Distribution Mgmt BIMS

Distribution Management

& The Marketing Mix

The Marketing Mix

• Product • Place • Price• Promotion • Distribution channels help in the ‘place’

aspect of the marketing mix• Distribution provides place, time and

possession utility to the consumer

Example • Consumer wants to buy a tube of toothpaste

– Made available at a retail outlet close to her residence – place

– Made available at 8 pm on a Tuesday evening when she wants it – time

– She can pay for the toothpaste and take it away – possession

• The company distribution function has made all this possible.

• The situation would be similar if a customer wants to buy a refrigerator or medicines or even an electric motor

Players Involved

• The company and its distribution network– Direct company to consumer– Company to a C&FA / distribution center to

distributors to retailers– Distributor to wholesaler to retailer

• All these intermediaries help the process of ‘exchange’ of the product or service.

What is distribution management?

Distribution Management

• Management of all activities which facilitate movement and co-ordination of supply and demand in the creation of time and place utility in goods

• The art and science of determining requirements, acquiring them, distributing them and finally maintaining them in an operationally ready condition for their entire life.

A distribution channel…

Distribution Channels Defined

• Are sets of interdependent organizations involved in the process of making a product or service available for use or consumption – Stern & Ansary– Whether selling products or services, marketing

channel decisions play a role of strategic importance in the overall presence and success a company enjoys in the marketplace.

Distribution Channels

• Are intermediaries or middlemen– Exist because producers cannot reach all their

consumers– Multiply reach and provide efficiency to the

marketing process– Facilitate smooth flow and create time, place and

possession utilities– Have the core competence and reach – Provide contact, experience, specialisation and

scales of operation

Types of Channels

• Sales: motivates buyers, shares information between company and its consumers, negotiates fair bargains for consumers and finances the transactions

• Delivery channel meant only for physical part of the distribution

• Service channel – performs after sales service

Channel members…

Listing of Channel Members

• Company own sales team• C&FAs and CSAs• Distributors, dealers, stockists, value-added

re-sellers• Agents and brokers• Franchisees • Electronic channels• Wholesalers• Retailers

C&FAs / C&SAs• C&FA: carrying and forwarding agent and

C&SA: carrying and selling agent – both are on contract with a company

• Both are transporters who work between the company and its distributors

• Collect products from the company, store in a central location, break bulk and despatch to distributors against indents

• Goods belong to the company• C&SA also sells the goods on behalf of the

company but remits proceeds after sale

Distributors, Dealers, Stockists, Agents

• Name denotes the extent of re-distribution done by them

• Distributors invest in the products – buy products from the company

• Are on commission, margins or mark-up• May or may not get credit – but extend credit• Distributors cover the markets as per a beat

plan. All others merely finance the business.• Distributors could be exclusive for a company• Agents bring buyer and seller together

Wholesalers• Operate out of the main markets• Deal with a number of company products of

their choice• Are not on contract with any company• Sell to other wholesalers, retailers and

institutions• Negotiate about 15 days credit from company

distributors – also provide credit to their customers

• Operate on high volumes and low margins

Retailers

• The final contact with consumers• Operate out of their shops and sell a large

assortment and variety of goods• Located closest to consumers• Buy from company, distributors or

wholesalers• Highest margins in the network• Provide personalised services to their

customers

Industrial Products

Producer Producer

Industrial Distributor

Industrial Customer

Industrial Distributor

Industrial Customer

Agent/middleman

Customers may also direct from company sales force

Consumer Products

Producer ProducerProducer

Customer /consumer

Retailer

DistributorDistributor

Retailer

Customer/Consumer

Wholesaler

Customer/Consumer

Retailer

Retailers may also direct from company sales force

Patterns of Distribution

• Determines the intensity of the distribution

• Intensity decides the service level provided

• Types of distribution intensity:– Intensive– Selective– Exclusive

17

Distribution Intensity

• Intensive: distribution through every reasonable outlet available – FMCG

• Selective: multiple, but not all outlets in the market – pharma, frozen food

• Exclusive: may be only one outlet in a market - car dealers

Intensive Distribution

• Strategy is to make sure that the product is available in as many outlets as possible

• Preferred for consumer, pharmaceutical products and automobile spares

Selective Distribution

• A few select outlets will be permitted to keep the products

• Outlets selected in line with the image the company wants to project

• Preferred for high value products• Tanishque jewelry

• Keeps distribution costs lower

Exclusive Distribution

• Highly selective choice of outlets – may be even one outlet in an entire market

• Could include outlets set up by companies – Titan, Bata

• Producer wants a close watch and control on the distribution of his products.

Channel strategy…

Distribution Channel Strategy

• Derived from the corporate strategy and the marketing strategy

• Steps for designing the distribution strategy are:– Defining customer service levels– Distribution objectives and steps – Structure of the network required – Policy and procedure to be followed– Key performance indicators– Critical success factors

Customer Service Levels

• Defined by the nature of the industry, the products, competition and market shares.

• Affordability also decides the service level

• It should at least match competition.• Customer expectations have no limit

Distribution Objectives

• Influenced by the customer expectations

• Defines the extent of time, place and possession utility which the customer can expect out of the channel network

Set of activities….

Set of Activities• Manner in which the company and its

marketing channels go about achieving the customer service levels

• Some of these steps could be:– Sales forecasts– Despatch plans– Market coverage beat plans– Journey plans for service engineers– Collection of sales proceeds– Carrying out promotional activities

• The company also decides as to who is to perform which task

Organization….

Distribution Organization

• Extent of company support and outsourcing to be decided

• Budget for the cost of the distribution effort• Select suitable channel partners – C&FAs,

and distributors• Setting clear objectives for the partners• Agree on level of financial commitments by

the channel partners.Policy and procedure..

Policy & Procedure

• Define policy and implementation guidelines through Operating Manuals

• Policy guidelines include– Code of conduct for channel members– System for redressal of complaints– Any additional subsidies etc– Handling institutional business– Service policy for engineering products

KPIs….

Key Performance Indicators

• For measurement of effectiveness. Some of these could be:– Consistent achievement of targets by product

groups, periods and territories– Achievement of market shares– Achievement of profitability– Zero complaints from customers– No stock returns– Ability to handle emergencies and sudden spurts

in demand

Key Performance Indicators

• For measurement of effectiveness. Some of these could be:– Balanced sales achievement during a

period – no period end skews– Market coverage with ready stocks– Excellent management of accounts

receivables– Minimize losses on account of stock-outs– Minimize damages to products

CSFs…

Critical Success Factors• The distribution strategy also needs the

support and encouragement of top management to succeed

• Some of the CSFs could be:– Clear, transparent and unambiguous policy and

procedure– Serious commitment of the channel partners– Fairness in dealings– Clearly defined customer service policy– High level of integrity– Equitable distribution at times of shortage– Timely compensation of channel partners

Channel Functions

• Information gathering• Consumer motivation• Bargaining with suppliers• Placing orders• Financing • Inventory management• Risk bearing• After sales support

SDM- Ch 9 Tata McGraw Hill Publishing 31

Vertical Marketing System

• Various parties like producers, wholesalers and retailers act as a unified system to avoid conflicts

• Improves operating efficiency and marketing effectiveness

• 3 types:– Corporate– Administered – Contractual

Corporate…


Corporate VMS

• Combines successive stages of production and distribution under single ownership

• Examples: – Bata, Bombay Dyeing, Raymond– Sears, Goodyear– Suppliers of food items could be also their

own supplying firms - like Nilgiris

Administered…


Administered VMS

• Co-ordinates distribution activities• Gains market power by dominating a channel• Usually true of dominant brands like GE,

Kodak, Pepsi, Gillette, Coke and HLL in certain locations– Command high level of co-operation in shelf

space, displays, pricing policies and promotion strategies

Contractual…


Contractual VMS

• Independent producers, wholesalers and retailers operate on a contract

• Could take the forms of:– Wholesaler sponsored voluntary chains– Retailer co-operatives– Manufacturer sponsored retail or wholesale

franchise– Franchise organizations – Service firm sponsored retail franchise


Horizontal MS

• Two or more unrelated companies join together to pool resources and exploit an emerging market opportunity– In-store banking in hotels, big stores– Retail outlets in petrol bunks– Coffee Day outlets in airports

Multi-channel…


Multi-channel Distribution

• Company uses different channels to reach / same or different market segments– Most FMCG companies have separate

networks for retail market and institutions

– Pharma companies may use different channels to reach doctors, chemists and hospitals


Multi-channel Distribution

• Used in situations where:– Same product but different market

segments– Unrelated products in same market –

detergents and ice creams (HLL)– Size of buyers varies – Geographic concentration of potential

consumers varies– Reach is difficult


Distribution Channels

• Take care of the following ‘discrepancies’– Spatial– Temporal – Breaking bulk– Assortment and– Financial support


Spatial Discrepancy

• The channel system helps reduce the ‘distance’ between the producer and the consumer of his products.– Consumers are scattered– Have to be reached cost effectively

• Example: companies produce products in one location even for global needs


Temporal Discrepancy

• The channel system helps in speeding up in meeting the requirement of the consumers– Time when the product is made and when it is

consumed is different– Limited number of production points but hundreds

of consumers

• Maruti plant in Gurgaon – cars and spares are available when the consumer wants


Breaking Bulk

• The channel system reduces large quantities into consumer acceptable lot sizes– Production has to be in large quantities to benefit

from economies of scale– Consumption is necessarily in small lot sizes

• India is the ultimate example in breaking bulk – you can buy one cigarette, one Anacin, one toffee etc


Need for Assortment

• The channel system helps aggregate a range of products for the benefit of the consumer – it could be made by one company or several of them.– For the same product, it could be a variety

of brands and pack sizes• MICO makes fuel injection equipment,

spark plugs etc in different plants but its dealer will sell the entire range.


