Formulating Formulating channel strategychannel strategy

Dr. R. Satish ChandraDr. R. Satish ChandraAsst. ProfessorAsst. Professor

AMC Engg. CollegeAMC Engg. CollegeBangaloreBangalore

Industrial distributors – Industrial distributors – Definition,Definition,

►““Industrial distributor is used with Industrial distributor is used with various meanings, for the purposes of various meanings, for the purposes of analysis they are identified as analysis they are identified as middlemen who buy and sell products middlemen who buy and sell products for industrial uses.”for industrial uses.”

Geographical distribution,Geographical distribution,

►Concentrated geographically.Concentrated geographically.►Mainly found in areas that have heavy Mainly found in areas that have heavy

concentration of manufacturing concentration of manufacturing establishments, for that are where the establishments, for that are where the industrial market is. industrial market is.

►One would expect, a large percentage One would expect, a large percentage of the total number of distributors with of the total number of distributors with the lion’s share of distributor sales is the lion’s share of distributor sales is found in large cities. found in large cities.

Size characteristicsSize characteristics

►Small firmSmall firm►Annual sales of less Annual sales of less ►Collateral benefit of this strategy is Collateral benefit of this strategy is

often a reduction in the expenses of often a reduction in the expenses of selling and physical distribution.selling and physical distribution.

►Manufacturers who pursue a policy of Manufacturers who pursue a policy of selective distribution often sell to other selective distribution often sell to other distributors at the same prices distributors at the same prices charged industrial users. charged industrial users.

Operating characteristicsOperating characteristics

►Perform a number of functions which Perform a number of functions which make them a viable marketing channel make them a viable marketing channel for many types of industrial goods.for many types of industrial goods.

►Classified as selling, warehousing, Classified as selling, warehousing, financing and service.financing and service.

►SELLINGSELLING Typically, an outside salesman requireTypically, an outside salesman require Direct compensation,Direct compensation, Fringe benefits,Fringe benefits, Travel and entertainment expenses.Travel and entertainment expenses. Salesmen are increasingly expected to Salesmen are increasingly expected to

service accounts, feed back marketing service accounts, feed back marketing intelligence to superiors and cooperate intelligence to superiors and cooperate with other company personnel in with other company personnel in controlling expenses controlling expenses

►WAREHOUSINGWAREHOUSING

Carrying inventory Carrying inventory General line distributors often carry as many as - General line distributors often carry as many as -

many items many items Even a specialty wholesalerEven a specialty wholesaler Stock competing lines of merchandise.Stock competing lines of merchandise. Apt to follow this policy only in the case of highly Apt to follow this policy only in the case of highly

standardized items.standardized items.►All distributors do some financing beyond the proverbial All distributors do some financing beyond the proverbial

ten-day, open book terms. ten-day, open book terms. ►Some times it exceed beyond 90 daysSome times it exceed beyond 90 days►Modest financial aid distributors provide their customers Modest financial aid distributors provide their customers

is the financial assistance they provide manufacturers is the financial assistance they provide manufacturers in the very act of buying and storing merchandise. in the very act of buying and storing merchandise.

SERVICESERVICE Commonly available through industrial Commonly available through industrial

distributors is deliverydistributors is delivery Maintain their own trucks Maintain their own trucks Delivery in their territories often in a matter of Delivery in their territories often in a matter of

hours on emergency orders.hours on emergency orders. Transportation costs are also minimized by the Transportation costs are also minimized by the

manufacturersmanufacturers Equipped to provide manufacturers of Equipped to provide manufacturers of

mechanical or technical product with installation, mechanical or technical product with installation, maintenance, and repair service.maintenance, and repair service.

Keep customer informed about new application Keep customer informed about new application of their products, new engineering or of their products, new engineering or performance data related to their use, and performance data related to their use, and improved methods of maintenance or repair. All improved methods of maintenance or repair. All distributors do some financing beyond the distributors do some financing beyond the proverbial ten-day, open book terms.proverbial ten-day, open book terms.

