9bfefDistribution & Logistics Management Module 1

7/29/2019 9bfefDistribution & Logistics Management Module 1

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Amity Business School


Distribution Logistics & Management

Module 1Swati Bhatnagar




Introduction of Distribution Management

“Distri bution M anagement is the management of all activit ies which facil itates movement & coordination of demand & supply in creation of time & place uti l i ty of goods & services

• Deals with the “place” part of themarketing mix.

• Helps gain sustainable competitiveadvantage as the same is increasinglygetting difficult through product , price or promotion strategy!

• This aspect of marketing function provides place, time & possessionutility to the customer.

Possession utility

Place utility

Time Utility




Overview of distribution channels• A distribution channel is a group of people & firms involved in the

transfer of title or ownership as the product moves from the producer tothe end user.

• The AMA defines the same as “ A structure of intra company organisation uni ts & extra company agents, dealers, wholesalers & retailers through which a commodity, product or service gets marketed.

• Marketing channels comprise complex & dynamic systems but much of what they do is not visible to the end customer.

• Distribution management study requires one to go “behind the scenes”!

Distribution channels can be broadly classified into :-

Sales Channel- motivates buyers, shares information between thecompany and the customer, negotiates fair bargains & finances thetransaction

Delivery Channel- consists of CFAs, CSA s ( Consignment Selling agents)also known as facilitators.

Service Channel- which performs pre sales & post sales service




Need for distribution channels

• In the past all distribution related operations were undertaken by the company itself .

• Soon they realized that the intermediaries could do the job better at a much lower cost !

• The intermediaries became a link between the manufacturer &its customers.

But are intermediaries necessary?




Discrepancies in marketplace

The distribution channel takes care of 4 discrepancies in the

market place:

Spatial discrepancy : Space difference b/w production point

& consumption point Temporal discrepancy : Time difference b/w production time

& consumption time

Breaking of the bulk

To provide assortment




• Companies like Dell & Amazon exist !• Eureka Forbes is also a case in point !

Normally, in case of a technical & complicated product thecompany may want to handle the distribution themselves as

the intermediary may or may not be able to learn as much astheir own salesperson

A combination works better !• A combination of direct & indirect distribution of goods &

services generally works out better… • The intermediaries which includes all CFAs, distributors &

retailers enable smooth flow of goods & services at a certainmargin to themselves.




Patterns of Distribution

I ntensive distr ibution : make sure that the product is

made available in as many outlets as possible

Selective distr ibution: only few select outlets will be

permitted to sell company’ s products

Exclusive distr ibution: All the more selective, only

one outlet in the market may sell the company’ s product




Types of channel members

Distributors, dealers , stockists & agents

- are required to invest in products i.e. buy from company, areon commission basis, may or may not get credit from thecompany.

Wholesalers- deal in large volumes, as margin is quite low, operate out of the main markets in the city, deal with large no. of companies‟s products & packs

Retailers

- are shopkeepers who set up shops in the market placeCFA s & CSA s

- also known as facilitators. Basically transporters who act as amid way point between the company & its distributors. CSA sact as CFAs but also sell goods in the market & remit the

value of goods sold to the company



Amity Business SchoolContd.

Facilitatorsare business firms which assist in the performance of distribution tasks

other than buying, selling & transferring title.

Some common types of facilitating agencies are

Transportation agencies

Storage agencies

Order processing agencies

Advertising agencies

Financial agencies Insurance companies

Market Research firms




Functions performed by the intermediaries• Facil i tation of search

Addresses the uncertainty part at both the consumers & manufacturers end.

At times also enables sales of less known brands

• Sort, Accumulate, Allocate& Assort the r ight kind of goods

Producers typically produces a large number of variety of goods, whereas

consumers only require limited quantity of wide variety of goods!• Routinisation of transactions

Helps in reducing the cost of distribution & increase the efficiency.

• Enables f low of information to both the buyers & the sellers to help themmanage their business better

• Reduction in the number of contact points

• Awareness of the environment in which they operate




Channel Formats

Channel formats have been categorised into 4 types

depending upon who drives the channel. They are:-

Producer driven

Seller driven

Service driven

Others




Producer driven

Manufacturer tries to reach the product directly to his customer eg – Company owned retail outlets, Licensed outlets, CSAs,franchisees.

Seller driven

Manufacturer uses the wholesalers & retailers to reach the enduser eg departmental stores, discount stores, specialty stores,supermarkets etc

Service Driven

CFAs, CSAs, transporters who “ facilitate” distributionOther formats

Multi level marketing system – Amway, Tupperware, Co-operative societies, catalogue shopping etc



Amity Business SchoolChannel Levels

The number of channel members decides thelevel of channel in operation.