Financial Support

• The channel system provides critical working capital to its customers by extending credit.

• Some channel members like stockists and wholesalers finance the business of their customers.– Medical diagnostic equipment to hospitals


Channel Flows

• Forward flow – company to its customers – goods and services

• Backward flow – customers to the company – payment for the goods. Returned goods.

• Flows both ways - information


Three Flows Recognized

FORWARD

BOTH WAYS

BACKWARD

Goods and Services

Information

Payment for goods / returns

Company Customers


The Five Channel Flows

• Physical flow of goods• Title flow of goods (negotiation,

ownership and risk sharing also)• Payment flows (financing and payment)• Information flow (about goods, orders

placed and orders executed)• Promotion flows

Who is responsible?


Channel Flows• Some channel member/s have to perform

them• There is a cost associated with each flow• If a channel member is discontinued, the flow

has to be performed by another• All flows and transactions can be effective

only with timely, accurate and correct information

• The channel flow is ideally to be handled by the most competent channel member who can deliver best service at the lowest cost.


Degree of Involvement

Manufacturer C&FA or Distribution

Center

Distributor,dealers

Wholesaler or retailer

PhysicalTitle / ownershipInformationRisk sharingPromotions

PhysicalTitle InformationPayment Order processing

PhysicalTitle / ownershipInformationPayment Order placementNegotiation Risk sharingPromotions

PhysicalTitle / ownershipInformationPayment Order placementNegotiation Risk sharingPromotions

Channel formats…


Channel Formats

• Is decided by who ‘drives’ the channel system:– Producer driven– Seller driven– Service driven– Others


Producer Driven

• This is the effort of the manufacturer to reach the product to his consumers. Examples:– Company owned retail outlets – petrol, Bata,

Reliance mobiles– Licensed outlets – KMF– Consignment selling agents– Franchisees– Brokers– Vending machines– Company contracted distributors


Seller Driven

• Use of existing channels to reach the largest number of end users– Existing wholesalers and retailers – Modern retail formats– Specialty stores – Shoppers’ Stop– Discount stores – Subhiksha– Pheriwalas


Service Driven

• These are the people who facilitate the distribution– Transporters and freight forwarders– Providers of warehouse space– C&F agents– 3P Logistics service providers– Couriers


Other formats• Multi-level marketing systems – Amway,

Modicare, Tupperware, Herbalife• Co-operative societies• Telephone kiosks• TV home shopping• Catalogue marketing• The internet• Exhibitions, fairs and trade shows• Data base marketing

Channel levels…


Channel Levels

• Zero level – if the product or service is provided to the end user directly by the company.– Used mostly by companies delivering service like

health, education, banking (also known as service channels)

• One level – consists of one intermediary• Two level – consists of two intermediaries

and is the most common for FMCG products


Service Channel • Companies establish their own unique

channels to deliver services like health, education, banking, insurance etc– Hundreds of bank branches to be close to

prospects– Banks may also recruit independent agents to get

customers to walk in– Consulting or IT firm uses one team for Biz

Development and another for execution– Musician or magician may use mass media,

events or web sites to reach customers


Channel LevelsManufacturer ManufacturerManufacturer

End User

Retailer

End User

Retailer

End User

Distributor/ wholesaler

Zero level Two levelOne level

Summarize Expectations…


Key Learnings

• Marketing channels are responsible for flows – physical possession, title, payments, information and promotion covered by forward, backward and flows both ways

• Each channel partner has a different role in supporting customer service through suitable channel flows

• Number of categories operating in a channel system define the channel levels as one, two etc


Chapter 10

Channel Institutions - Retailing


Learning Objectives

• Understand what retailing is all about• Global retail scene and trends• Indian retail scene and trends• Types of retailers• Trade and retail formats, trading area• Retail management strategies and operations• Measuring retail performance• Franchising and e-tailing• FDI in retail in India


What is Retailing? • Any business entity selling to consumers

directly is retailing – in a shop, in person, by mail, on the internet, telephone or a vending machine

• Retail also has a life cycle – newer forms of retail come to replace the older ones – the corner grocer may change to a supermarket

• Includes all activities involved in selling or renting products or services to consumers for their home or personal consumption


Retailing • Term retail derived from French word

‘retaillier’ meaning ‘to break bulk’• Characteristics:

– Order sizes tend to be small but many– Caters to a wide variety of customers. Keeps a

large assortment of goods– Lot of buying in the outlet is ‘impulse’- inventory

management is critical– Selling personnel and displays are important

elements of the selling process– Strengths in ‘availability’ and ‘visibility’– Targeted customer mix decides the marketing mix

of the retailer


Retailing

• Retail stores are independent of the producers – not attached to any of them

• A survey shows that only 35% of supermarket purchases are pre-planned. The rest are ‘impulse’- greatly influenced by quality of the merchandising efforts


Functions of Retailers

• Marketing functions to provide consumers a wide variety

• Helps create time, place and possession utilities

• May add form utility (alteration of a trouser bought by a customer)

• Helps create an ‘image’ for the products he sells


Functions of Retailers

• Add value through:– Additional services – extended store

timings, credit, home delivery– Personnel to identify and solve customer

problems– Location in a bazaar to facilitate

comparison shopping


How do Customers Decide on a Retailer?

• Price • Location• Product selection• Fairness in dealings• Friendly sales people• Specialized services provided


Kinds of Retailers

Type of retailer

Characteristics

Specialty store Narrow product line with deep assortment – apparel, furniture, books

Department store

Several product line in different departments – Shoppers Stop, Big Bazaar

Supermarket Large, low-cost, low-margin, high volume, self-service operation with a wide offering

Convenience store

Small stores in residential areas, open long hours all days of the week – limited variety of fast moving products like groceries, food

Discount store Standard merchandise sold at lower prices for low margins - Subhiksha


Kinds of Retailers

Type of retailer

Characteristics

Corporate chains

More outlets owned and controlled by one firm – Globus

Voluntary chain Wholesaler sponsored group of independent retailers

Retailer co-ops Independent retailers with centralized buying operations and common promotions

Consumer co-ops

Co-op societies of groups of consumers operating their own stores – farmers, industrial workers etc

Franchise organisation

Contractual arrangement between the producer and retailers – selling products exclusively – Kemp Toys


Retailing Scene - Global

• Well organised in most developing countries• Global biz worth about $ 6.6 trillion• Retail market size is $2325 bln in the US and

$ 280 bln in India.• Organised retail is 85% in the US and about

5% in India. China 20% Taiwan 80%• Retail sector is part of the service sector and

if organised, is a major contributor to a country’s GDP


Retailing Scene - Global

• High potential for generating employment – 2 mln retail outlets in the US employ about 22 mln people

• Retail sector contributes significantly to the growth of the economy

• Organised retail is becoming powerful over its suppliers (who may also be big corporates)

• Producers of goods taking action to protect their turf


Retailers’ Strengths

• Choice of merchandise is their prerogative – put pressure on producer suppliers

• Many new products on offer. Can charge penalty if products do not do well

• New developments in IT help them run operations optimally and keep track of loyal customers. Also helps them identify profitable store locations.


The Indian Retail Scene


Salient Features

• Estimated over 12 mln retail outlets with most of them in the unorganized sector

• 10 outlets per 1000 population• Average per capita space – 2 sq ft

compared to 15 sq ft in the US• Organized retail is estimated between 4

to 7% but growing fast


Organized Retail

• Growing trends attracting global players• Some of them like Wal Mart and Tesco have

already created buying hubs here.• In Jan 2006, GOI has permitted FDI upto 51%

in single brand retail outlets• Well known brands like Marks & Spencer,

Reebok, Levis, Adidas, Nike, Reebok, McDonalds, KFC, Swarowski are already in India.