Role of sales agent and their Role of sales agent and their drawbacksdrawbacks

► Represents sellers Represents sellers ► Represents a limited number of principals with more or less Represents a limited number of principals with more or less

continuity rather than playing the field does the broker or the continuity rather than playing the field does the broker or the commission agentcommission agent

► When single industrial goods item, or narrow line of them with When single industrial goods item, or narrow line of them with limited sales volume in the average market area, faces a limited sales volume in the average market area, faces a difficult problem in marketing his outputdifficult problem in marketing his output

► Advantages Advantages ► Low marketing costLow marketing cost► Establish contactsEstablish contacts► Competent sellingCompetent selling

► Disadvantages Disadvantages ► Loose controlLoose control► Lack of flexibilityLack of flexibility► Divided loyaltyDivided loyalty

Choice of the right Choice of the right distributorsdistributors

What marketing functions will be assigned to or shared What marketing functions will be assigned to or shared with distributorswith distributors

What portion of the product line will be sold through this What portion of the product line will be sold through this channelchannel

What size and type of distributor should be chosenWhat size and type of distributor should be chosen Should exclusive or multiple distribution be usedShould exclusive or multiple distribution be used How should the selling function be divided between How should the selling function be divided between

distributors and the company sales forcedistributors and the company sales force What policies must be spelled out to ensure an effective, What policies must be spelled out to ensure an effective,

profitable, mutually satisfying relationship.profitable, mutually satisfying relationship.

Participation of the other channel Participation of the other channel

members in industrial distributionmembers in industrial distribution ►Brokers: Brokers:

These commissioned middlemen may represent These commissioned middlemen may represent a seller or buyer or botha seller or buyer or both

Term of service is usually shortTerm of service is usually short Often involved in the buying and selling of Often involved in the buying and selling of

surplus inventorysurplus inventory May know of another industrial user who needs May know of another industrial user who needs

the parts or a distributor who normally sells this the parts or a distributor who normally sells this type of product.type of product.

Negotiates a deal that is mutually satisfactory to Negotiates a deal that is mutually satisfactory to buyer and sellerbuyer and seller

►Value-added reseller (VARs)Value-added reseller (VARs) Gained greater prominence Gained greater prominence Usually specialists dealing with a Usually specialists dealing with a

particular market segment. particular market segment. Gather together the separate parts of Gather together the separate parts of

individual firms and design an operating individual firms and design an operating system tailored to the needs of their system tailored to the needs of their specialty market.specialty market.

Provide a very valuable service to both Provide a very valuable service to both buyer and seller.buyer and seller.

►Channel logistics Channel logistics ►Customer service is a crucial element in any Customer service is a crucial element in any

marketing strategy.marketing strategy.►Industrial customers depend on consistent Industrial customers depend on consistent

deliveries to maintain production flowdeliveries to maintain production flow►Logistical marketing activitiesLogistical marketing activities

TransportationTransportation Inventory availabilityInventory availability Warehousing Warehousing Material handlingMaterial handling Order processingOrder processing

►Most effective logistical system is one that Most effective logistical system is one that balances overall performance against total balances overall performance against total cost.cost.

►Rarely will either lowest total cost Rarely will either lowest total cost ►High service performance be the best logistical High service performance be the best logistical

strategy.strategy.

Relationship of logistics and Relationship of logistics and physical distribution,physical distribution,

► Refers to the interrelation and management Refers to the interrelation and management of all the activities involved in making of all the activities involved in making products and raw materials available for products and raw materials available for manufacturing and in providing finished manufacturing and in providing finished products to customers when where and how products to customers when where and how they are desired.they are desired.