Zero level channel denotes direct distribution set up.

One level channel consists of one intermediary only. (retailer)

Two level channel would have two intermediaries (distributors then retailers)




Prominent channel systems

• Vertical Marketing system (VMS) : corporate,

administered & contractual

• Horizontal marketing system ( HMS)

• Multi- channel marketing system




Examples of channel systems

Category of

product

Channel objectives

Industrial/ technology Direct marketing to a small no.of customers

Consumer products Large no. of end users/intensive distribution

Frozen desserts/ ice creams Cold chain supported channel system

Fertilizers, pesticides/ seeds Rural based channel system

Pharmaceutical products Requires different set of partners to handle

doctors, chemists, hospitalsMulti level marketing Distributors to recruit more distributors

House construction items Distributors of hardware




Distribution channel strategy

Corporate strategy

Marketing strategy

Distribution strategy




Channel Mix decisions

Channel Mix deals with organizing & managing distribution

functions. The same requires :-

a) Defining customer service levels b) Defining distr ibution objectives

c) Outl ining steps to achieve the above objectives

a) Defining policy & procedure

b) Stating KPIs

c) Understanding CSFs



Amity Business SchoolChannel flowsThe work of the channel includes the performance of several marketing flows. All the functions

performed by the marketing channel recognizes three kinds of flows:- Forward F lows – from the company to the customers, basically goods & services

Backward F lows -from the customers to the company, basically the value of goods & services

F lows both ways -mainly Information

On the basis of value added activities performed these can be further categorized into eightuniversal marketing flows. The same are

Physical flow of goods Ownership

Promotion flow

Negotiation flow

Financing flow

Risking flow

Ordering flow

Payment flows

A very important flow that permeates all such activities is the information flow. So important isthis flow that logistics mangers often call this flow “ the abil ity to transform inventory to information.”




MARKETING FLOWS IN CHANNELS

Physical Physical Physical

Possession Possession Possession

Ownership Ownership Ownership

Promotion Promotion Promotion

Negotiation Negotiation Negotiation Consumers

Producers Wholesalers Retailers Industrial

Financing Financing Financing and

Household

Risking Risking Risking

Ordering Ordering Ordering

Payment Payment Payment

Commercial Channel Subsystem




Implications of marketing/ channel flows

• The progress in information technology provides great opportunity in capturing the

vital information flow.

• Specialization in the performance of channel flows is the hallmark of an efficiently

operating channel.

• Channel members should add value to the various channel flows.

• Too much specialization also breeds interdependency.

• The performance of certain flows is also co related with that of other flows.

• One can eliminate or substitute members in a channel but not the channel f lows




• Every channel flow not only contributes to the production of valued

service outputs but also carries an associated cost.

Market Flow

Physical possessionOwnership

Promotion

Negotiation

Financing

RiskingOrdering

Payment

Cost represented

Storage & Delivery costsInventory carrying costs

Personal selling, advertising, sales promotion, publicity,

public relations cost

Time & Legal costs

Credit terms/ conditions of sale

Price guarantees, warranties, insurance, repair & after sales service costOrder processing costs

Collections / bad debt costs



Amity Business SchoolSODs/End user preferences

SODs : defined by the desired customer service levels expected out of channel system.

The same consists of Lot size, waiting time, choice to the customer , place uti l i ty & service support.

Lot size : convenient size

Waiting time: time elapsed b/w the desire in the customer to buy the product& the time when he actually buys it.

Choice to the customer :Variety of products to choose from, assortment

Place utility : depends on the intensity of the distribution

Service support: after sales service ; matters quite a lot in case of industrial products e.g. Maruti service centres



Amity Business SchoolContd

Service Outputs :

Are basically the benefits which the channel system passes to the end users.

Other things being equal , the end user would prefer to deal with a channel

system which gives him greater service output.

Louis Bucklin came out with the framework on the service outputs &

specified four generic service outputs :- a) Bulk breaking( more bulk

breaking ; higher price to the enduser)

b) Spatial convenience

c) Waiting/ delivery time

d) Product varietyZero based channel a) meets the target market‟s service outputs & b) at a minimum cost of

performing these channel flows that produce those service outputs




Channel Design & Implementation




INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS:Retailing, Wholesaling and Logistics, Franchising

Channel Design Process

SEGMENTATION:

Recognize and respond to target customers’

service output demands

Decisions About

Efficient Channel Response:

CHANNEL STRUCTURE:

What kinds of intermediaries are in mychannel?

Who are they?

How many of them?