Organized Retail - Features• Sponsored by companies or corporate groups• Large formats like supermarkets, department

stores and now hypermarkets• Right ambience to make shopping a pleasure• Use latest technology for customer care and

supply chain management.• Large employment potential• Effectively manage operating costs• Offer consumers value for money


Retailing Trends - India• Consumer wants more benefits without

additional costs• Rising income levels – cheap no longer

works, but ‘value for money’• Explosion of communication channels

influences choices of products• Increased literacy has made consumer more

conscious of his bargaining power• Growing number of urban nuclear families


Retailing Trends - India• Influence of retailer increasing – assortment

plus other facilities offered• Rural consumers want the same things and

as their urban counterparts and are willing to pay for it

• Better organized supply chains to cater to a large number of outlets in different locations

• Improved infrastructure helping the consumers

• Bigger volumes help in economies of scale


FDI in Retail in India• MNC players showing interest to operate in

India• Resistance from the existing players• So far only cash-and-carry permitted• Franchisees also allowed – KFC, Tag Heuer,

Swatch, McDonalds• Jan 2006, 51% FDI permitted in single brand

businesses:– All products should be under the same brand

name– Same brands should be sold internationally– Branding at the time of manufacturing itself


Trade / Retail Format• Range of goods and customer service

dimensions determine the ‘format’. Elements distinguish between stores and include:– Store ambience. (Kemp Fort)– Saving in time for shopping – interiors of practical

design – reduce time for search and pick-up of goods

– Location – Physical characteristics – external appearance,

arrangement of goods• All these are parts of the positioning strategy

and influence the ‘footfalls’ to the store.


Categories of Shoppers (1)• Identified by Cook & Walters• Task focused shopper – visits the store to buy

specific things he has planned for – Convenience, minimum time, easily accessible

goods, pleasing store format– Grocery shopping is an example

• Leisure shopper – more interested in the ambience and environment – Has plenty of time, wants to have a good time

while shopping– Lifestyle stores are examples


Category of Shoppers (2)

• Convenience goods (low value): probable gain from shopping and making comparisons is small compared to the time, effort and mental discomfort required in the search -toothpaste

• Shopping goods (high value): gain is large - refrigerator

• Specialty goods: clearly distinguished by brand preferences – Maruti Zen car or Tag-Heuer watch

Trading area…


Trading Area

• Catchment area from where most of the customers of a retail store come– Corner grocery store caters to the locality in which

it is situated– Discount stores have a wider area. Subhiksha

locations for consumers in 2 km radius– Specialty stores have a much wider trading area –

MTR, Shoppers’ Stop etc• Trading area increases with the size of the

store and the variety it offers


Retail Strategy

• Positioning of the retailer• Merchandising • Customer service• Customer communication


Positioning Strategy

• Wide range with a high value add – Lifestyle brand of stores

• Limited range but a high value add – Tanishque jewelry store

• Limited range with a limited value add – Bata stores

• Wide range of goods but a limited value add – a Food World outlet


Merchandising

• A set of activities involved in acquiring goods and services and making them available at the places, times and prices and the quantity that enable a retailer to reach his goals

• The most critical function in retail• Directly effects the revenue and profitability of

the store• Also takes into account the assortment of

goods and their quality


Customer Service Strategy

• Developed to create ‘stickiness’ in customers• Personal data collected using IT – including

purchasing practices and preferences• Customer loyalty programs planned• Create ‘customer’ delight• Location strategy to give competitive

advantage• Understanding the buying profile of the

customers Communication …


Customer Communication• The manner in which the retailer makes

himself known to his customers. Has two parts to it:– The messages which the retailer sends to his

customers and prospects– The word of mouth support which satisfied

customers give to the retailer by talking to others• Retailer communicates about:

– Announcing the opening of a store– Promotions running in the store– Additional facilities introduced by the stores


Pricing Strategy

• Premium and indicating high value• Reasonable pricing with good value• Low pricing but high value for money• All strategies are focused on giving

value to the customer

Product differentiation….


Product Differentiation

• Feature exclusive national brands not available in competing retailers – unlikely

• Exclusivity of products – specialty stores• Mostly private labels – Westside• Feature, big, specially planned

merchandising events – Kemp Fashion sows• Introduce new products before competition -

-again unlikelyPerformance measures…


Retail Performance Measures

• Gross margin return on inventory investment – GMROI– Gross margin multiplied by ratio of sales to

inventory (50%*4= 200%)• Gross margin per full time equivalent

employee• Gross margin per square foot


Franchising

• Franchisor is the firm which wants to sell its goods or services

• Franchisee is the firm or group that are willing to sell the products or services on behalf of the franchisor– The first party gives advice and help to the

second to find good locations, blue prints for a store, financial, marketing and management assistance

Franchisor benefits…


Benefits to Franchisor

• Faster expansion• Local franchisee pays lower advertising

rates than a national firm• Owners motivated to work more hours

than mere employees• Local taxes and licenses are

responsibility of franchiseesFranchisee benefits…


Benefits to Franchisee

• Quick recognition among potential customers• Management training provided by principal• Principal may buy ingredients and supplies

and sell to franchisee at lower prices• Financial assistance• Promotional aids, in-store displays etc

Electronic channels…


Retailing on the Internet• Unlimited assortment• Items may not be on hold – someone has to

deliver the product – delays• No product touch or feel• More info makes the customer a better

shopper• Comparison shopping possible• Consumer has to plan purchases ahead• No need to handle cash – payment can be

on-line• Shopping is 24X7


E-tailing Issues

• Logistics support to selling• Payment gateway • Customer product returns• Conflicts with Brick &Mortar – overcome

by selling separate products

FDI in retail….


Key Learnings• Any business selling / renting a product or

service to a consumer is retailing• A consumer selects a retailer based on price,

location, merchandise selection, fairness in dealings, helpful sales people and other services

• Organized retail is growing strong and negotiating better terms from producer suppliers

• In India, upto 51% foreign investment is permitted in single brand businesses


Key Learnings

• Format defines the physical features of the store and its service

• Trading area is the catchment area from where the customers of store come from

• Retail strategy is built on positioning, product offerings, merchandising and communication

• Retail performance is measured by utilisation of space, inventory and manpower

• E-tailing is buying goods on the Internet


Chapter 11

Channel Institutions - Wholesaling


Learning Objectives

• Understand functions of a wholesaler• Understand various classes of

wholesalers• Major wholesaling decisions• Benefits and limitations of wholesalers• Understand about a – distributor in

more detail• Trends in wholesaling practices


Need for Wholesalers

• Widespread economy – consumers can only reached by thousands of retailers (except for consumer durables and industrial products)

• Reaching these retailers by a company directly is not possible (except for consumer durables and industrial products)

• Hence the need for wholesalers in two forms:– Well established free-lance wholesalers– Contracted distributors, stockists and agents

Characteristics….


Characteristics of Wholesalers

• Operate on large volumes but with chosen group of products– Food, grocery, pharma or automobile spares etc

• The company itself, contracted parties or free lancers, can operate as wholesalers

• Mostly B2B business – trade and institutions• Wholesaler could also be a retailer – in rural

markets – W/s sells to other retailers and also to consumers


Characteristics of Wholesalers

• Sell physical inputs or products – tangible goods ( Ws in some service industries)

• Optimise results, maximise service (effectiveness) and minimise operating costs (efficiency)

• Buy goods for resale, keep inventory, take risks of price changes, negotiate terms, procure orders, deliver and extend credit.

Definition…


Definition

• Wholesaling is concerned with the activities of those persons or establishments that sell to retailers and other merchants and / or industrial, institutional and commercial users but do not sell in large amounts to consumers – US Bureau of Census

Delivering value…


Delivering Value

• Keep goods accessible to customers instantly

• At times, get together to bargain for better terms

• Pass on benefits or incentives to their customers

• Have a wide trading area


Difference with Retailers

• Not too worried about location, ambience or promotions – prefer to be in the main market

• Deal with other businessmen and not consumers

• Deal with a specific group of products only• Much larger trading area• Much larger transactions with suppliers and

customers• Believe in low margins but high volumes.

