2ef27Distribution & Logistics Management Module 1

8/12/2019 2ef27Distribution & Logistics Management Module 1

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Amity Business School


Distribution Logistics & Management

Module 1Swati Bhatnagar


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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 companyorganisation units & extra company agents, dealers, wholesalers &retailers through which a commodity, product or service gets marketed.

Marketing channels comprise complex & dynamic systems but much ofwhat 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.

ServiceChannel-which performs pre sales & post sales service


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Need for distribution channels

In the past all distribution related operations were undertakenby the company itself .

Soon they realized that the intermediaries could do the jobbetter at a much lower cost !

The intermediaries became a linkbetween the manufacturer &its customers.

But are intermediaries necessary?


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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


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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.


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Patterns of Distribution

I ntensive distr ibution :make sure that the product ismade available in as many outlets as possible

Selective distr ibution: only few select outlets will bepermitted to sell companys products

Exclusive distr ibution:All the more selective, only

one outlet in the market may sell the companys product


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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 ofthe main markets in the city, deal with large no. ofcompaniess 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


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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


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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 informationto 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


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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


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Amity Business SchoolChannel Levels

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

Zero level channeldenotes direct distribution set up.

One level channelconsists of one intermediary only. (retailer)

Two level channelwould have two intermediaries (distributors then retailers)


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Prominent channel systems

Vertical Marketing system (VMS) :corporate,

administered & contractual

Horizontal marketing system ( HMS)

Multi- channel marketing system


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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


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Distribution channel strategy

Corporate strategy

Marketing strategy

Distribution strategy


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Channel Mix decisions

Channel Mixdeals with organizing & managing distribution

functions. The same requires :-

a) Defining customer service levelsb) Defining distr ibution objectives

c) Outl ining stepsto achieve the above objectives

a) Defining policy & procedure

b) Stating KPIs

c) Understanding CSFs


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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 lowsfrom 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 theinformation flow. So important isthis flow that logistics mangers often call this flow the abil ity to transform inventory toinformation.


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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


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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 membersin a channel but not

the channel f lows


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Amity Business SchoolContd. Every channel flow not only contributes to the production of

valued service outputs but also carries an associated cost.Market Flow

Physical possession

OwnershipPromotion

Negotiation

FinancingRisking

Ordering

Payment

Cost represented

Storage & Delivery costs

Inventory carrying costsPersonal selling, advertising, sales promotion,

publicity, public relations cost

Time & Legal costs

Credit terms/ conditions of salePrice guarantees, warranties, insurance, repair

& after sales service costs

Order processing costs

Collections / bad debt costs

S i O D d /E d f


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Service Output Demands/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 tothe customer , place uti l i ty & service support.

Lot size: convenient size

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

Choice to the customer :Variety of products to choose

from, assortmentPlace utility : depends on the intensity of the distribution

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


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Amity Business SchoolService 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 end user)b) Spatial convenience

c) Waiting/ delivery time

d) Product variety


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Zero based channel

a) meets the target markets service outputs & b)

at a minimum cost of performing these channel

flows that produce those service outputs


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Channel Design & Implementation


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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


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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?


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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 theirservices?

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

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

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


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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


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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 insome 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


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II.Setting & coordinating distributionobjectives

Become familiar with objectives & strategies in other marketing mix areas

& that of the firm. E.g FritoLay 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


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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 tennisplayers would specify distribution tasks such as :-

Gather information on target markets 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.


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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 45possible structures!!!!


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Factors and variables affecting the channel

designNumber 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 requi red to add value to theproduct passing through it !


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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

i


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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 individual customers

wil l increase 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


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Bulk& weight

Perishability

Unit Value

Degree ofstandardisation

Technical vsNon technical

Product variables

Newness ofproduct

Product variables


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Amity Business SchoolCompany variables

Size

Financial

capacity

Managerial

expertise

Objectives

&

strategies

Company

variables


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Amity Business SchoolIntermediary variables

Availability

Cost

Services

Intermediary


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Environmental variablesPolitical, sociocultural, technological,economical, competitive

legal forces

Behavioral variablesAvoid members with behavioral problems which can distort

communications.


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VI. Choosing the best channel structure

Calculate exact payoffs associated with each

possible channel structure


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Stages in channelplanning

Segmentation Positioning Focus Development


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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 beingpurchased !

Enduser 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 notto pursue just as much aswhom to pursue

Different segments represent different business opportunities.

For eg : Albert Karoll, a custom tailor in Chicago


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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 itproduces 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


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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

intermediariesis decided.

Define the service objectives & flows of each channel element


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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 givenon the basis of the degree of participation in themarketing flows & the value created by theparticipation !


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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.


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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


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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


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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.


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Amity Business SchoolContd.

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


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Amity Business SchoolGap Analysis

The Gap Analysis framework considers :-

a) Sources of gaps

b) Types of gaps

c) Closing gaps

The gap analysis framework


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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 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



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Segmentation Positioning Targeting Establish

new channels

Refine existin

channels

Segmentation

* Define SODsby 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

2ef27Distribution & Logistics Management Module 1

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