Sales, Distribution and Supply Chain Management

MK 0001
Sales, Distribution and Supply Chain Management

Contents
Unit 1
Personal Selling and Sales Management Overview 1
Unit 2
Organizing the Sales Department 18
Unit 3
Sales Force Management 28
Unit 4
Directing and Controlling Sales Efforts 67
Unit 5
Logistics of Distribution 78
Unit 6
Channel Management 99
Unit 7
Recent Trends in Channel Management 127
Unit 8
Introduction to Supply Chain Management 135
Unit 9
Planning and Designing Supply Chain 152
Unit 10
Co-ordination in Supply Chain 164
Unit 11
Issues Regarding Information Technology
and Supply Chain 177
References 197
Edition: Fall 2007
th
BKID – B0773 8 Nov. 2007
Brig. (Dr). R. S. Grewal VSM (Retd.)
Pro Vice Chancellor
Sikkim Manipal University of Health, Medical & Technological Sciences
Board of Studies
Mr. Rajen Padukone
Member – Academic Senate, Sikkim Manipal University
Ms. Vimala Parthasarathy Prof. K. V. Varambally
HOD Director
Convener Manipal Institute of Management
Department of Management & Commerce Manipal
Directorate of Distance Education
Sikkim Manipal University
Prof. Raj Dorai Mr. Jagadeesh
Industry Consultant and Assistant Professor
Visiting Faculty, IBA, IFIM and BIM, Department of Management &
Bangalore Commerce, Directorate of Distance
Education, Sikkim Manipal University
Mr. Umesh Maiya Mr. R. Ravindra Rao
Assistant Professor Senior Faculty
Department of Management & Commerce Manipal Institute of Management
Directorate of Distance Education Manipal
Content preparation Team

Content Writing and Compilation
Dr. Tribhuvan J.
Professor, Garden City College
Bangalore
Format Editing Language Editing
Mr. Umesh Maiya Mr. Sridhar Bhatt
Assistant Professor Lecturer in English
Department of Management & Commerce Government College,
Directorate of Distance Education Udupi
Edition: Fall 2007

This book is a distance education module comprising of written and compiled
learning material for our students.
All rights reserved. No part of this work may be reproduced in any form by any
means without permission in writing from Sikkim Manipal University of Health,
Medical and Technological Sciences, Gangtok, Sikkim.
Printed and Published on behalf of Sikkim Manipal University of Health, Medical and
Technological Sciences, Gangtok, Sikkim by Mr. Rajkumar Mascreen, GM, Manipal
Universal Learning Pvt. Ltd., Manipal – 576 104. Printed at Manipal Press Limited,
Manipal.
SUBJECT INTRODUCTION
The focus of management has changed over time. Business thinking in the
70s was driven by strategic planning and product portfolio approach.
Success was dependent upon the ability of an organization to meet the
demand at the lowest cost, leading to economies of scale approach. The
80s exposed the weakness of this approach and saw an upsurge in quality
consciousness, leading to an increased emphasis on TQM, product
reliability and customer satisfaction. Flexibility and responsiveness have
become key business drivers for the 21st century, forcing businesses to
orient themselves along processes instead of functions.
Selling products to the customers has become a challenging task amidst

tough competition. In case of financial services and commercial banking,
any position that deals in sales management, commercial and industrial
sales will prove to be very challenging. It is in this regard that good sales
personnel must be regarded as an asset to any organization. A sales
executive requires the ability to successfully prospect for new sales
opportunities in the mid-market sector across various vertical markets.
Additionally, one must be competent in developing and executing a winning
sales strategy.
Businesses must be willing to change their attitudes, routines and their

ideas of how things need to run. Supply chains can be tremendous assets to
companies and their vendors. A supply chain consists of all of the entities
necessary to transform ideas into delivered products and services. Supply
chain management directs and transforms a firm's resources in order to
design, purchase, produce, and deliver high-quality goods and services.
This courseware has been carefully designed to incorporate all essential

aspects of sales management and supply chain management.
This book comprises 11 units:
Unit 1: Personal Selling and Sales Management Overview

Deals with the meaning and objectives of personal selling. Also discusses
methods to design new sales and marketing process.
Unit 2: Organizing the Sales Department
Discusses the essential duties and responsibilities of a sales executive. Also
deals with sales department relations and distributive network relations.
Unit 3: Sales Force Management

Focusses on recruitment, selection and training of sales personnel.
Unit 4: Directing and Controlling Sales Efforts

Deals with the sales budget, sales territories, sales control and cost
analysis.
Unit 5: Logistics of Distribution

Deals with the meaning, functions and the process of logistics.
Unit 6: Channel Management

Deals with the policies of marketing channels, designing channels,
assessing channel performance and managing channel relationships.
Unit 7: Recent Trends in Channel Management

Discusses wholesaling and retailing, while dealing with the ethical and social
issues in sales and distribution management.
Unit 8: Introduction to Supply Chain Management

Deals with the meaning and definition of supply chain as well as the
objectives and the process of supply chain management.
Unit 9: Planning and Designing Supply Chain

Throws light on supply chain integration, forecasting in supply chain and
managing demand and supply.
Unit 10: Co-ordination in Supply Chain

