DISTRIBUTION

Distribution is one of the four elements of the marketing mix, the other three being

product, pricing and promotion. This marketing mix is also referred to as the four Ps of

marketing; distribution is here called physical distribution or place. Simply put,

distribution is the process of delivering the products manufactured or service provided by

a firm to the end user. Various intermediaries are involved in this process. This chain of

intermediaries which helps in transferring the product from one intermediary to the next

before it reaches the end user is called the Distribution Chain or Distribution Channel. Each

intermediary has a specific role and need which the marketer caters to.

Distribution channels are not limited to products only even the services provided by a

producer may pass through this channel and reach the customer. Both direct and indirect

channels come into use in this case. For instance, the hotel industry provides facility for

lodging to its customers, which is a non-physical commodity or a service. The hotel may

provide rooms on direct booking as well as through indirect channels like tour operators,

travel agents, airlines etc. Distribution chain has seen several improvements in the form of

franchising. Also there has been link ups between two service sectors like travel and

tourism which has made services available more accessible to the customer. For instance

hotels also provide cars on rent.

FUNCTIONS OF A DISTRIBUTION CHANNEL

The primary function of a distribution channel is to bridge the gap between production and consumption.

A close study of the market is extremely essential. A sound marketing plan depends upon thorough market study.

The distribution channel is also responsible for promoting the product. Awareness regarding products and other offers should be created among the consumers.

Creating contacts or prospective buyers and maintaining liaison with existing ones.

Understanding the customer's needs and adjusting the offer accordingly.

Negotiate price and other offers related to the product as per the customer demand. Storage and distribution of goods

Catering to the financial requirements for the smooth working of the distribution chain.

Risk taking for example by stock holding

Three Levels of the Distribution Channel

In level (1) there are no intermediaries involved, the manufacturer is selling directly to the

customer. This is called the ‘direct-marketing' channel. Examples of direct marketing

channel can be seen at factory outlet stores. Various hotels prefer direct-marketing, they

market their services directly to their customers without taking the help of any retail

intermediary (travel agent).

Levels (2) and (3) are examples of 'indirect-marketing' channels. In level (2) one

intermediary or retailer is used. A Retailer sells goods/services directly to the end users.

Retailer buys products from manufacturers.

In level (3) along with retailer a second member is added to the distribution chain. He is the

wholesaler. A wholesaler buys and stores products in bulk from manufacturers. He sells

these products in smaller quantities to retailers.

Why should a producer not indulge in selling his product directly to the consumer?

The reason is that the intermediaries manage the distribution costs efficiently. They are

experienced and have potential contacts which add to their productiveness. Their scale of

operation is large as compared to the manufacturer alone which means the scale of sales

reached would be higher. While there are various organizations which operate their own

distribution channel or do not take any help from channel members, there are others who

are in need of some level of channel partnership.

LEVEL OF DISTRIBUTION COVERAGE

A marketer needs to consider various factors before he decides upon the right level of

distribution coverage. It is well understood that distribution always increases company

costs. A part of this cost is covered by the customer for instance shipping costs but the rest

cannot be passed on to the customer. The marketer can determine the right level of

distribution by comparing the profit made (example, more sales) with the cost incurred in

achieving the profit. There are three levels of distribution coverage:

1. Mass Coverage

Mass coverage is also known as intensive distribution. As the name suggests in this

level of distribution coverage the product is distributed to nearly all the locations

where that type of product is sold. Mass coverage is suitable for low priced products

with huge consumer demand. An example of such a product is Coca Cola. The

product is available at all kind of stores, grocery stores, convenience stores, vending

machines, hotels and more. The distribution cost for such products is very high

however huge sales volume keeps the profits running high for the marketer.

2. Selective Coverage

In selective coverage the product distribution is limited to certain selected locations.

This is the case with products with a smaller market size. As the market size is small

the number of locations needed to support the distribution of the product is also

smaller.

3. Exclusive Coverage

Exclusive coverage is ideal for products that target relatively smaller markets, for

instance high-end products have small customer size. These products are more than

often purchased by customers who satisfy most of their needs with high quality,

expensive products (example- cars) Efficient and well-trained customer service is

essential for satisfying and helping such customers. Due to these characteristics of

the product as well as its buyers the marketer sells his products at select stores or

exclusive group of resellers. Another kind of product which gets exclusive coverage

is the one found only in company owned outlets. These may not be high-end

products or very expensive but since they are found only in select outlets they are

distributed exclusively.