► Requires two primary product flows:Requires two primary product flows:►Physical supplyPhysical supply►Physical distributionPhysical distribution►Physical supply: Physical supply:

Involves all those activities necessary to make production Involves all those activities necessary to make production inputs (input raw materials, component parts, and supplies)inputs (input raw materials, component parts, and supplies)

►Physical distribution: Physical distribution: Encompasses those tasks necessary to deliver the Encompasses those tasks necessary to deliver the

completed product to customers or channel intermediaries.completed product to customers or channel intermediaries.

Total cost approach,Total cost approach, ► Efficient physical distribution system is to minimize Efficient physical distribution system is to minimize

the costs involved in storing products and moving the costs involved in storing products and moving them from the point of production to the point of them from the point of production to the point of purchase within a specified level of customer servicespurchase within a specified level of customer services

► Focuses on two essential variablesFocuses on two essential variables Total distribution costsTotal distribution costs Level of service provided to customers.Level of service provided to customers.

► Must result in a combination of costs and services Must result in a combination of costs and services levels that maximize profits to the firm and to levels that maximize profits to the firm and to channel members channel members

► TCA is based on the premise that a firm should TCA is based on the premise that a firm should consider as a lump sum the cast of all the activities consider as a lump sum the cast of all the activities involved in physically moving and storing materials involved in physically moving and storing materials and products when it attempts often in an inverse and products when it attempts often in an inverse manner.manner.

► Cost involvedCost involved Interactive costsInteractive costs Evaluation cast trade offsEvaluation cast trade offs

Customer service,Customer service,

►Determining customer service levelsDetermining customer service levels►Competitive environmentCompetitive environment►ProfitabilityProfitability

Service, assessing the Service, assessing the customer servicecustomer service

►Optimized byOptimized by►Researching the customer’s needsResearching the customer’s needs►Setting service levels that realistically balance Setting service levels that realistically balance

revenues and expensesrevenues and expenses►Making use of the latest technology in order Making use of the latest technology in order

processing systemprocessing system►Measuring and evaluating the performance of Measuring and evaluating the performance of

individual logistical activities individual logistical activities

Identifying the cost centers Identifying the cost centers such as transportation and such as transportation and

warehousing.warehousing. Includes the integration of relevant cost centers Includes the integration of relevant cost centers Must consider both the operating costs and Must consider both the operating costs and

investment level investment level Total cost analysis is the relevant Total cost analysis is the relevant Object of TCAObject of TCA

► Identify the costs by activity centerIdentify the costs by activity center►Evaluate these costs in terms of desired level of Evaluate these costs in terms of desired level of

customer servicecustomer service

►Seek trade – offs between and among Seek trade – offs between and among the various activities centersthe various activities centers

►TransportationTransportation►Air freightAir freight►TruckTruck►RailRail►PipelinePipeline► Inter-modal transportationInter-modal transportation►Fright forwardersFright forwarders

►Criteria for selecting the mode of Criteria for selecting the mode of transportationtransportation

►Speed and availability of serviceSpeed and availability of service►Dependability of serviceDependability of service►Carrier capabilityCarrier capability►Frequency of serviceFrequency of service

►WarehousingWarehousing►Cost saving, Cost saving, ►Lessening customers serviceLessening customers service►Exist in the area Exist in the area ► Improve customers service reduce costs.Improve customers service reduce costs.►Efficient and timelyEfficient and timely►Private or public facilitiesPrivate or public facilities►Warehouse site locationsWarehouse site locations►Market positioned warehousesMarket positioned warehouses►Production – positioned warehouses.Production – positioned warehouses.► Intermediately positioned warehouses. Intermediately positioned warehouses.

►Site location strategies,Site location strategies,►The quality and variety of transportation carriers The quality and variety of transportation carriers

serving the site serving the site ►The quality and quantity of labourThe quality and quantity of labour►Labour ratesLabour rates►The cost and quality of industrial landThe cost and quality of industrial land►The potential for expansionThe potential for expansion►The tax structureThe tax structure►Building codesBuilding codes►The nature of the commodity environmentThe nature of the commodity environment►The cost of constructionsThe cost of constructions►The cost and availability utilitiesThe cost and availability utilities