distribution managemen & logistics t-module i

Amity Business School


MBA Class of 2012, Semester II

Distribution Logistics & Management

Module 1Swati Bhatnagar


Introduction of Distribution Management

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

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

“Distribution Management is the management of all activities which facilitates movement & co- ordination of demand & supply in creation of time & place utility of goods & services”

Possession utility

Place utility

Time Utility


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 are a link between the manufacturer & its

customers.• The intermediaries which includes all CFAs, distributors &

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


Functions performed by the intermediaries• Facilitation 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 right 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 flow of information to both the buyers & the sellers to help them

manage their business better• Reduction in the number of contact points• Awareness of the environment in which they operate


Are intermediaries necessary?• Companies like Dell & Amazon exist !• Eureka Forbes is also a case in point ! Normally, in case of a technical & complicated product the

company may want to handle the distribution themselves as the intermediary may or may not be able to learn as much as their own salesperson

A combination works better !A combination of direct & indirect distribution of godds &

services generally works out better…


Discrepancies in distribution channel

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 point & consumption point

Breaking of the bulk To provide assortment


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 distribution objectives

c) Outlining steps to achieve the above objectives

a) Defining policy & procedure

b) Stating KPIs

c) Understanding CSFs


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 to the end user.

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

Distribution channels can be broadly classified into :- Sales Channel- motivates buyers, shares information between the

company and the customer, negotiates fair bargains & finances the transaction

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

Service Channel- which performs after sales service


Types of channel members

CFA s & CSA s : are known as facilitators. Basically transporters who act as a mid way point between the company & its distributors. CSA s act as CFAs but also sell goods in the market & remit the value of goods sold to the company

Distributors, dealers , stockists & agents : they are required to invest in products i.e. buy from company, are on commission basis,, may or may not get credit from the company.

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 place


Patterns of Distribution

Intensive distribution : make sure that the product is made available in as many outlets as possible

Selective distribution: only few select outlets will be permitted to sell company’s products

Exclusive distribution: All the more selective, only one outlet in the market may sell the company’s product


Channel flows

The 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 Flows – from the company to the customers, basically goods & services Backward Flows -from the customers to the company, basically the value of goods & services Flows both ways -mainly Information

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

Physical flow of goods Ownership Promotion flow Negotiation flow Financing flow Risking flow Ordering flow Payment flowsA very important flow that permeates all such activities is the information flow. So important is

this flow that logistics mangers often call this flow “ the ability to transform inventory to information.”


Marketing flows in channels

ProducersWholesalers Retailers

ConsumersIndustrial&Household

PhysicalPossession

PhysicalPossession

PhysicalPossession

OwnershipOwnership Ownership

PromotionPromotion

Promotion

Negotiation Negotiation Negotiation

Financing

Risking

Ordering

Payment

FinancingFinancing

Riskingrisking

OrderingOrdering

Payment Payment


Implications of marketing/ channel flows

• The progress in information technology provides great opportunity in capturing the vital information flow.

• The flows performed may be managed in different ways for different parts of the company’s business. Eg. –Ingersoll-Rand International Bobcat, Clark Material handling & the Spicer Division of Dana Corporation use a 3PL German firm- Feige to handle all non U.S Distribution of spare parts

• Not every channel need participate in every flow. Specialization in the performance of channel flows is the hallmark of an efficiently operating channel.

• Flows should be shared only among those channel members who can add value or reduce cost by bearing them. But one also needs to bear in mind that too much specialization also breeds interdependency.

• The performance of certain flows is also co related with that of other flows. The opportunity cost tied up in the form of inventory should also be considered.

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

Amity Business SchoolEnd user preferences/ SODs

Define customer needs : 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 utility & service support.

Lot size : convenient sizeWaiting 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, assortmentPlace utility : depends on the intensity of the distributionService 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 end user)

b) Spatial convenience

c) Waiting/ delivery time

d) Product variety

Amity Business SchoolContd.

• Zero based channel is one that a) meets the target market’s service outputs & b) at a minimum cost of performing these channel flows that produce those service outputs

• Every channel flow not only contributes to the production of valued service outputs but also carries an associated cost.

Market Flow

Physical possessionOwnershipPromotion

NegotiationFinancingRiskingOrderingPayment

Cost represented

Storage & Delivery costsInventory carrying costsPersonal selling, advertising, sales promotion, publicity, public relations costTime & Legal costsCredit terms/ conditions of salePrice guarantees, warranties, insurance, repair & after sales service costsOrder processing costsCollections / bad debt costs


Channel Formats possible

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 end user eg departmental stores, discount stores, specialty stores, supermarkets etc

Service Driven : CFAs, CSAs, transporters who “ facilitate” distribution

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

Amity Business SchoolChannel Levels

The number of channel members decides the level 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)


What is the channel expected to deliver?