With the advent of internet the effectiveness of these three levels of distribution

coverage has been severely challenged. This is so because all products sold on

internet are distributed by mass coverage. Therefore these three distribution levels

are best options for distribution of products that are physically purchased by a

customer.

ISSUES IN ESTABLISHING DISTRIBUTION CHANNELS

A manufacturer must conduct a thorough market research before deciding upon the

distributive method he wants to employ. Like all marketing decisions this too requires lot

of thought and study. There are various factors which determine his choice of a distribution

system. These factors can be grouped into two. Factors can be either related to marketing

decisions which determine a distribution channel or the kind of relationship that exists

between channel members.

1. Marketing Decision Issues

2. Channel Relationship Issues

MARKETING DECISION ISSUES

Various marketing decisions regarding the product help in establishing its distribution

channel. For instance the following factors:

A. Product Issues

The nature of the product often determines the distribution option. Various

products which need to be distributed are very delicate and fragile for instance

flowers. Here the marketer will choose an appropriate channel on the other hand a

marketer selling tough or durable products like steel beams will have other kinds of

distribution channels in mind.

B. Promotional Issues

Apart from issues like whether a product needs special handling or not the marketer

also needs to keep in mind how the product needs to be promoted before he

chooses a distribution channel for it. Certain products need extensive salesperson-

to-customer contact for instance automobile purchase. On the other hand a product

like bread will need a different distribution channel as its buyers require no help

from salesmen.

C. Pricing Issues

The price at which the marketer wants to sell his product is another factor to be

kept in mind before choosing a distribution system. The number of resellers

involved in the distribution channel affects the final price of the product. This is so

because each channel member tries to make some profit for their contribution to

the sale of the product. Therefore more the number of channel members the

marketer has to increase the product price to maintain his profit and the

distribution channel.

D. Target Market Issues

The primary motive of utilizing a distribution channel is to ensure the products

reach the end user. The nature of the target market is another important point to

consider while deciding upon the distribution channel. In this regard it is beneficial

to determine the level of distribution coverage needed to effectively meet

customer’s needs. Distribution coverage is measured in terms of the intensity by

which the product is made available to the end user.

CHANNEL RELATIONSHIP ISSUES

Apart from marketing decisions the marketer must consider the quality of relationship that

exists between distribution channel members. Relationship between channel members just

like marketing decisions has the potential to effect product sales.

Relationship issues can be broadly studied under the following three heads:

A. Channel Power

A distribution channel usually has several members, each having a set of duties to

perform and each add on to the value of the product. Among these members some

may hold a stronger position than the others. This phenomenon is known as channel

power. This member/s tries to influence the rest of the distribution chain. In such a

situation they start demanding for terms and conditions more favorable to them.

Like, they would buy more products only if the prices are lowered, will sell only if

the prices are higher. Or would demand other members for instance to do more

marketing to customers etc.

Channel power can be exerted in the following ways:

Backend or Product Power

Backend or product power usually lies in the hand of manufacturers whose

products enjoy high consumer demand. The rest of the channel members have to

carry forward the product in the chain or else they are at the risk of losing their

customers.

Middle or Wholesale Power

Here the power lies in the hands of the wholesaler who is in the commanding

position in the distribution chain. Often a wholesaler distributes products among

several smaller retailers and he himself obtains products from various

manufacturers. The small retailers cannot buy products in bulk or variety because of

cost constraints therefore is dependent on the wholesaler who can exert channel

power in this situation.

Front or Retail Power

Front or retail power as the name suggests stays in the hands of the retailers. This

state is reached when the retailer generates a high percentage of sales and therefore

the rest of the channel members are dependent on them.

DISTRIBUTION CHANNEL ARRANGEMENTS

A distribution channel is made up of various channel members like retailers and

wholesalers. For a smooth working of this channel the relationship between the members

must be strong. Trust and understanding between the members go a long way into

successful working of the chain.

A retailer often buys products from a wholesaler and expects him to deliver products on

time so that the retailer can meet the consumer demands. Similarly the wholesaler expects

the retailer to buy products on a regular basis and make payments on time.

