of business. If newer markets are developed
aptly, credit takes a back seat. Even in times of negative topline growth, we
can expect to have positive bottomline growth. One can look at this as an
opportunity to develop a new business portfolio of servicing niche markets,
getting into retail, online sales and so on.