Variety of products to suit customers needs Close to customer location Breaking bulk Speed to delivery Additional services Support for installation After sales service support Financing support


Prominent channel systems

• Vertical Marketing system (VMS) : corporate, administered & contractual

• Horizontal marketing system ( HMS)• Multi- channel marketing system


Channel Design & Implementation

The design of the channel involves two main elements:-i) Who shall be the members of the channel &ii) How many of each type of channel member will be in the channel. ( channel intensity) A number of factors are to be kept in mind while designing the channel.

Some of these factors are :-a) Nature of the product or service being marketedb) The expectations/ “deliverables” from the systemc) Location & nature of customersd) Nature of competitione) Intensity of distribution requiredf) Nature of the markets being targetedA marketing channel is required to add value to the product passing through

it !


Channel Design & Planning ProcessDesigning a suitable channel system requires defining customer needs,

clarifying the channel objectives, looking at alternate systems which can meet these objectives , cost of channel & finally evaluating various alternatives to hone in on the ideal channel system.

The process of channel design answers some of these questions :- What activities are the channel members required to perform? Which of

these activities is to be performed by which channel partner? How is the performance of these activities going to help company achieve

its customer 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 ?

Amity Business School Stages in channel planning

Segmentation Positioning Focus Development

Amity Business SchoolSegmentation stage

The most useful demand side insights for marketing channel design are not about what end users want to consume rather how they want to consume the product/service being purchased !

End –user channel preferences There is a need to identify not only what the consumer wants to buy but

also how he wants to buy. Clusters of customers on the basis of what each segment expects out of the

channel is grouped together. Different set of end users have different set of demands & that

understanding & responding to those demands create new business opportunities.

For eg : a pharma company


Segmenting the market by SODs• Service outputs clearly differentiate marketing channels.• Different group of end users value service outputs

differently.

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

a) Maximally similar within a groupb) Maximally different b/w groupsc) differ on dimensions that matter on building the distribution

system

Amity Business SchoolPositioning stage

The activities or functions that produce the service outputs demanded by the end users are called channel flows.

Define the channel element which is required to service each segment. Need to decide which channel partner is “ ideal” to meet the expectation of

different segments & how many of them are required, basically the no. & type of intermediaries is decided.

The sales manager also defines the service objectives & flows of each channel element

There are eight generic channel flows : physical possession, Ownership, promotion, negotiation, financing, risking, ordering, payment


Importance of positioning stageIdentifying what channel flows are performed by whom and at

what level is helpful in several aspects :-

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

The sales manager decides which segment to be addressed as it may be impractical & expensive to target all segments.

There can be constraints such as those of the environment, managerial talent pool available & competition.


Developing the right channel alternative

The sales manager has to work out best possible alternatives in case a new channel needs to be established

In case an existing channel exists which needs to be modified , the sales manager needs to identify the gaps which exist b/w the ideal channel & existing channel .

Needs to take steps to minimize these gaps


Establish new channel• The channel manager opts for a new channel if no channel

exists currently in the market for a particular segment.

• He needs to establish a channel design which comes closest to meeting the target market’s demands.

• The same will be subject to the environmental & managerial bounds constraining the design


Refine existing channel• When a pre existing channel exists in the market but is not that

effective & productive, the channel manager needs to perform a gap analysis.

• The difference b/w a zero based and the the actual channel on the demand &supply side constitute gaps in the channel design.

• On the demand side, gaps mean that at least one of the service output demand 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 is carried out at too high a cost..

• This not only wastes channel profit margins but can also translate as higher prices for end users which they are unwilling to pay. This is followed by a drop in sales and thus 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

Amity Business SchoolThe gap analysis framework

Sources of gaps Environmental Managerial• Local legal constraints Lack of knowledge• Local physical retailing infrastructure Optimization at a higher

level

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

Amity Business SchoolChannel Design Process

Segmentation Positioning Targeting Establish

new channels

Refine existin channels

Segmentation

* Define SODs by segment

* Identify environment-al characteristic-s & constraints

Positioning*Define optimal channel flow performance for each Channel*Define optimal channel structurefor each segment

Targeting• Choose segments to target to

*EnvironmentBounds*Managerial Bounds*Competitivebenchmarks

Establish new Channels*Channel flow Performance*Channel structure

Refine existing Channels*Gap analysis*Channel flow Performance*Channel structure

Channel Design Process


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, hospitals

Multi level marketing Distributors to recruit more distributors

House construction items Distributors of hardware


Channel Implementation Process After attaining a good channel design for the market, the channel

manager’s job is not over. He now has to implement the channel design. Specific channel members are likely to specialise in particular flows &

activities. If the channel members do not perform properly , the entire channel effort

suffers.For e.g a poor transportation system can ruin a most excellent channel design

also at times For a channel manager to implement the optimal channel design, in the

face of interdependence of the channel partners , of whom not all incentivised uniformly & not all cooperate to deliver their designated channel flows, the channel manager needs to possess & use channel power.

A channel member’s power is its ability to control the decision variables in the marketing strategy of another member in the given channel at a different level of distribution

distribution managemen & logistics t-module i

Documents

cost of distribution

marketing channel

service channel

sales channel

company distributors

business better reduction

value of goods services

goods services backward