Relationship between channel members is a function of the arrangement that occurs

between the channel members. Channel arrangements are of two types:

1. Independent Channel Arrangements

2. Dependent channel arrangements

Independent Channel Arrangements

In this kind of arrangement the channel members prioritize their own objectives and are

not concerned about the chain as a whole. It is a more conventional form of arrangement

where the members are free to take decisions which are in their own interest. As a result

the chain suffers as a whole as its objectives are not achieved. There is no binding or unity

in the group as each member functions selfishly. The members in this kind of arrangement

enjoy the freedom of moving away from a relationship they feel is not advantageous.

Dependent Channel Arrangements

In this kind of arrangement the channel members feel they are bound together and

working together towards a similar goal. There is more unity. They form a more stable

distribution channel. This form of arrangement is also called the "vertical marketing

system". In this system a single member cannot make changes in the way the product is

distributed in the channel.

The dependent channel arrangement can be further divided into three categories:

1. Corporate

In this form of arrangement the supplier maintains his own distribution channel.

This arrangement is commonly seen in the retail industry. For instance Starbucks

operates a chain of retail stores. Starbucks sells coffee by first importing it. It is then

processed by them and sold under their brand name in their retail stores. It should

be mentioned that Starbucks uses a multi-channel approach to market its product.

For instance coffee is also distributed through grocery stores and mail orders.

2. Contractual

In this kind of arrangement the supplier provides a legal document to his

distributors who are supposed to stick to its contents. The legal document clearly

mentions which member of the chain is permitted to perform what and what not.

This arrangement can be

a. Wholesaler-sponsored: where a wholesaler brings together and is

responsible for the working of several independent retail stores. The

retailers here are supposed to use the same name as well.

b. Retail-sponsored: here again several independent retail stores come together

but the retailers are themselves responsible for managing the channel.

c. Franchised: In this arrangement there exists a central organization which is

responsible for controlling the activities of all channel members.

3. Administrative

In this arrangement a single member controls the activities of all channel members.

This is possible when a single channel member attains a very powerful position.

This channel member may be the manufacturer who has attained this position as his

products are enjoying high consumer demand. Or it may be the retailer because of

his size and market coverage.

ADVANTAGES OF A DISTRIBUTION CHANNEL

When a customer is considering buying a product he tries to access its value by looking at

various factors which surround it. Factors like its delivery, availability etc which are

directly influenced by channel members. Similarly, a marketer too while choosing his

distribution members must access what value is this member adding to the product. He

must compare the benefits received to the amount paid for using the services of this

intermediary. These benefits can be the following:

Cost Saving

The members of distribution channel are specialized in what they do and perform at

much lower costs than companies trying to run the entire distribution channel all by

itself.

Time Saving

Along with costs, time of delivery is also reduced due to efficiency and experience of

the channel members. For example if a grocery store were to receive direct delivery

of goods from every manufacturer the result would have been a chaos. Everyday

hundreds of trucks would line up outside the store to deliver products. The store

may not have enough space for storing all their products and this would add to the

chaos. If a grocery wholesaler is included in the distribution chain then the problem

is almost solved. This wholesaler will have a warehouse where he can store bulk

shipments. The grocery store now receives deliveries from the wholesaler in

amounts required and at a suitable time and often in a single truck. In this way cost

as well as time is saved.

Customer Convenience

Including members in the distribution chain provides customer with a lot of

convenience in their shopping. If every manufacturer owned its own grocery store

then customers would have to visit multiple grocery stores to complete their

shopping list. This would be extremely time-consuming as well as taxing for the

customer. Thus channel distribution provides accumulating and assorting services,

which means they purchase from many suppliers the various goods that a customer

may demand. Secondly, channel distribution is time saving as the customers can find

all that they need in one retail store and the retailer

Customers can buy in small quantities

Retailers buy in bulk quantities from the manufacturer or wholesaler. This is more

cost effective than buying in small quantities. However they resell in smaller

quantities to their customers. This phenomenon of breaking bulk quantities and

selling them in smaller quantities is known as bulk breaking. The customers

therefore have the benefit of buying in smaller quantities and they also get a share

of the profit the retailer makes when he buys in bulk from the supplier.

Resellers help in boosting sales

Resellers often use persuasive techniques to persuade customers into buying a

product thereby increasing sales for that product. They often make use of various

promotional offers and special product displays to entice customers into buying

certain products.

Customers receive financial support

Resellers offer financial programs to their customers which makes payment easier

for the customer. Customers can buy on credit, buy using a payment plan etc.