Functions…


Functions of Wholesalers

• Varies in degree between free-lance, company distributors and stockists / agents

• Sales and promotion of chosen company products

• Buying the assortment of goods• Breaking bulk to suit customer requirements• Storage and protection of goods till sold


Functions of Wholesalers

• Grading and packing of commodities• Transportation of goods to customers• Financing the buying of customers• Bearing the risks associated with the

business• Collecting and disseminating market

information to both suppliers and customers


Types of Wholesalers

• Full service: stocking, selling, offering credit, delivery and business assistance (company distributors, wholesale merchants)

• Limited service: range of service is limited (examples include Metro C&C, mail order)

• Merchant w/s: independent businesses• Brokers and agents: bring buyer and seller

together – do not take possession of goods• Others: agri business, auction companies etc


Limitations of Wholesalers

• Some of them do not give complete information to suppliers for selfish reasons

• Cannot be relied on to do equitable distribution

• At times, do not want company and customers to meet

• Tend to hoard goods and influence pricing• Consumers have no say in pricing or quality

in a w/s dominated system

Major decisions…


Major Wholesaling Decisions

• Which markets to operate in• Manpower to employ• What products to sell• Pricing decisions / Promotional support• Credit and collections• Image and customer perception• Warehouse location and design• Inventory Control


Favourable Factors

• Companies have limitations in market / outlet coverage. Wholesalers are required to fill the gaps

• Hundreds of small companies who cannot afford to set up distribution networks – need to depend on wholesalers

• In food grains, fruits and vegetables – hardly any organised distribution network. Wholesalers help move goods from farm gate to consumers


Favourable Factors• Big companies also need wholesalers

to get big volumes• W/s extend credit to customers.

Companies cannot match this• Retailers have to visit w/s markets to

buy food grains, cereals and pulses – buy a lot more.

Unfavourable…


Unfavourable Factors

• Companies coverage focus on retailers and institutions through their distributors

• Using modern retail formats as wholesalers

• More outlets like Metro C&C being encouraged

• Enforcing strict price control so that w/s do not sell below company prices.


Distributor

• Is a wholesaler nominated by a company to exclusively re-distribute the company products to its customers in a designated territory. He does not deal in competitor’s products. Does not sell from his premises. Extends credit selectively.– A redistribution stockist for HLL– A distributor for Philips lighting division– A distributor for L&T engineering division


Dealer

• Role similar to a distributor but– May not have a clearly defined territory and may

sell both in the market and from his shop– May deal with competitive products also– Extends credit selectively.– Dealers in industrial products may have better

defined roles.• Examples:

– Dealer for an edible oil company– A dealer for garment brands


Stockist

• May be working for a company with a designated territory but does not re-distribute the stocks. Sells from his premises. Extends credit selectively.– A stockist for paper products– A stockist for automobile spares

• Re-distribution is visiting customer premises to sell products

Managing distributors….


Managing Distributors • The principles are similar across

industry verticals. FMCG is the most complex.

• Has the capacity to maximise sales and market shares.

• Has to ensure buying goods from the company and re-distribution to the trade


Managing Distributors • Distributor responsibilities include:

– Buying adequate quantities by Stock Keeping Unit (SKU) for redistribution

– Ensuring full market coverage of all customers in the territory assigned to him

– Help finance the operations – pays for the goods upfront but extends credit to his customers

– Maintaining inventory of company products adequate at all times to service the market

– Assist company in its promotional efforts

Why necessary?….


Need for Distributors• Under three circumstances:

– For entering a new town– For additional coverage in the same town– For replacing an existing distributor

• For entering a new town, assess the potential for business to decide:– If the town can sustain a full fledged distributor– The number of distributors required

• Starts with a town profile of potential, number of customers to be serviced and the competition.

Cost of servicing…


Cost of Servicing• Cost benefit of using distributors to be

assessed– Logistics cost of serving the market– The number of customers to be covered by

category – wholesalers, retailers, institutions– Frequency of visits to markets and outlets– Sales revenue estimate from each visit– Markets to be covered with ready stocks or order

booking for later delivery– Likely collections during each visit – gives an idea

of the credit requirements

Expectations…


Expectations from a Distributor

• To be stated at the start of the relationship• Helps get the right kind of distributor also

– Achieving sales targets – volume, value and packs– Financial commitment on inventory and credit– Investment in infrastructure – space, vehicles– Manpower – front line and back office– Distribution effort – market and outlet coverage as

per a beat plan with productive calls– Developing new markets and new accounts– Managing key accounts and institutional business



• Merchandising and displays in the market• Secondary sales efforts and tracking – critical

for fmcg and pharma (secondary sales is sales from the distributor to the outlets in the market)

• Effectively handling promotions and schemes initiated by the company

• Managing damaged stocks



• Organising and participation in promotional events

• Assist company in making a success of launching new products and packs

• Handling consumer quality complaints• Handling statutory requirements on behalf of

the company• Payments and remittances promptly to the

company


Key Learnings

• Wholesalers are required to reach hundreds of customers and retailers

• Wholesaler business is usually B2B• Wholesalers can be free-lance or appointed

by companies – like distributors• Company distributors are bound by strict

operating norms• Future of wholesalers in India still seems

favourable

Tata McGraw Hill Publishing 124SDM- Ch 12

Chapter 12

Designing Channel Systems


Learning Objectives

• Understanding customer needs to define channel objectives

• Channel design factors, components, issues, steps and process

• Method of evaluating various channel alternatives

• How channel partners are: selected, trained and kept motivated

• Principles of vertical integration and electronic channels

Channel design factors….


Channel Design Factors• Product mix and nature of the product• Width and depth of market / outlet coverage

planned• Long term commitments to channel partners• Level of customer service planned• Cost affordable on the channel system• Channel control requirements of the company

Steps….


Channel Design Steps

• Define customer needs• Clarify channel objectives• Look at alternative systems which can

meet these objectives• Estimate cost of operating the channel

system• Evaluate available alternatives• Finalise the ‘ideal’ system

Customer needs….


Customer Needs• Lot size – most convenient pack size which

the consumer can buy at a time• Waiting time – time elapsed between the

desire to buy the product and the time when he can actually buy it – should be almost zero

• Variety – choice of products, brands, packs• Place utility – choice of buying where he

wants. For a consumer product it has to be at a location closest to his residence

Components …


Channel Design Components

• Revenue generation or the commercial part

• Physical delivery of the goods or services – the logistics part

• The ‘service’ part to take care of after-sales support

• Each part of the system is likely to be handled by a different entity.

Design issues….


Channel Design Issues

• Activities required and who will perform• Activities relationship to service levels• Number of channel members required

and the relationship between categories• Roles, responsibilities, remuneration

and appraisal of performance of channel members


Channel Design Process

Segmentation

Development

Focus

Positioning

Similar to any other marketing task


Segmentation

• Putting customers in similar clusters based on their needs– Doctors who prescribe medicines– Chemists who dispense medicines– Hospitals and nursing homes who use them

• Each segment has a different need to be serviced by the channel

• Gives an idea to the sales manager as to the kind of channel members he should be planning for.


Positioning

• Defines the channel element required to service each of the segments– The sales manager decides the channel partner

who is ‘ideal’ to meet the expectations of the segments.

– The number of each category of intermediary is also decided based on the number of customers to be serviced in each segment.

– The service objectives and flows for each channel partner are also frozen


Focus

• It may not be possible to meet the needs of all segments – cost and practicality considerations (the managerial talent available for instance)

• The sales manager has to firmly decide which of the segments he will service

• The competitive scenario also helps in this decision


Development • At this stage the channel system is being put

in place to achieve the objectives• Select the best of the alternatives

– Comparison with the most successful competitor could be a good benchmark

• Channel partners of competitors may be willing to share best practices of their principals

• For modifying an existing channel, the gap between the ideal and the existing is to be identified for remedial action.


Channel Objectives

• Defines what the channel system is supposed to do to support customer service.

• Customer needs could include:– Lot size convenience– Minimum waiting time– Variety and assortment– Place utility

• The product characteristics and the market profile also impact the objectives.

• Competition could also affect the objectives


Channel Alternatives

• Are planned after deciding the customer segments to be serviced and the levels of service– Business intermediaries currently available like

C&FAs, distributors, dealers, agents wholesalers and retailers.

– The number and type of intermediaries required– Developing new channel types– Roles of each channel member


Evaluation of Major Alternatives

Cost of operations

Ability to manageand control

Adaptability

Range and volumeto be handled

Criteria for evaluation


Evaluation Critieria• Cost:

– If existing sales force can be expanded cost effectively, this is the best alternative

– Cost of alternatives at different volumes can only be estimated for comparison

– System with the lowest cost is preferred• Adaptability – the channel should be flexible

to handle different types of markets and changes in the market conditions

• Volume and range to be handled – Capable even when business grows or expands


Evaluation Criteria

• Ability to manage and control:• Distribution network being an extended arm of

the company, the channel partners have some obligations

• Operating guidelines specify these rules• The channel system should help the company

enforce these rules fairly to all channel partners• Some of the operating rules are……

• Company trains channel personnel and provides proper product literature


Selecting Channel Partners

• Getting good channel partners is a difficult part of doing business

• Some of the methods employed to select channel partners are:– Sales people identify prospects and talk to them– Press advertising (industrial goods)– Existing channel partners can give good

references– Competitors’ channel members for reference, not

poaching


Selection Criteria

• Qualitative: willingness, confidence in company products, willingness to abide by company rules, building company image, innovativeness etc

• Quantitative: financial status, infrastructure, location, present businesses, customer relationships, market standing etc


Training Channel Members

• Starts from the time of recruitment• Channel member owner and his staff• Market views channel member as part of the

company – he has to behave in a like manner – hence training assumes significance

• Training could be on the job field training or classroom training

• Training is an ongoing process.