SPLITTING THE WORKLOAD:

With what responsibilities?

DEGREE OF COMMITMENT:

Distribution alliance?Vertical integration/ownership?

GAP ANALYSIS:

What do I have to change?

Channel Implementation Process

CHANNEL CONFLICT:

Identify actual and potentialsources

MANAGE/DEFUSECONFLICT:

Use power sources strategically,subject to legal constraints

GOAL:

Channel Coordination

CHANNEL POWER:

Identify sources for allchannel members




Channel Design & Implementation

• Refers to decisions involving development of new marketing channelsor modification of existing channels.

• Has a strategic connotation as helps a firm achieve sustainablecompetitive advantage.

The main elements involved in the design of channel are :-

i ) Who shall be the members of the channel &

i i) How many of each type of channel member will be in the channel.

( channel intensity)

i i i ) Who wil l do what task?



Amity Business SchoolContd.The process of channel design answers some of these questions

What activities are the channel members required to perform? Which of theseactivities is to be performed by which channel partner?

How is the performance of these activities going to help company achieve itscustomer satisfaction objective?

The no. of channel members required in the network & of each category?

How do we define the relationship between various channel entities?

Are the roles & responsibilities of the channel partners clearly defined ?

Are all channel members clear about how they would get compensated for their services?

Is the compensation plan fair to all channel members with regards to the task they perform?

Are the channel members clear about how their performance going to be judged & by whom , at what frequency?

What is the risk of their performance being not upto the target ?




Channel Design & Planning ProcessDecision for a suitable channel design involves seven phases or steps:-

Recognizing the need

Setting & clarifying the distribution objectives

Specifying distribution tasks

Developing possible alternate structures Evaluating variables affecting channel structures

Choose the “best”/ideal channel system.

Select channel members




I. Recognizing the need for channel designa)Developing a new product/product line

b)Aiming an existing product on a new target market

c)Making a major change in some component of marketing mix

d)Establishing a new firm either from scratch or as a result of merger &

acquisitione)Response to changing intermediary policies

f)Opening up of new marketing territories

g)Occurrence of some major environment changes

h)Due to conflict or some behavioral problem of channel members




II.Setting & coordinating distributionobjectives

Become familiar with objectives & strategies in other marketing mix areas

& that of the firm. E.g Frito –Lay „s emphasis on freshness of its products

compels them to use almost 13000 salesforce to supply directly to thegrocery store

Set explicit distribution objectives

Check for congruency



Amity Business SchoolIII.Specify distribution tasks

This job is much more specific and situationally dependent. E.g a

manufacture of high quality tennis racquets aimed at serious amateur tennis players would specify distribution tasks such as :-

• Gather information on target market‟s shopping patterns

• Promote product availability in the target market

• Maintain inventory storage

• Compile information on product features

• Provide for hand on try out of the product

• Sell against competition

• Process & fill specific customer orders

• Transport the product• Arrange for credit provisions

• Provide product warranty service

• Provide repair and restringing service

• Establish product return procedure.




IV. Developing alternate structures

• Possible channel structures should be in terms of the

following three dimensions

Number of levels in the channel

Intensity at various levels

Types of intermediaries at each level

So a 3 level channel with 3 degrees of intensity & 5

different types of members can theoretically have 45 possible structures!!!!




Factors and variables affecting the channel

design Number of factors are to be kept in mind while

designing the channel are :-

a) Nature of the product or service being marketed

b) The expectations/ “deliverables” from the system

c) Location & nature of customers

d) Nature of competition

e) Intensity of distribution requiredf) Nature of the markets being targeted

A marketing channel is required to add value to the product passing through i t !




V.Evaluating variables affecting channel structure

Some basic categories of variables are:-

i. Market variables

ii. Product variables

iii.Company variablesiv.Intermediary variables

v. Environmental variables

vi.Behavioral variables




Geography

Size

Density

Behaviour

Market

variables

Greater the distance b/w manufacturer & the market

greater the need for intermediar ies

Larger the size better is the use of intermediar ies,

else serving large numbet of i ndividual customers

wil l i ncrease transaction costs

Greater the density of market better i t is to

el iminate in termediar ies

Four types of customer behaviour – how , when ,

where , who?

Market variables

P d i bl




Bulk& weight

Perishability

Unit Value

Degree of standardisation

Technical vs Non technical

Product variables

Newness of product

Product variables



Amity Business SchoolCompany variables

Size

Financial

capacity

Managerial

expertise

Objectives

&

strategies

Company

variables



Amity Business SchoolIntermediary variables

Availability

Cost

Services

Intermediary




Environmental var iables Political, sociocultural, technological,economical, competitive

legal forces

Behavioral variables Avoid members with behavioral problems which can distort

communications.