Resellers provide valuable information

Manufacturers who include resellers for selling their products rely on them to

provide information which will help in improving the product or in increasing its

sale. High-level channel members often provide sales data. On all other occasions

the manufacturer can always rely on the reseller to provide him with customer

feedback.

DISTRIBUTION SYSTEMS

Before settling for a distribution system the marketer has too keep in mind various factors

affecting distribution system (like marketing decision and relationship issues).

The following distribution designs are available to the marketer for his distribution system:

1. Direct Distribution Systems

In direct distribution system the marketer reaches the target consumer directly

without the use of any intermediary. The distribution chain is small and no other

party can take ownership of the product being distributed. The direct distribution

system can be further sub-divided on the basis of the methods of communication

that takes place during sale between marketer and consumer. These methods are:

Direct Marketing Systems

In this system the consumer buys the product based on information gained

from impersonal contact with the marketer like by visiting the marketer's

website or ordering from the marketer's catalog. Or he buys based on

information gathered through some personal communication with a

customer service personnel who is not a salesperson and can be reached

through a toll-free number.

Direct Retail System

In this type of system the marketer operates his own retail stores. A perfect

example of this system is Starbucks.

Personal Selling Systems

In this system the distribution of the product is carried forward by people

whose main responsibility is creating and managing sales (for instance a

salesperson). He persuades the buyers into placing an order. This order may

not be handled by the salesperson but through websites or toll-free

telephone numbers. The sales person plays a vital role here in generating

sales.

Assisted Marketing System

In this form of distribution system the marketer handles the distribution of

his product and helps it reach directly to the end user. However he needs

assistance from others to spread awareness about his product among the

customers. An example of assisted marketing system is e-bay, here the

buyers and sellers are brought together for a fee. Agents and brokers can also

be included in this category.

2. Indirect Distribution System

In indirect distribution system the marketer includes intermediaries or other

members in his distribution chain. These resellers make sure the product reaches

the end user, while performing their duties they take complete ownership of the

product. However the reseller may sell products on a consignment basis wherein

the reseller pays for the product only when the product is sold. The resellers may be

expected to take up a few responsibilities to help boost the sales of the product.

Indirect methods include the following:

Single-Party Selling System

In this system the marketer involves another party to sell and distribute his

product to the end user. An example of single-party selling can be when the

product is sold through large store-based retail chains or through online

retailers. In this case the distribution system is also referred to as trade

selling system.

Multiple-Party Selling System

In multiple-party selling system the distributor involves two or more reseller

in the distribution process before the product reaches the end user. This is

most likely to happen when a wholesaler buys the product from the

manufacturer and then sells it to the retailer.

3. Multi-Channel (Hybrid) Distribution System

A marketer is said to be using a multi-channel or hybrid distribution system when

he utilizes more than one distribution design. As we have studied earlier in the

example of Starbucks, multiple distribution designs are put to use in the distribution

of its product. It uses a direct retail system when it sells its products in company-

owned stores, a direct marketing system by selling via direct mail and single party

selling system is put to use when its products are sold through grocery stores. Apart

from these other distribution systems are also put to use.

Multi-Channel distribution system is advantageous as it expands the distribution

system and more customers can be reached. The possible disadvantage again is

channel conflict of which the marketer should always be cautious.

Imported cars

Vehicles are either,

(1) Directly imported from the overseas manufacturers (official import)

(2) Imported through overseas dealers (parallel import). The official import is only for new

cars, but parallel import is for both new and used cars.

ISSUES:

Criteria in selecting channel members. Typically, the most important consideration

whether to include a potential channel member is the cost at which he or she can perform

the required functions at the needed level of service. For example, it will be much less

expensive for a specialty foods manufacturer to have a wholesaler get its products to the

retailer. On the other hand, it would not be cost effective for Procter & Gamble and Wal-

Mart to involve a third party to move their merchandise—Wal-Mart has been able to

develop, based on its information systems and huge demand volumes, a more efficient

distribution system.

A manufacturer enlists another manufacturer that already has a channel to a desired

customer base, to pick up products into an existing channel.

Parallel Distribution. Most manufacturers find it useful to go through at least one

wholesaler in order to reach the retailer, and it is simply not efficient for Colgate to sell

directly to pathetic little "mom and pop" neighborhood stores. However, large retail chains

such as K-Mart and Ralph’s buy toothpaste and other Colgate products in such large

volumes that it may be efficient to sell directly to those chains. Thus, we have a "parallel"

distribution network whereby some retailers buy through a distributor and others do not.