Subjects…..


Subjects for Training

• Field training on how the markets are to be worked to achieve sales, collect payments and ensure the right kind of merchandising

• Class room training on company products, competition and how to tackle it to gain market shares

• Special meetings for new product launches• Submitting reports and maintaining records• Statutory compliance


Subjects for Training

• Care of company products• Technical specifications and answering FAQs

of customers• For technical and industrial products –

recognition of specs, installation procedure, repair and maintenance and effective demonstrations

• Servicing of automobiles and other engineering products

Motivation….


Motivating Channel Members

• Ambitious volume and growth targets – continuous motivation required to achieve

• Motivation includes:– Capacity building programs– Training– Promotions support– Marketing research support – Working with company personnel– Incentives

“power”……


“Power” of Motivation

• Reward – positive support• Coercion- threat of punitive action• Referent – positive effects of association• Legitimate – enforcing a contract• Expert – support of special knowledge• Support – additional benefits for performers• Competition – pitting against peers

French & Raven


Channel Members Evaluation

• Effectiveness of the distribution channel determines the success of the company

• Company would like its channel partners to perform at the highest standards possible

• Need to constantly evaluate performance on sales targets, coverage, productivity, inventory holdings, attending to servicing requests etc

Role of ROI…..


ROI as a Measure

• Leading FMCG companies feel that an ROI of 30% for a distributor is healthy and is a fair indication that he is performing well.– If the ROI is more, additional tasks are given– If the ROI is less, the company may provide

additional support

• Post evaluation tasks include counseling, retraining and motivating. In extreme cases it may result in termination.


Performance Evaluation

• On pre-agreed tasks only. No surprises.• Specific targets on periodical basis are set.

– Targets on volume and outlet productivity could be for a week or a month

– Targets relating to increasing market shares or total outlet coverage could be for 6 months

– Different weightages could be given for each of the parameters for evaluation

• The performance appraisal is open and transparent

Modifying a network..


Steps for Modifying Networks• Service level desired and willing to deliver• Activities required to deliver service level,

who will do it and at what cost• Derive ideal channel structure and compare

with existing to know gaps by evaluating based on standard parameters relating to effectiveness and efficiency

• Action to bridge the gaps and put modified channel system into place

• Define key performance indicators


Channel Comparison Factors

Efficiency

Effectiveness

Scalability

Flexibility

Consistency

Reliability

Integrity


Non-store Retailing

• Selling door-to-door• Vending machines• Tele-shopping networks• Selling through catalogs• Other forms of direct selling• Electronic channels

Electronic channels…


Retailing on the Internet• Unlimited assortment• Items may not be on hold • No product touch or feel• More information makes the customer a

better shopper• Comparison shopping possible• Consumer has to plan purchases ahead• No need to handle cash – payment can be

on-line• Shopping is 24X7

Vertical integration….


Vertical Integration

• This means owning the channel. The company does the work of production, branding and distribution.

• Downstream integration means the producer of the goods also does the distribution – Eureka Forbes, Bata


Vertical Integration• Upstream integration means the seller

also produces the goods – private labels of modern retailers.

• If the organization does the work of production, branding and distribution, it is said to be vertically integrated.

• Vertical Integration provides better control over the distribution function

Outsourcing..


Outsourcing Distribution • Is the most prevalent situation as:

– The ‘reach’ is better– The cost may be lower– The company can exploit the ‘core competence’ of

its channel partners, which is distribution• Vertical integration is a choice which will

become long term and cannot be easily changed once the resources have been committed.

• However, direct distribution (owning the channel) is still the best solution for ‘intensive’ distribution.


Key Learnings• The nature of distribution channels required

in different situations is based on a number of factors

• Channel design takes into account all the service deliverables required by customers

• Intensity of distribution determines the number of intermediaries required

• Distribution can be in-house (vertical integration) or out-sourced

• Channel design alternatives are assessed primarily on effectiveness and efficiency


Key Learnings• Channel alternatives are evaluated on cost,

ability to control, adaptability and capability to handle range and volume.

• Training of channel partners can be in the class room or on the job and is a continuous process

• Motivating channel partners can be done using different ‘power’ equations

• There are different formats of non-store retailing like catalogues, internet etc

• Electronic channels are used to sell products to consumers directly

SDM – Ch 14 Tata McGraw Hill Publishing 160

Chapter 14

Channel Information Systems


Learning Objectives

• Understand importance of information systems for management of channels

• Elements of channel information systems• How information systems are used to impact

channel service objectives• Performance measures for channels• Understand principles of channel

implementation


CIS Purpose• CIS is Channel Information Systems• CIS is the orderly flow of pertinent operational

data both internally and between channel members, for use as a basis of decision making in specified responsibility areas of channel management

• CIS is of primary use of sales managers.


Information - Advantages

• Useful in marketing planning – helps improve quality of marketing decisions

• Can help tap market opportunities• Provides an alert against competition• Helps spot trends – favourable or

otherwise• Helps develop action plans for growth• Gives feedback on consumer needs


Classification of Information

• Based on the use made of it by marketing – planning, operations, decision making or control

• Based on subjects – consumers, products, competition, channels, promotions, pricing, sales volume, value etc

• Operations data – facts and figures• Also based on assumptions, anticipated

occurrences – forecasts relating to the channel system


Information Process

COLLECTION

USE

PROCESSING

STORAGE


Information Process• Collection: acquiring and placing raw data –

monthly sales by each territory• Processing: analyzing data to get meaning

out of it – arranging, modifying and interpreting the data by the user – comparison of sales between periods

• Storage: keeping the information intact till it is needed

• Use: application of information for management decision making – sales data of the last 6 months to forecast the sales of the next month.

Development….


Developing a Channel MIS

Decide what information is required

Decide who will use the informationwhen and for what purpose

Organize information in a manner suitable for interpretation and action


Use of Information

• Planning: sales forecasts or distributor indents

• Control: expenses against budget• There is always a cost of collecting

information. • If data collected is not used properly, the data

provider will hesitate to give the information.• The channel MIS works at the sales

operational level. It has very little strategic intent.


Sources of Data• Reports (oral and written) and records of

channel members, sales people• Letters, statements and market research• Any other info collected by the sales people

and the channel members from the market• External sources like business publications,

magazines, newspapers, trade journals.• In a dedicated channel system the collection

of info is well streamlined – in the JC meeting• With use of IT enabled systems collection and

processing has become simpler.


A Good Channel MIS…

• Integrated system to handle all regular data• Useful decision support system• Reflects the style of the marketing

organization• User friendly and user oriented• Convincing to the providers of the info as to

its purpose• Be cost effective• Not need for verification from other sources• Be fast and totally reliable


Element Importance

• In a good channel MIS, it is necessary to define upfront for each element of the MIS, the following:– Purpose of the info– Source of the info– Action possible – Impact on customer service


Competition Tracking

Purpose Plan day to day corrective action to protect market shares and shelf space

Source Trade, channel partners and sales people

Action possible

Spot action while in the market and taken by channel partners or sales people

Impact on service

Timely action to provide better support to the trade and retain their goodwill

Example


Channel Performance Evaluation


Evaluation Criteria

• Channel system can be evaluated on how well it provides time, place and possession utilities

• Formal channel evaluation only with contracted channel members

• Independent wholesalers and retailers may not accept any evaluation by a company

• Periodicity of evaluation and parameters like achieving targets market coverage etc agreed with channel partners.


Distributor Evaluation

• Once a month by the sales people on the performance of the previous month on all agreed criteria

• Criteria varies with the category of channel member, nature of the product and the nature of customers.


Evaluation • Each of the primary criteria can be

given a weightage and performance scores worked

Criteria Weightage % - X

Criteria score (1 to

10) - Y

Weighted score X*Y

Sales target achievement 50 7 3.50Inventory management 15 8 1.20Selling resources 15 7 1.05Market coverage 10 8 0.80Back office support 10 6 0.60

Overall performance score – 7.15


Evaluation • Each of the primary criterion can be broken down

into it components and also rated.

