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Secondary Sales

Its importance and how to implement:

for the Pharmaceutical Industry

Table Of Contents
1. Introduction ................................................................................................................................................2
2. Why is Secondary Sales a better measure of sales for all decision making? .............................................2
3. Impact on Inventories and Receivables: ....................................................................................................3
3a. Case 1 : Decisions based on Primary Sales...........................................................................................3
3b. Case 2 : Decisions based on Secondary Sales.......................................................................................4
4. How does a company implement a good Secondary Sales (SS) system? ..................................................6

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1. Introduction

In a typical distribution set up of a Pharma company, Primary Sales are the sales invoiced by the C&F
Agent to a stockist; Secondary Sales is sales from stockist to the retailer. The following diagram illustrates
the distribution chain:

2. Why is Secondary Sales a better measure of sales for all decision making?

There is a great deal of focus in the industry on streamlining flow of secondary sales information. Why is
this so important?

• Retailers or chemists rarely stock more than what is needed. And so, their buying pattern reflects
their sales well. Retailer buys from stockist what he can sell. And he sells on cash.
• This also means that the stockist can largely sell to the retailer only what the retailer can sell. There is
rarely any “clog” in the chain.
• What the stockist sells (Secondary Sales) is, therefore “stock adjusted” sales and better reflects
demand.

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• Up the chain, primary sales also, therefore have to be congruent with secondary sales. If not, there
will be “clogs” in the pipeline, leading to non-optimal stocks with the stockist, and consequently, a
possible burden on receivables.

This is simple, and yet not often followed in the industry. If primary sales have to be planned based on
Secondary Sales of stockists, the first step is to measure Secondary Sales!

For good production planning, inventory and receivables management (in short, for good working capital
management), it is imperative that Secondary Sales data is obtained.

3. Impact on Inventories and Receivables:

If planning is based on primary sales (PS) and if planning is based on Secondary Sales (SS).
Let us illustrate the impact with an example. (Figures below are only for illustration).

3a. Case 1 : Decisions based on Primary Sales

Figures for one stockist for ABC Pharma

Base data Month 1 : Number of Units Month 2 : Number of Units

Cost for Cost for
Primary Secondary Primar Secondary Closing Primary Secondary Closing
Product Cost/unit Sales Sales y Sales Sales Stock sales sales Stock
Of Raw
Materials
In Rs.
A111 35.00 87.50 96.25 1200 1000 200 2200 900 1500
B111 45.00 112.50 123.75 2200 1800 400 4000 1700 2700
C111 125.00 312.50 343.75 1200 1000 200 2200 950 1450
D111 25.00 62.50 68.75 2300 2000 300 4300 2100 2500
Cost in
Lakhs 8.71 8.00 15.99 7.68 10.44

Note : The general practice is to keep a Month’s Stock-on-hand.

Note : Month 2 Primary sales are based on (Month 1 Primary Sales for Stock-on-Hand + Month 1 Primary Sales-
Month 1 Closing Stock)

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3b. Case 2 : Decisions based on Secondary Sales

Figures for one Stockist for ABC Pharma

Base data Month 1 : Number of Units Month 2 : Number of Units

Cost for Cost for
Primary Secondary Primar Secondary Closing Primary Secondary Closing
Product Cost/unit Sales Sales y Sales Sales Stock sales sales Stock
Of Raw
Materials
A111 35.00 87.50 96.25 1200 1000 200 1800 900 1100.00
B111 45.00 112.50 123.75 2200 1800 400 3200 1700 1900.00
C111 125.00 312.50 343.75 1200 1000 200 1800 950 1050.00
D111 25.00 62.50 68.75 2300 2000 300 3700 2100 1900.00
Cost in
Lakhs 8.71 8.00 13.11 7.68 7.57

Note : The general practice is to keep a Month’s Stock-on-hand.

Note : Month 2 Primary sales are based on (Month 1 Secondary Sales for Stock-At-Hand + Month 1 Secondary
Sales- Month 1 Closing Stock)

3c: What the two Case Studies mean..

ABC Pharma has just 4 products. Above table illustrates how the two scenarios in Case 1 and Case 2 impact
the primary sales invoiced to stockist 1, and therefore all the other variables.