Note that we may also be tempted to add a direct channel—e.g., many clothing

manufacturers have factory outlet stores. However, note that the full service retailers will

likely object to being "undercut" in this manner and may decide to drop or give less

emphasis to the brand. It may be possible to minimize this contract by precautions such as

(1) having outlet stores located in vacation areas not within easy access of most people, (2)

presenting the merchandise as being slightly irregular, and/or (3) emphasizing

discontinued brands and merchandise not sold in regular stores.

Evaluating Channel Performance. The performance of channel members should be

periodically monitored—a channel member may have looked attractive earlier but may

not, in practice be able to live up to promises. (This can be either because of complacency

or because the channel member simply did not realize the skills and resources needed to

perform to standards). Thus, performance level (service outputs) and costs should be

evaluated. Further, changes in technology or in the market place may make it worthwhile

to shift certain functions to another channel member (e.g., a distributor has expanded its

coverage into another region or may have gained or lost access to certain retail chains).

Finally, the extent to which compensation is awarded in proportion to performance should

be reassessed—e.g., a distributor that ends up holding inventory longer or taking on more

returns may need additional compensation.

Internal Considerations

• do I have enough money to add another channel member ?

• is it compatible with my other businesses ?

• will any change cause more problems than solutions ?

• for example, IBM, Compaq threatened by Dell

Is it compatible with my business model e.g. Dell in China these internal considerations have a bearing on type of channel

Legal Considerations

• a manufacturer cannot insist that they sell their own products only (unless in case of a franchisee)

• a manufacturer cannot tie the sale of certain goods to certain others

• “you buy 100 crates of Vanilla Coke, if you want 500 crates of Coke”

• I am sure, though, that this is happening

• Cost and Profit Considerations

• a low profit margin, high volume company will have many channel members

• a high profit margin, low volume member will have only a few members

Channel Conflict

• This is defined as tension/clashes between channel members as a result of perceived unfairness

• vertical conflict arises when there is a clash of interests between members at 2 different levels (like wholesaler and retailer)

• horizontal conflict is between members at the same level - Retailer A Vs. Retailer B

• conflict can be caused by unfair manufacturer policies, a few “rotten” apples, partisanship etc

• conflict can be potentially dangerous and can snowball

• McDonald’s franchisees for instance; if care is not taken, the grumbles might become a roar

• however, a little conflict is good

• manufacturers must be fair

Case 1

TATA NANO

Profile:

Tata Motors Limited is India’s largest automobile company, with revenues of Rs.35651.48

crores (USD 8.8 billion) in 2007-08. It is the leader in commercial vehicles in each segment,

and among the top three in passenger vehicles with winning products in the compact,

midsize car and utility vehicle segments. The company is the world’s fourth largest truck

manufacturer, and the world’s second largest bus manufacturer. In March 2008, Tata

Motors acquired Ford’s UK based car brands Jaguar and Land Rover (BBC News, 2008).

According to Ratan Naval Tata (Chairman of Tata Group), the need for an innovation like

Nano has got to do something for the people of India and transport. Unavailability and poor

quality of mass transport is a common problem in India. In a two wheeler, father driving

with elder child standing in front and wife behind holding a baby is norm in this country.

Thus, this is a relatively an unsafe mode of transporting a family. Thus, with this in mind

Tata Nano was created as a safer form of transport.

As one of its objectives is to become an Indian business conglomerate operating in many

countries, Tata Nano will be introduced in Malaysia.

Distribution review

Just like in India, Tata Nano will be positioned as an affordable car even in overseas

markets. ‘Easy-to-assemble kits’ will be imported from Tata in India. The car then will be

assembled at pre-defined locations. The proposed locations are Shah Alam, Selangor and

Pasir Gudang, Johor Bahru. It will be then redistributed to showrooms that will be set up

based on region. 30 sales offices will be opened throughout Malaysia.

Direct marketing channel (zero-level channel)

We perform the Tata Nano in Malaysia by selling it directly to customers. Customers can

deal directly with our dealers and make the booking for Tata Nano by visit our sales office

or at any special event/campaign. By this way we can save more cost and maintain the

cheapest purchasing price rather than through retailers or resellers.