Criterion Weightage % - X

Score 1 to 10 - Y

Weighted score X*Y

Primary sales 15 8 1.20

Secondary sales 50 7 3.50

Achievement of secondary sales target

20 7 1.40

Sales growth by period 10 8 0.80

Market share achievement 5 6 0.30

Sales target achievement – Performance score

7.20


Evaluation Overall Rankings

Channel member

Overall performance score

Ranking

A 7.39 1

B 7.20 2

C 7.15 3

D 6.89 4

E 6.56 5

F 5.60 6


Overall Rankings - Action

• Bottom 20% to be warned to improve performance

• Top scorers have potential to give more business to the company – to be encouraged

• Consistent poor performance will entail dismissal


Implementation Principles

• More relevant where member is bound by a contract. Wholesalers and retailers are involved in the implementation to the extent that the company wants to cover them with its product presence.

• The most critical issue in implementation is the ‘intensity’ of distribution desired. This is more relevant to FMCG, pharma kind of products and not so much for consumer durables or industrial products


Influencing Factors

• Intense distribution allows consumer to shop where he likes for the product

• Intensive distribution increases sales – good companies insist on retail distribution intensity

• Selective or exclusive distribution may result in loss of sales opportunities

• Channel members feel widely distributed product must be a fast seller. Equitable efforts are required in selling all brands and packs of the same company


Influencing Factors

• Intensive distribution is more expensive and requires more supervision

• For consumer electronics or durables intensive distribution may result in ‘free-riding’ situations

• Channel members prefer selective distribution – the company should give the products only to them


Influencing Factors

• If a brand has a strong consumer franchise, no outlet can ignore it – HLL brands – distribution becomes intensive

• Channel partner or reseller also has a choice on what he wants to stock and sell

• If the product category is important and competition is severe, selectivity is a costly option


Implementing Rules

• Low value goods: cigarettes, soaps, shampoos – intensive distribution – fmcg kind of low investment but mass based.

• High value goods: electronic goods or consumer durables – buyer makes comparisons across outlets – selective

• Specialty goods: Mont Blanc pen or Tag Heuer watches – exclusive distribution.


Intensive - Factors

• Influence of channel principal decreases with intensity

• Channel member’s competitors also have same products

• Higher quality positioning does not match higher intensity

• Depends on the target market• Takes into account the importance of the

market and prevailing competition – more intense the competition, more the intensity of distribution


Selective - Factors

• Can cut costs but may prove inadequate – lower selling expenses, higher promotional allocations, larger transactions, more accurate forecasting of demand

• Channel members margins may be better• Better influence over channel members• Manufacturer attracts more aspirants• Suitable for new product or testing the market


Key Learnings

• Channel information systems is to collect and analyse data about operations of channels

• CIS uses methods and sources to collect, process, store and use pertinent information for decision making

• Steps for development of a CIS are: decide info required, organize info in a suitable manner and decide users with purpose

• A CIS can include all elements of interest to sales managers to operate better


Key Learnings

• The channel evaluation system checks as to how well the system reaches the products or services to customers

• Channel implementation is guided by the ‘intensity’ of the distribution required

• For products with a large consumer base, intensive distribution is preferred

• Under specific circumstances, selective or exclusive distribution has advantages.


Chapter 13

Channel Management


Learning Objectives• Understand how and why channel conflicts

occur• Look at ways of managing conflict• Channel practices followed to resolve

conflicts• Principles of channel management• Various parameters on channel policy• Way in which services use marketing

channels


Channel Management

• Is in three broad phases:– Use of power bases– Identifying and resolving channel conflicts– Channel co-ordination

Use of power….


Use of Power Bases• Channel system has a set of players:

– Not equally motivated to implement the ideal channel design

– Whose expectations from the system differ• Use of the 5 power bases brings diverse

channel partners in line for effective implementation– 5 power bases are: reward, coercion, legitimate,

expert and referent (French & Raven)– Two more power bases in the Indian context are

support and competition


Use of Channel Power

• Channel members are dependent on each other. The power equations between them keep them working together.

• There are basically 5 types of power bases – reward, coercion, expert, reference and legitimacy. 2 more can be considered as support and competition.

• Extent of dependence defines the power base which is appropriate.


“Power” of Motivation• Reward – incentives for good performance• Coercion – threat of punishment for non-

performance• Referent – benefit of sheer association with a

strong company• Legitimate – arising out of a contract• Expert – specialized knowledge• Support – additional benefits for better

performers only• Competition – created between channel

partners

French & Raven

Countervailing power……


Countervailing Power

• Balances the power exerted by one channel member. It is not a one-sided equation.

• Both the channel member and the principal can have influence on each other.

• Results from interdependence within the channel system.– Company exerts power on the distributor to get its

coverage and revenues– Distributor has enough influence on his customers

and this is critical for the company also– Weaker partners do get exploited – ancillary units

Co-ordination…

Exa

mp

les


Channel Co-ordination

• Channel system is well co-ordinated if each member understands his role correctly and performs it to help the system achieve its customer service objectives.

• In a co-ordinated channel:– Interests of all channel members are protected– Actions of all are in line with overall objectives– Flows are streamlined to desired customer service

objectives• Channel co-ordination is an on-going effort

Conflict….


Channel Conflicts• Conflict is generated when actions of any

channel member come in the way of the system achieving its objectives

• Three broad categories of channel conflict are:– Goal conflict – understanding of objectives by

various channel members is different– Domain conflict – understand responsibilities and

authority differently– Perception conflict – reading of the market place is

different and proposed actions vary


Channel Conflict

CONFLICT

DOMAIN PERCEPTIONGOAL


Channel Conflict

• Situation of discord or disagreement between partners in the same channel system – has negative connotations and is driven more by feelings than facts

• Conflict is part of any social system – getting disparate entities to work together as in a channel system is also one such social unit

• If any member feels that another is working in a manner as to affect him, conflict results


Conflicts Result From…

• Each channel member wanting to pursue his own goals

• Each wants to retain his independence• There are limited resources which all of them

want to utilise in achieving their goals• Features of conflicts:

– Initially latent and does not affect the working– Is not normally possible to detect till it becomes

disruptive

Four stages….


Four Stages

LATENT

MANIFEST

FELT

PERCEIVED

Each stage is progressively more severe than the earlier one


Types of Conflicts• Latent Conflict:

– Some amount of discord exists but does not affect the working or delivery of customer service objectives.

– Disagreement could be on roles, expectations, perceptions, communication.

• Perceived Conflict:– Discords become noticeable – channel partners

are aware of the opposition.– Channel members take the situation in their stride

and go about their normal business – No cause for worry but the opposition has to be

recognized


Types of Conflicts• Felt Conflict:

– Reaching the stage of worry, concern and alarm. Also known as ‘affective’ conflict.

– Parties are trying to outsmart each other.– Causes could be economical or personal– Needs to be managed effectively and not allowed

to escalate.• Manifest Conflict:

– Reflects open antagonistic behaviour of channel partners. Confrontation results.

– Initiatives taken are openly opposed affecting the performance of the channel system.

– May require outside intervention to resolve


Reasons for Channel Conflict

• Roles not defined properly• Allocation of scarce resources between

members seem unfair to some• Differences in perception of the

business environment


Reasons for Channel Conflict

• Future expectations not likely to materialize• Decision domain disagreements – who has to

decide on what (key account pricing)• Channel members do not agree on objectives• Misunderstanding or mis-interpretation of

routine business communication

Resolving….


Resolving Conflicts

Understanding nature and intensity

Strategy and plan of action for resolution

Understand the impact of the conflict

Tracing the source of the conflict

A 4 Stage Process


Conflict Resolution Styles

Avoidance

Aggression

Accommodation

Compromise

Collaboration

Least effort and results

Maximum effort and Best results

Kenneth W Thomas

Styles are a combinationof assertiveness and

co-operation.


Avoidance

• Used by weak channel members.• Problem is postponed or discussion

avoided. • Relationships are not of much

importance.• As there is no serious effort on getting

anything done, conflict is avoided.


Aggression

• Also known as a competitive or selfish style.• It means being concerned about one’s own

goals without any thought for the others.• The dominating channel partner (may be the

principal) dictates terms to the others. Long term could be detrimental to the system.


Accommodation

• A situation of complete surrender.• One party helps the other achieve its goals

without being worried about its own goals.• Emphasis is on full co-operation and flexibility

in approach. May generate matching feelings in the receiver.

• If not handled properly, can result in exploitation


Compromise

• Obviously both sides have to give up something to meet mid way.

• Can only work with small and not so serious conflicts.

• Used often in the earlier two stages.


Collaboration

• Also known as a problem solving approach• Tries to maximize the benefit to both parties

while solving the dispute.• Most ideal style of conflict resolution – a win-

win approach• Requires a lot of time and effort to succeed.• Sensitive information may have to be shared


Channel Policies

• Defines how the channel is required to operate.

