Distribution Management - CHAPTER 4

Distribution Management

Session - 6

Today’s session:

•Physical Distribution Channels•Types of Flows•Channel Management•Why distribute through intermediaries•Channel Structure•Channel Design models

Channels of distribution

Physical Distribution Channel:

•The method by which•a product is physically transferred•from the point of production•to the point where they are•available to the customer for purchase

Retailer Factory Customer’s Home

Physical distribution channels

Manufacturer Manufacturer Manufacturer Manufacturer

Consumer Consumer Consumer Consumer

Retailer Retailer Retailer

Wholesaler Wholesaler

Agent/ Broker

Physical Ownership of Goods

Physical distribution channels

Factory

Consumer

Retailer

Wholesaler

DC

RDC

Manufacturer/ Company

External organizations

Transfer of ownership of product

Not just physical product flow – other flows as well

Distribution channels

Five different types of flows

Manufacturer

Consumer

Retailer

Transporter

WS/ Distr.

Transporter

PHYSICAL NEGOTIATION OWNERSHIP INFORMATION PROMOTION

Manufacturer

Consumer

Retailer

WS/ Distr.

Manufacturer

Consumer

Retailer

WS/ Distr.

Manufacturer

Consumer

Retailer

Transporter

WS/ Distr.

Transporter

Manufacturer

Consumer

Retailer

WS/ Distr.

Agencies

Distribution channels – Types of Flows

Physical product flow:•Actual physical movement of product•From manufacturer to consumer•Includes all those who take physical possession of the product.

Manufacturer

Consumer

Retailer

Transporter

WS/ Distr.

Transporter

PHYSICAL


Negotiation flow:•This flow represents the discussions between the buying and selling functions of the channel members.•This discussion is associated with the transfer of title.•Transportation firm is not included in this flow – No participation in negotiation•Arrows point in both directions – mutual exchange between buyers & sellers at all levels

NEGOTIATION

Manufacturer

Consumer

Retailer

WS/ Distr.


Ownership flow:•Movement of title refers to the flow of the title to the product – from manufacturers to consumers•Transportation firm again not included – does not take transfer of title.

OWNERSHIP

Manufacturer

Consumer

Retailer

WS/ Distr.


Information flow:•All parties involved in movement of information•Information moves in both direction – bi-directional arrows•Some information may by-pass the transporter – not of importance to the transport role.

INFORMATION

Manufacturer

Consumer

Retailer

Transporter

WS/ Distr.

Transporter


Promotion flow:•Movement of persuasive communication like advertising, personal selling, sales promotions, publicity.•A new type of firm – agency may be involved.•Agency involved in providing and maintaining the promotion flow.•Informational exchange between manufacturer and agency bi-directional•All other information flows in one direction only.

PROMOTION

Manufacturer

Consumer

Retailer

WS/ Distr.

Agency

Channel Management v/s Physical distribution management

Manufacturer

Consumer

Retailer

Transporter

WS/ Distr.

Transporter

PHYSICAL NEGOTIATION OWNERSHIP INFORMATION PROMOTION

Manufacturer

Consumer

Retailer

WS/ Distr.

Manufacturer

Consumer

Retailer

WS/ Distr.

Manufacturer

Consumer

Retailer

Transporter

WS/ Distr.

Transporter

Manufacturer

Consumer

Retailer

WS/ Distr.

Agencies

Physical distribution management - only concerned with movement of the physical productChannel management - concerned with not just movement of the physical product but all other flows. Broader concept.

Channel Management

Channel management much broader than the management of just the physical product flow

It involves management of :•Physical product flow•Ownership flow•Negotiation flow•Information flow &•Promotion flowto achieve the firm’s distribution objectives

Why distribute through intermediaries?

1. Specialization & Division of Labour:

M

C

R

W/ D

Why not reach the product directly from Manufacturer to Consumer

Adam Smith – The father of Modern Economics

Pin Factory example – The Wealth of Nations - Specialization of labour

What holds true for manufacturing holds true for the complex task of distribution•Break down complex task into smaller tasks•Each task less complex than the whole task•Allocate these small tasks to parties who will specialize at doing these tasks•Greater efficieny can thus be achieved

Why distribute through intermediaries?2. Improve efficiency in the exchange process

Barter Exchange Economy:

Producer 1

Producer 2

Producer 3

Producer 4

Producer 5

Hats

Sticks

Baskets

Pots

Knives

•Each producer needs all other producer’s products•Total of ten exchanges needed to satisfy all.

•With a distributor only five exchanges needed.