Physical flow:

From the diagram, can know that Tata Nano will send the paths to the Malaysia after

received the order from the sales office. After that, we will assemble a car at the workshop.

Finally, send to the customers directly. From here, we can often provide faster delivery to

customers because we are closer to the customers.

Payment flow:

Customers can pay bills by cash or do the financing from bank. Customers pay less by this

diagram due to not need to pay extra commission to third party such as wholesalers or

retailers. Tata Motor also can collect the payment more efficient.

Information flow:

Customers can get the information directly from Tata Motor such as new product, price

development and so on. Tata Motor can more understanding customer's needs when

receiving customers, response calls and mailings or through internet blog. If customers

have any need or complaint, we can satisfy them immediately by deal with customers

directly.

Case 2

TATA – FIAT

Profile

About Fiat

One of the pioneer companies in the automobile industry, Fiat has produced more than 85

million passenger cars and light commercial vehicles, including no less than 400 models,

since 1899, when the company was founded in Turin, Italy. Some of them have represented

milestones in the automotive industry. The Fiat Group’s Automobiles Sector operates

world-wide with the following brands: Fiat, celebrated for value, economy, and innovation

and whose mass produced cars are distributed over almost the entire price class spectrum;

Lancia (acquired in 1969) means prestige cars noted for their elegant styling, and comfort;

Alfa Romeo (acquired in 1986) is famous as a maker of sport and luxury vehicles of style

and distinction; Maserati (acquired in 1992) represents a landmark in the history of the

automobile; Ferrari (acquired in 1969), well renowned for unsurpassed design,

performance, and luxury, is a legendary automobile that imparts special cachet to its

owner.

Fiat India Private Limited, with its renewed brand strategy for the Indian market, is

focused on the premium end of the B & C category in the growing automobile sector. Fiat

Adventure Sport is the latest offering targeted at the new generation of customers who

enthusiastically seek out the latest trends in style, safety, engine and performance. Fiat’s

superiority in design and technology has been re-emphasized from the fact that its 1.3-

multi jet has been chosen as the “Engine of the Year 2005” in the 1 to 1.4 litres by the Jury

of the “International Engine of the Year” award.

About Tata Motors

Tata Motors is India’s largest automobile company, with revenues of US$ 4.7 billion. The

company is a market leader in commercial vehicles in India and is the second largest

passenger car company in the domestic market. It is the world’s fifth largest medium and

heavy commercial vehicle manufacturer. Tata Motors vehicles are being marketed in

several countries in Europe, Africa, the Middle East, South East Asia, South Asia and

Australia. The company has manufacturing operations in South Korea and Spain, and a

Technical Centre in the U.K.

Tata- Fiat Dealer Network

Tata Motors and Fiat India Private Limited today announced the commencement of the

new Tata-Fiat dealer network to sell both Tata and Fiat branded cars, along with service

and sales of spare parts, in 11 cities across India.

The Tata-Fiat dealer network comprises 25 existing Tata Motors Passenger Vehicles

dealers and 3 existing Fiat India dealers. Starting today, the 28 Tata-Fiat dealers will sell

the Fiat Palio (1.2 EL PS, 1.2 ELX, 1.6 Sports) and the Fiat Adventure (1.6 Sports), and all

Tata Motors Passenger Vehicles – the Tata Indica, the Tata Indigo, the Tata Indigo Marina,

the Tata Sumo and the Tata Safari.

The Fiat Palio range will now be available from an attractive price of Rs.3.8 lakhs onwards

(all prices ex-showroom Delhi). The 1.6 litre Adventure Sports is now available at a new

uniform price across the country at Rs.5.65 lakhs.

The 28 Tata-Fiat dealers, who together have 44 outlets, are located in 11 cities – Mumbai,

Pune, Ahmedabad, NCR Delhi, Chandigarh, Ludhiana, Bangalore, Chennai, Hyderabad, Kochi

and Kolkata.

The beginning of operations of the Tata-Fiat dealer network follows the agreement,

announced by the Fiat Group and Tata Motors on January 13, 2006, to cooperate on dealer

network sharing. The execution of the distribution arrangement is the first initiative post

the signature of the Memorandum of Understanding signed between the Fiat Group and

Tata Motors in September 2005. Discussions are on to explore other areas of co-operation,

on which specific announcements can be expected once their feasibility is established.

Commenting on the commencement of the Tata-Fiat dealer network, Mr. Rajiv Dube, Sr.