• Normally framed by the channel principal to guide the operations of the channel system

• If not framed properly could prove the starting point of channel conflicts.

• Some subjects of channel policies could be as seen in the next slide:


Channel Policies

• Markets to be covered• Customer coverage• Pricing • Product portfolio to be handled• Selection, termination of channel

members• Ownership of the channel


The Services Sector

• Twice the size of the manufacturing sector• Services offered are to be in line with

customer demand• Services have to be presented in an

appealing manner to sustain customers.• Needs specialized channels which

understand the characteristics of service delivery


5 Characteristics of Services

• They are intangible – can only be felt. No visual features like size, style.

• They are inseparable from their service providers – a 3P cannot deliver

• They cannot be standardized – custom made and delivered

• Customers are involved to a great degree – define the services

• They are perishable – cannot be stored for delivery later. Salvage value of an unsold service is zero.


Channels Used

• Shorter channels than for products• Some channels used are:

– Direct from service provider to user– Agents or brokers to bring buyer and seller

together– Franchisees or contractors– Electronic channels

• High degree of customization is provided


Key Learnings• Channel management is done by: use of power

bases, identifying and resolving channel conflicts and co-ordination

• Channel conflicts could occur due to: goal conflicts, domain conflicts and perception conflicts

• Channel conflicts pass thru’ the 4 stages of latent, perceived, felt and manifest.

• Conflicts are avoided with the use of power bases of rewards, coercion, expertise, legitimacy and reference.

• There are 5 styles of conflict resolution: avoidance, aggression, accommodation, compromise and collaboration


Key Learnings• Channel conflicts are resolved by joint membership of

associations, exchanging personnel or arbitration• Channel management involves the four steps of

planning, organisation structure, control of the channels and measuring performance for continuous improvement

• Services are distinguished by 5 characteristics of being intangible, inseparable from service providers, cannot be standardised, customers are involved in service delivery and are perishable. Distribution channels should take these into account.


Chapter 15

Market Logistics & Supply Chain Management


Learning Objectives• Principles of materials management, logistics

and supply chain management• Logistics interface with other functions• Inventory management principles and

systems• Warehousing management fundamentals• Transportation management practices• How IT enables the logistics function• Understand about the performance

measurement of the logistics function


Materials Management

• Materials forms the largest single cost item in most manufacturing companies – needs to be carefully managed

• Materials management function includes planning and control, purchasing and stores and inventory control

• Materials management is the precursor to logistics and supply chain management

Logistics……


Logistics Defined

• Logistics means having the right thing, at the right place, at the right time

• The procurement, maintenance, distribution and replacement of personnel and materials – Webster’s Dictionary

• The science of planning, organizing and managing activities that provide goods or services – Logistics World, 1997


Logistics

• Functions: planning, procurement, transportation, supply and maintenance

• Processes: requirements determination, acquisition, distribution and conservation

• Business: science of planning, design and support of business operations of procurement, purchasing, inventory, warehousing, distribution, transportation, customer support, financial and human resources


Scope of Logistics

• Choice of markets• Procurement• Plant location and layout• Inventory management• Location and management of warehouses• Choices of carriers, mode of transport• Packaging decisions• Relevant to all enterprises: manufacturing,

Government, Institutions, service organisations


Components of LOG Management

• Natural Resources

(land, facilitiesEquipment)

• HR• Finance

• Information

• Marketing Orientation

(competitive Advantage)

• Time and Place utility

•Efficient moveto customer

Customer serviceDemand forecasting

DistributionCommunicationsInventory control

Materials handlingOrder processing

Parts and service supportPlants and warehouse selection

ProcurementPackaging

Return goods handlingSalvage and scrap disposalTraffic and transportationWarehouse and storage

Input OutputLogistics Activities


Links and Flows

Customer’scustomer

Supplier’ssupplier

SupplierLead FirmCustomer

General cash flow

Information flow

Information flow

General material flow/ service flow

Inbound / Upstream logisticsOutbound / Downstream logistics

Source: ICFAI


Logistics and Marketing• Interface on:

– Product design and pricing– Customer service policies– Sales forecasts and order processing– Inventory policies and location of warehouses– Channels of distribution and despatch planning– Transportation to reach products to customers

• Production wants larger production runs to minimise time spent on set up changes on the machines. Marketing wants smaller runs of a variety of products.


The Value ChainCompany Infrastructure

Organisation, people, methods

Systems & technology

Procurement

Inboundlogistics Operations

Outboundlogistics

Marketing& sales

Service

Primary activities

SUPPPORT

margin

margin

Source: Michael Porter


Logistics Plan Outline• Internal analysis (current position)

– Organisation– Human resources– Transportation– Relations with internal customers– Quality of product– Quality of Service

• External / situation analysis– Competitor logistics performance– Trends– External environment / economy– Public, private and contract warehouse– Public, private and contract carriage


Principles of Logistics Excellence

Alling & Tyndall

Strategic Operational

Link logistics to corporate strategyOrganise comprehensivelyUse the power of informationEmphasise human resourcesForm strategic alliances

Focus on financial performanceTarget optimum service levelsManage the detailsLeveraging logistics volumesMeasure and react to performance


Logistics Focus Areas

Customer service related Operations related

Packaging Order processingSpare parts and service supportAfter sales Customer service supportDemand forecastingDistribution communicationsReturn goods handling

Plant and warehouse site locationProcurement Inventory controlMaterials handlingSalvage and scrap disposalTraffic and transportationWarehousing and storage

Logistics may be confined to the company whereas SCM extends beyond


Supply Chain Management• Business context:

– Globalization of the market place– Advances in technology– Increasingly demanding, informed customer base– Purchase decisions on dimensions of quality, price

and time• Innovative supply chain:

– To meet customer driven challenges– To reduce costs– Improve service levels– Enhance speed to market


Supply Chain Integration

• Optimising the supply chain requires supplier and customer involvement to integrate processes, policies, systems, database and strategies between diverse trading partners


IntegratedSupply ChainManagement

Manufacturing/Re-manufacturing/

Assembly

Demand & Lead Time Management

Storage & Transportation

Materials Management

Inventory Management and control

Customer Analysis

Purchasing/Supplier Partnering

Order Fulfillment

Supply Chain Integration

Inventory management…


Why Carry Inventory?

• Support production requirements• Support operational requirements• Maximize customer service – ensure

availability when needed – protect against uncertainty

• Hedge against marketplace uncertainty• Take advantage of order quantity

discounts


Functions of Inventory

• Inventory serves as a buffer between:– Supply and demand– Customer demand and finished goods– Requirements for an operation and the

output from the previous operation– Parts and materials to begin an operation

and the suppliers of the materials

The shock absorber of business !


Factors Which Drive Inventory

• Target service level parameters• Lot sizing practices• Safety stock and safety time

conventions• Volume discounts and purchase

arrangements• Seasonal build up needs


Categories of Inventory

• Anticipation – built in anticipation of future demand – peak season, strike, promotion

• Fluctuation (safety) – to cover random, unpredictable fluctuations in supply and demand and lead time – to prevent disruption in operations, deliveries etc

• Lot-size – to take advantage of quantity discounts, reduce shipping, set up and clerical costs – also called cycle stock


Categories of Inventory

• Transportation – pipeline or movement inventories – to cover the time needed to move from one point to another – factory to distribution point for example

• Hedge – for materials where prices are volatile

• Maintenance, repair and operating supplies (MRO) – to support M and O – spare parts, lubricants, consumables etc


Types of Inventory

• Obvious….– Raw materials– Work-in-process– Finished goods – of primary concern to

marketing– Maintenance, repair and operating (MRO)

supplies– In-transit, pipeline

Performance measures…


Performance Measures

• Inventory turns = Annual cost of goods sold /average inventory in value

• Days of sales = inventory on hand / average daily sales


Types of Inventory Systems

• Pure Inventory – when and how much to order. RM procurement. Simple manufacturing operations

• Production Inventory – finite production rates. Demand fluctuation. Products compete for manufacturing capacity

• Production – distribution Inventory – compete for production capacity. Geographic placement of inventory for best service of demand


Types of Classification

• ABC category – most common for all• HML - high, medium, low - similar• FSND – fast moving, slow moving, non-

moving, dead – spare parts / FG• SDE – scarce, difficult, easy to obtain –

procurement / Spares• GOLF – govt, ordinary, local, foreign source –

procurement / Spares• VED – vital, essential, desirable – spare parts

/ FG• SOS – seasonal, off-seasonal - commodity


ABC Inventory Analysis

• Based on Pareto’s law:– A – 20% items worth 80% of value– B – 30% items worth 15% of value– C – about 50% items account for 5% of the usage