Let us first summarize the figures in Case 1 and Case 2 as follows: Figures in Rs Lakhs

Case 1 Case 2
Cumulative Primary Sales (Month1 + Month2) 24.70 21.82
Cumulative Secondary Sales (Month1 + Month2) 15.68 15.68
Stockist inventory-Month 2 10.44 7.57
Raw material stocks at ABC (2 mths Primary Sales) 12.79 10.49

(Note : These figures are illustrative and have been used to illustrate the point).

How do the above figures impact ABC’s cash flows and working capital?

• Impact 1: Stocks at the stockist: End point stocks.

We can see from the above figures that, there is significant overstocking in month 2 in Case 1, where
primary sales are used for planning dispatches. Such a situation is destined to lead to pipeline clogging,
throwing all working capital management out of gear. Overstocking can also result in loss due to expiry
dates.

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• Impact 2: Excess finished goods stocks at C&F: Higher planned primary sales will lead to higher
planned production and therefore higher finished goods stocks.

• Impact 3: Higher raw materials stock:

It is only logical that if planned production is inflated, raw material stocks will increase. Case 1 and case
2 figures above are based on 2 months PS as Raw Material stock, assumed to be 40% of PS price.

• Impact 4: Laboured collections from stockist

Why would the Stockist clear a cumulative payment of Rs 24.70 lakhs, if he has collected only Rs 15.68
lakhs? Even he were willing to stock Rs 7.57 lakhs more (1 month Secondary Sales), he would only pay
that amount plus Secondary Sales, totaling Rs 23.25 lakhs, out of Rs 24.70 lakhs.

• Impact 5: Is ABC losing primary sales? (Cumulative figure of Rs 21.83 lakhs in case 2, instead of Rs
24.70 lakhs in case 1).

Obviously not. This is just advancement of billing!

Diagrammatically represented, the two scenarios will look as follows.

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Let us look at Case 2

With this, the following broad numbers emerge for possible cost savings by implementing a good Secondary
Sales system.
• Reduction in raw material inventory: 5 days
• Reduction in finished goods inventory: 5 days
• Reduction in receivables: 5 days
For a company with Rs 100 crores in sales, this will translate to a reduction in working capital of Rs 2.8
crores, saving about Rs 42 lakhs in interest cost alone! Add to that less doubtful debts, and less loss due to
stock write offs due to close to expiry stocks being returned and you have a handful of savings!

This has also been the general feedback received from several CIO s in pharma companies that collect and
use Secondary Sales information well.

4. How does a company implement a good Secondary Sales (SS) system?

Having seen that there are significant savings in implementation of a Secondary Sales system, let us briefly
look at the critical areas and challenges in this task. The following six points need to be addressed:

4.1. It is good to validate secondary sales data with primary sales. Considering that an average company will
have stockists scattered all over the country, It would not be advisable to collect SS data, without validating
the numbers.

4.2. A good SS software application is a must. The application needs to consider all key aspects and
validations. The application should also have the ability to consolidate stockist sales over all required
dimensions, such as geographies, product groups, teams or divisions.

4.3. A company can conveniently follow the 80:20 approach. It is common to have 30-40 % of the stockists
accounting for 80+% of sales. And so,

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Collect SS for all large stockists (A and B category).

For other stockists, one may assume that PS=SS.

4.4. Some companies collect SS data just a few times a year, believing that such data would give them trends
in SS Vs PS, and that is adequate. This approach does not yield ROI. Consistent data collection and analysis,
month after month, as per a pre-defined time line, is a MUST. .

4.5. It is important to align the responsibility for data collection with the organization’s own convenience.
There are three good options:

• Outsourced agency that will take an end to end responsibility.

• C& F agent could collect, collate and enter data for their stockists.
• Area manager or MR could collect and enter data.

The right choice will depend on the company’s policy. What works for company A, may not work for
company B.

4.6. Having collected and consolidated the data, it must be put to use in the decision making process
involving

Rolling sales forecasts

Dispatches Month n+1
Production planning Month n+2 or beyond
Raw material procurement Month n+2 or beyond
In my opinion, if you wish to implement and reap the benefits out of a good secondary sales system, please
remember three golden rules:

1. Choose a good IT and consulting partner, who can use tools to simplify data collection.
2. Make sure that the stockist benefits; you then don’t need coercion to get figures.
3. Set realistic time lines and goals to achieve a good system.

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