Vice-President (Manufacturing & Commercial – Passenger Cars Business Unit), Tata

Motors, said, “Tata Motors is delighted to be partnering Fiat India in bringing a larger

portfolio of products under a single roof at our joint dealerships. Between the Tata and Fiat

brands, the company is in a position to offer one of the widest product offerings in the

Indian market with the promise of several exciting options to come.”

Mr. Giovanni de Filippis, Managing Director of Fiat India Private Limited, said, “The coming

together of Tata and Fiat through the dealer network sharing signifies better service, after

sales support and more convenience to Fiat customers. Our customers have always been

delighted with the superior build quality of our cars. The after sales support that comes

with the Tata trust will complement this, and Fiat is confident of serving its customers

better.” Existing Fiat dealers will continue to retail the full range of Fiat offerings, including

the Fiat Petra.

Case 3

Toyota calls back cars

 It began with two separate issues – floor mats that interfere with the accelerator, and

“sticking” accelerator pedals, causing the car to speed up or the pedal to return too slowly

to the idle position. The discovery has caused Toyota to issue a recall on more than 7

million cars, including models of the popular RAV4, Corolla, Camry, Highlander and

Sequoia. (Toyota didn’t move fast enough on the recalls for public taste, however. It has

been suggested that the company was forced into initiating the action by the U.S.

government. So much for the fundamentals of crisis management.)

More recently, we’ve witnessed the recall of nearly 500,000 Prius and Lexus models

worldwide for a braking problem which stems from the software that runs the control

system. Assuming Toyota isn’t sitting on more bad news, the combined effect of those flaws

could be devastating enough to the world’s number-one automaker. IHS says Toyota is

likely to lose sales of some 10,000 units for both January and February. D&B’s Lawton

quotes an estimate by investment banker UBS that the event will cost the company $155m

a week to fix. And that doesn’t even allow for the long-term effects from this blow to

Toyota’s carefully burnished image.

There’s an extra twist to this story. Industry experts are always telling companies about the

importance of focusing on major suppliers. Yet the smaller ones can cause the biggest

headaches. Elkhart, Ind.-based CTS Corp. is the maker of the pedal assemblies that

prompted the Jan. 21 recall. But automotive business reportedly accounts for less than a

third of the company’s sales. And Toyota contributes about 3 percent of that. (CTS calls

Toyota “a small, but important” customer.)

Was it CTS’s fault? In a rather chilly statement on Jan. 27, the company stated that its

products “have been manufactured to Toyota’s design specifications.” It went on to say that

the two are “actively working” to develop a new pedal that meets tougher specifications.

And that’s about it. In fact, the boilerplate “Safe Harbor” language tacked on to the end of

the CTS press release is longer than the statement itself.

Regardless of where the blame ultimately falls, there appears to have been too little

communication between Toyota and CTS. The lapse is hardly rare. Lawton says there are

numerous “natural barriers” in any corporate environment that prevent businesses from

discovering and coming clean about product defects. Maybe the screwup can be fixed

before the public finds out, top executives might reason. Or perhaps we’d better run it by

Legal first. But the failure to act quickly and decisively often does more damage than the

original flaw. Do the words “Ford” and “Firestone” ring a bell?

Lawton says it’s vital that companies review their suppliers on a regular basis, to flush out

problems related to financial condition or product quality. Are your vendors working with

liens against them? Have they been charged with violations of environmental or worker-

safety laws? Are there issues related to their financial stability? Buyers and suppliers “need

to create an environment from a technology perspective where it’s easy and cost-effective

to share information,” Lawton says. The issue becomes even more critical in tough

economic times, when partners in the chain pare back resources to an absolute minimum.

The price of failure is high. According to a report by the CFO Executive Board

(https://cfo.executiveboard.com/Public/Default.aspx), the number of supply disruptions

has been on the rise. Typical results include an 11-percent increase in costs, 7-percent

decline in sales growth and 35-percent plunge in shareholder returns.

So we’re left with a major automaker that must accelerate from a slow start in reassuring

consumers and regulators of its commitment to safety. Company president Akio Toyoda

finally got around to apologizing to customers at a Feb. 5 news conference (although

observers have been debating the depth of his bow), but “sorry” by itself doesn’t cut it. Real

results will come from a commitment to better supplier relationships within the Toyota

organization. Meanwhile, costs continue to mount. Says Lawton: “The clock is ticking.”