• Classify items based on the above criteria• Apply degree of control in proportion to the

importance of the group


Inventory Related Costs• Unit costs – basic value of the item carried• Ordering costs – generating and sending a

material release, transport, any other acquisition costs

• Carrying costs – capital, storage, obsolescence

• Stock-out costs• Quality costs – non-conforming goods• Other costs – duties, tooling, exchange rate

differences etc


Approaches for Controlling Inventory

• Continuous review:– Safety stocks and forecasting methods– Excess and obsolete inventory

• Part simplification and re-design• On-site supplier managed inventory• Use of supply chain inventory management

systems, Materials Requirement Planning, Distribution Requirement Planning etc

• Automated inventory tracking systems• Supplier – buyer cycle-time reduction

Warehouse management…


Stores Management Objectives

• Providing efficient service to users• Reduce cost of carrying goods• Providing correct, updated stock figures• Controlling inventory• Preventing damage to or obsolescence of

materials• Achieve all of the above with good

housekeeping


FunctionsWarehouses

Material handling

Storage function

Customer service

Information transfer

Temporary Permanent Receive goodsIdentify goods

Sort goodsDespatch to storage

Hold inventoryRecall, select goods

Marshal the shipmentDespatch the shipmentPrepare records and

advices


Purpose of Warehousing

• To provide desired level of customer service at the lowest possible total cost

• It is that part of the firm’s logistics system that stores products (RM, Packing Materials, WIP, FG) at and between point of origin and point of consumption and provides info to management on the status, condition and disposition of items being stored

• Distribution warehousing relates mainly to FG


Reasons for WarehousingService related Cost related

Maintain source of supplySupport customer service policiesMeet changing market conditionsOvercome time and space differentialsSupport JIT programs of suppliers and customersProvide customers with the right mix of products at all timesTemporary storage of materials to be disposed or re-cycled

Achieve production economiesAchieve transportation economiesTake advantage of Quantity Purchase discounts and forward buysLeast Logistics cost for a desired level of customer service


Warehouses

• Support manufacturing • Mix products from multiple facilities for

shipment to a single customer• Break-bulk• Aggregate • Used more as a ‘flow-thru’ point than as

a ‘hoarding’ point


Distribution Warehousing

• The objective is to set up a network of warehouses closest to the customer locations to service markets better and minimise cost

• Could be C&FA s, depots or distribution centers

• Macro location strategies:– Market positioned– Production positioned– Intermediately positioned


Distribution Center

• Warehouse designed to speed the flow of goods and avoid unnecessary costs

• Speeds bulk-breaking to avoid inventory carrying costs

• Helps to centralise control and co-ordination of logistics activities

• Products can also be cross-docked (one vehicle to another)

Market positioned..


Market Positioned

• Warehouses located nearest to the final customer

• Factors influencing are:– Order cycle time– Transportation costs– Sensitivity of the product– Order size– Levels of customer service offered

Production positioned….


Production Positioned• Warehouses located close to the production

facilities or supply sources• Not the same level of customer service as the

earlier one• Serve as points of aggregation / collection for

products made in a number of plants• Factors influencing are:

– Perishability of raw materials– Number of products in the product mix– Assortments ordered by customers– Transport consolidation rates ex; FTL

In between…


Intermediate Positioned

• Mid point locations between the final customer and the producer

• High customer service levels possible even if products made in number of units

• Other macro approaches look at cost minimisation or cost and demand elements to maximise profitability

Transportation management….


Transportation • Very important in the Logistics function:

– Movement across space or distance adds value to products

– Transportation provides time and place utility• Role of transportation includes:

– Provides opportunity for growth under competitive conditions

– Deeper penetration into markets– Wider distribution means greater demand– Can influence product prices favourably

Principles….


Transportation Principles• Continuous flow• Optimise unit of cargo - stackability• Maximum vehicle unit – capacity utilization• Adaptation of vehicle unit to volume and

nature of traffic• Standardisation• Compatibility of unit load equipment• Minimum of dead weight to total weight• Maximum utilization of capital, equipment and

personnel

Process….


The Selection Criteria

• Environmental analysis: shipper, carrier, government regulations, public influence

• Deciding objectives• Selecting mode• Select transport type within the mode• Define functions of transport• Evaluation and control – customer perception

/ satisfaction, best practice benchmarking


Cost Factors

• Can be product related or market related.• Product related: density, stowability, ease or

difficulty of handling and liability• Market related: competition, location of

markets, Government regulations, traffic in and out of the market, seasonality of movements and impact on customer service

• Five prominent modes:– Road, rail, air, water and pipeline. – Sixth one is use of Ropeways


Customer Service Factors

• Consistency, dependability• Transit time• Coverage – door-to-door for example• Flexibility in handling a range of

products• Loss and damage performance• Additional services provided

Reverse logistics…


Reverse Logistics

• Movement of goods from the market or customer back to the company

• The need:– Increased awareness of the environment– Stringent legislation – For some it is part of the business– Profitability of dealing with scrap, surplus

• Surplus, obsolescence can result due to:– Over optimistic sales forecasts, change in product

specs, errors in estimating material usage, losses in processing or overbuying based on incentives

Comparison of modes……


Advantages of Rail

• Economy – more so for goods over long distances

• Efficiency of energy • Reliability – not affected by weather

conditions


Disadvantages

• Uneconomical for small shipments and short distances

• Not suitable for remote stations • Costly terminal handling facilities• Inflexible time schedules

Road transport…..


Road Freight Advantages

• Through movement – direct from consignor to consignee, no transshipment

• Flexibility – routes and loading routines can be easily altered, operate day and night

• Less capital costs – for own fleet + immunity from industrial action

• Fast turn-around – if articulated units like tractors and trailers are used

• Minimum delays


Disadvantages

• Susceptibility to weather and road conditions – in spite of the best protection

• Unsuitability for heavy loads – rail transport more economical for bulk loads

• Unsuitability for long distances – again the rail telescopic rates are more favourable

Air transport….


Air Transport Advantages

• Faster mode• Reduction in cost particularly inventory• Broad service range• Increasing capabilities• Disadvantages:

– High cost– Weather affects flight conditions– Limitations on heavy consignments

Water transport……


Water Transport

• Advantages: – Mass movement of bulk– Lowest freight cost – Preferred for long haul of low value commodities

• Disadvantages:– Not for quick transit– Suitable for certain types on commodities only

Pipeline….


Pipeline Movement

• Advantages:– Reliable, continuous, all weather transport– Low energy consumption – hence low cost– Low maintenance and operating costs– Underground, no space problem– Can traverse difficult terrain– Minimal transit losses– Operation round the clock, safe– Economies of scale – double the throughput for

only 30% additional cost• Disadvantage is in the investment cost

Ropeways….


Ropeways• Advantages:

– In hilly or inaccessible areas– Long and circuitous routes with streams / deep

valleys– For commodities capable of movement in ropeway

buckets– Short haulages of less than 50 kms– Areas where other carriers are uneconomical

• Disadvantages:– Heavy investments– Limitations on size and quantity of haul

How to decide on the right carrier?


Carrier SelectionTraffic Related Shipper related Service related

Length of haulConsignment weightDimensionsValueUrgencyRegularity of shipmentFragilityToxicityPerishabilityType of packingSpecial handling required

Size of firmInvestment prioritiesMarketing strategyNetwork of production and distribution Availability of rail sidingsStockholding policyManagement structureSystem of carrier evaluation

Speed (transit time)ReliabilityCost Customer relationshipGeographical coverageAccessibilityAvailability of special vehicles / equipmentMonitoring of goodsUnitisation Ancillary services – bulk breaking, storage


Chart of Relative Merits

Parameter Weightage

Rail Road Air Water Pipeline

Rope way

Speed 30 5 6 8 4 3 3

Versatility 10 6 8 5 6 3 2

Reliability 20 6 8 5 5 7 4

Availability 10 7 8 5 6 3 2

Continuity of service

10 6 7 5 5 8 3

Distribution cost 20 4 5 6 6 7 8

Total score 10 5.4 6.7 5.1 5.1 5.1 4.0

Overall ranking 10 2 1 4 5 5 6


Key Learnings

• Support to customer service has evolved from materials management to logistics and to supply chain management

• Production and marketing are the two internal customers of Logistics

• Logistics also has a direct impact on the financials of a company

• Three important functions of logistics are inventory management, warehousing and transportation


Key Learnings• Inventory directly supports customer service

but also adds to the cost and has to be managed carefully

• Warehousing provides the place utility and works as a balance between production and meeting customer needs

• Transportation supports the place and time utility and uses different modes to reach the products to the consumer

• Modern day supply chains integrate the operations of a firm, its suppliers and customers

Documents

Distribution Mgmt BIMS