DISTR

Without distributor With distributor

No of transactions:= n(n-1)/2

n-No. of producers

No of transactions:= n

n-No. of producers

Efficiency created in distri-bution due to use of an intermediary = 10/5 = 2

In general:Efficiency created

(n(n-1)/2)/n=(n-1)/2


2. Improve efficiency in the exchange process

A distribution channel with intermediaries reduces the number of transactions needed – brings in efficiencies


3. Lack of resources to reach all consumers directly

Consider this:•Maruti has 800+ dealerships•Cost of setting up a dealership (not counting stocks) – 15 cr•12000 cr needed to set up these dealerships•Even Maruti will find it difficult to invest that kind of money


4. Perform Specific Distribution Tasks

•Collect output of various producers•Manufacturer – Production in bulk – Break-Bulk role•Hold product till customer needs it•Disperse the product to places where customers can buy it

Creating Form, Place, Possession & Time utilities


5. Perform the distribution tasks faster & cheaper than manufac-turers can.

•Knowledge of local requirement•Local contacts•Sharing of services for several manufacturers

Channel Structure?Channel Structure is the group of channel members to which a set of distribution tasks has been allocated

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTUREM

C

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTUREM

C

R

W/ D

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTURE M

C

R

W/ D

•Each members of the distribution channel operates independently•Each member seeks to maximize its profit.•At the expense of others•Conflicts can arise•Will reduce profit of the entire chain

•Each member of the distribution channel works in a co-operative arrangement•Maximize benefits for all members•Objective is to reduce the cost of the product or to provide greater control

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTURE

Types of VMS: 1. Corporate:•A firm may also own firms at subsequent or previous levels.•It can own the entire channel also.

Rubber Plantations - LiberiaRubber Plantations - Liberia

Retail outlets

Factories

•Stable source of supplies•Better control over quality.

•Better cost chain•Lower overheads

Advantages:Disadvantages:•Hard to be good at

running Manufaturing, Retialing, Wholesaling

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTURE

Types of VMS: 2. Contractual:•Business firms in a supply chain enter into an agreement•To cooperate with each other on a binding basis.•Reduce costs and improve efficiencies

Franchisinga. Manufacturer sponsored retail franchise:

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTURE


2. Manufacturer sponsored wholesale franchise:

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTURE


3. Service firm sponsored retail franchise :

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTURE

Types of VMS: 3. Administered:•The dominant brand in the channel coordinates efforts•By virtue of its market power•Guide the entire channel as ‘Channel Captain”•No formal agreement or ownership

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTURE

•Two or more unrelated busi-nesses, put together their efforts to exploit a market opp-ortunity.•A product or service is pro-moted to potential customers.•This brings benefit to both the businesses

Horizontal Marketing System?

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTURE•Different channels used to reach the same of different consumer groups

DELLDELL

Large Customers

Retail

Web

Small Customers

Customers

Channel Structure?

DIRECTDIRECT

MULTI-CHANNEL

HORIZONTAL

VERTICAL

INDIRECT

CHANNEL STRUCTURE•Different channels used to reach the same of different consumer groups

DellDell Sales Outlet

Web

Purchase

Information

Call Center Tech Support

Channel Design Model

32

Designing a suitable channel system requires defining :

1. Understand factors influencing channel design, 2. Identify Factors that will have the most impact on the design3. Create a matrix based on these key factors o understand their interaction4. Decide which type of channel is suitable

Channel Design

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Factors that influence channel design:

Consumer Habits

Company Factors

Market Factors

Product Characteristics

•Frequency of purchase•Purchasing Effort•Rapidity of Consumption•Significance of purchase•Waiting time

Channel Design

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Consumer Habits

Company Factors

Market Factors


•Replacement rate•Gross Margin•Adjustment•Searching time•Unit Value•Product Complexity•Product life-cycle stage•Volatility of demand•Brand positioning on quality•Perishability

Channel Design

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Consumer Habits

Company Factors

Market Factors

Product Characteristics •Focus on mass market

•Rate of technological change•Intensity of competition•Geographic concentration of market

Channel Design

36


Consumer Habits

Company Factors

Market Factors


•Range of Products•Order Size•Market Share•Desire of control•Retailer investment•Number of support programs•Promotion budget•Size of firm


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Designing a suitable channel system requires defining :1. Understand factors influencing channel design, 2. Identify Factors that will have the most impact on the design3. Create a matrix based on these key factors to understand their interaction4. Decide which type of channel is suitable

Market ConcentrationAvailability of capital

Customer Service LevelAsset Specificity


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Understanding Asset Specificity:

It is the aspect or feature of an asset (such as a specialized machine) that makes it useful for one or few specific purposes and which, therefore, cannot easily be sold off quickly.

Six main types of asset specificity: •site specificity •physical asset specificity •human asset specificity •brand names •dedicated assets •temporal specificity


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Understanding Asset Specificity:

Questions to be asked to judge specificity: •Is it difficult for an outsider to learn how to do the sell this product. •Does the salesman need to be given elaborate training to sell this product•Does the customer have to be trained elaborately to use this product•Do the salesmen need to have some technical education to sell the product•Will a salesman's inside information on our procedures would be very helpful to our competitors. •Are specialized facilities needed to sell the this product. •Is a large investment in equipment and facilities needed to sell this product


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3. Create a matrix based on these key factors to understand their interaction

Capital avl. – HighCustomer Serv. – HighMarket concen. – HighAsset Specificity - Low


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Distribution Scope Strategy

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Distribution Management - CHAPTER 4

Documents

Transcript of Distribution Management - CHAPTER 4