VI. Choosing the “best” channel structure

Calculate exact payoffs associated with each

possible channel structure




Stages in channelplanning

Segmentation Positioning Focus Development



Amity Business SchoolSegmentation stage

For channel design its not just important to know what end users want to

consume rather how they want to consume the product/service being purchased !

End – user channel preferences

End users routinely make trade offs among service outputs, productattributes, price & analyze which product/ service bundle offers maximum

satisfaction/ overall utility Clusters of customers on the basis of what each segment expects out of the

channel is grouped together.

This helps the marketer to identify whom not to pursue just as much aswhom to pursue

Different segments represent different business opportunities.

For eg : Albert Karoll, a custom tailor in Chicago




Segmenting the market by SODs

• Service outputs clearly differentiate marketing channels.

• Different group of end users value service outputsdifferently.

• The channel segmentation process should be such that it produces group of buyers who are

a) Maximally similar within a group

b) Maximally different b/w groups

c) Differ on dimensions that matter on building thedistribution system



Amity Business SchoolPositioning stage

Identify the channel elements.

Identify the “ ideal” channel partner.

Analyse how many of them are required? Basically the no. & type of

intermediaries is decided.

Define the service objectives & flows of each channel element




Importance of positioning stage

The tasks performed in the positioning stage :-

1) Helps the channel manager diagnose & remedy shortcomings

in the provision of service outputs.

2) Helps establish a new channel or revise an existing channel to

minimize the cost of providing desired service outputs

3) Helps in allocating profits equitably because…..

Compensation in the channel system should be given on the basis of the degree of participation in the marketing flows & the value created by the participation !



Amity Business SchoolFocus Stage

Decide which segment to be targeted as it may be

impractical & expensive to target all segments.

Identify constraints such as those of the environment,

managerial talent pool available & competition which

makes targeting all segments insensible.




Developing the right channel alternative

Involves either-

a) Establishment of new channel

b) Refine existing channel

Work out best possible alternatives in case a newchannel needs to be established keeping in mind the

environment & managerial constraints.

Where an existing channel exists which needs to bemodified , identify the gaps which exist b/w the

ideal channel & existing channel .

Take steps to minimize these gaps




• Producer should periodically review & modify thechannel design & arrangements

• Distribution channel may not work as planned due

to:--Change in consumer buying patterns

-Expansion of market

-New competition

-Emergence of innovative distribution channel

-Product entering into later stages of PLC



Amity Business SchoolRefine existing channel

• For a pre existing channel which is not effective & productive,

perform a gap analysis.

• The difference b/w a zero based and the actual channel on the

demand &supply side constitute gaps in the channel design.

• In a Demand side gap at least one of the SOD is not being

appropriately met by the channel

• The SOD can be oversupplied or undersupplied.

• Supplying too much leads to higher prices to the end users

• Supplying too little will result in end users asking for more.




• In a Supply side gap at least one flow in a channel iscarried out at too high a cost..

• Wastes channel profit margins

• Translates into higher prices for end users which theyare unwilling to pay.

• Sales drop and thus there is a fall in market share.

• Generally occurs due to lack of up to date expertise in

channel flow management or simply from wastage in

a channel



Amity Business SchoolGap Analysis

The Gap Analysis framework considers :-

a) Sources of gaps

b) Types of gaps

c) Closing gaps

The gap analysis framework




The gap analysis framework

Sources of gaps

Environmental Managerial

• Local legal constraints Lack of knowledge

• Local physical retailing infrastructure Optimization at a higherlevel

Types of gapsDemand side gaps Supply side gaps

• SOS <SOD Flow cost too high

• SOS>SOD Which flow(s)?

• Which service outputs?

Closing gapsDemand side gaps Supply side gaps

• Offer tiered service levels Change flow responsibilities of current channel members

• Expand- contract provision of SO Invest in low cost distribution technology

• Change segment(s) targeted Bring in new channel members






Segmentation Positioning Targeting Establish

new channels

Refine existin

channels

Segmentation

* Define SODs by segment

* Identify

environment-alcharacteristic-s &constraints

Positioning*Define optimal

channel flow

performance

for each

Channel*Define optimal

channel structure

for each segment

Targeting• Choose

segments to

target to

*EnvironmentBounds

*Managerial

Bounds

*Competitive

benchmarks

Establish new

Channels

*Channel flow

Performance

*Channel structure

Refine existing

Channels

*Gap analysis

*Channel flow

Performance

*Channel structure

Documents

9bfefDistribution & Logistics Management Module 1