Discusses the obstacles in supply chain co-ordination. Also deals with
managerial leverages to achieve co-ordination while discussing the need for
outsourcing in supply chain management.
Unit 11: Issues Regarding Information Technology and Supply Chain

Deals with the use of Information Technology in supply chain management
while throwing light on e-business and supply chain.
Sales, Distribution and Supply Chain Management Unit 1
Unit 1 Personal Selling and

Sales Management Overview
Structure:
1.1 Introduction
Objectives
1.2 Sales Management, Personal Selling and Salesmanship
Self Assessment Questions I
1.3 Setting Personal Selling Objectives
1.4 Determining Sales-related Marketing Policies
1.4.1 Sales and Marketing Company Policy: Case Study
1.4.2 Methods to Design New Sales and Marketing Process
1.4.3 Control of Sales and Marketing Policy and Procedures
Self Assessment Questions II
1.5 Formulating Personal Selling Strategy
Self Assessment Questions III
1.6 Summary
1.7 Terminal Questions
1.8 Answers to SAQs and TQs
1.1 Introduction
When it comes to various positions in sales management, it is possible to
get them in various companies and organizations including service-oriented
institutions such as insurance, consulting agencies, banking and financial
services, and even government institutions.
In case of financial services and commercial banking, any position that
deals in sales management, commercial and industrial sales will prove to be
very challenging and at the same time a very rewarding experience, as
there are wide opportunities such as technical training, broad management
practices and system selling.
Sikkim Manipal University Page No. 1

Due to the varied market requirements and market opportunities, the

engaged sales personnel will be in need of newer and sophisticated
techniques and that too at constant intervals to match the market trends.
The sales force will be required to be imparted with the latest interpersonal
training techniques by duly taking into account their interests, background,
academic training, technical skills, and enthusiasm in accepting newer roles
or responsibilities.
In any kind of sales and sales management training programs, situation will
be different and one cannot have a standard set for time, format, length, etc.
When it comes to the career path in sales, different companies will have
different career paths and it is better to look into each and every system of
the company individually.
Sales management and the business enterprise:

Sales management by itself is a very broad portfolio and it includes all levels
and positions such as new business selling, technical selling, trade sales,
and missionary sales. In new business selling the personnel responsible for
sales will not be assigned any specific location or area and there is also no
designated account.
The sales force formed for the technical selling will have areas or specific
geographical locations assigned for them and specific accounts will also be
designated. In trade sales, the sales representatives are responsible for
selling the manufactured goods to the wholesale dealers as well as retail
traders to fulfill the manufacturer’s target or the company’s target.
Missionary salespersons represent the manufacturing companies and their

responsibilities include contacting retail sellers and decision makers of other
companies and making them to understand about the product and convince
them to buy. The job of any missionary sales representative will be in the

form of training or preparing personnel to take on actual sales work later on

and there is no need for the representative to sell or close the deal.
Persons holding sales management positions are required to show a very

strong and favourable performance and track record within a year or two,
and such a target-oriented approach will see them climbing the corporate
ladder fast. It is a fact and as realized by many persons engaged in sales
line, sales management is the most wonderful and challenging option for
climbing up the ladder of success and at the same time very rewarding one.
The team that is engaged in sales management will have the direct
opportunity to deal with the market and the personnel can make use of their
expertise and experiences to deal with the human factor for clinching the
deal in their favor, as other marketers hardly or rarely meet or interact with
customers for winning over.
The opportunities such as direct interaction with a variety of customers

including their own colleagues can make the sales management people very
confident and give them a sense of achievement and they can do a high
quality work by understanding the feel of the market and make use of the
information for increasing the sales.
There are various employment opportunities and many sales management

positions can be clinched or grasped from various companies and when it
comes to companies, there are categories such as profit-oriented
companies, non-profit organizations, and service-oriented industries such as
insurance, financial and banking services, consulting, and even government
agencies.
The training that is being imparted to the sales management people will be
very expanse in nature and as such people are bound to know all details
about the product they sell so as to have and maintain a competitive edge
over others in the market. Any detailed knowledge about the product that

they sell can certainly assist sales people in clarifying the doubts and
explaining things to the prospective buyers and thereby show an increase in
sales.
At the first instance, the personnel who sell the products should believe in
the products they sell and without this understanding it will be a difficult task
for them to sell. Few of other important factors that directly impact the sales
figures are the motivation levels, initiatives shown by the sales team and
effective supervision by the managerial group of the organization. Further, a
good analytical mind possessed by the sales people can help in
understanding the market situations correctly in its real perspective and take
corrective actions or use alternate decisions to boost sales.
Objectives:
After studying this unit, you will be able to:
 Explain personal selling.
 State the five objectives of promotion that are met through personal
selling
 Explain how the objectives of personal selling are set.
 Explain direct marketing.
1.2 Sales Management, Personal Selling and Salesmanship

Personal Selling:
Personal selling has a vital role in service, because of the large number of
service businesses which involve personal interaction between the service
provider and the customer, the service being provided by a person not a
machine and ‘people’ becoming part of the service product.
Many customers of service firms have a close and on-going relationship with
the service providers. Under these circumstances, selling has a pivotal role

in the communication mix. In certain services, selling is the preeminent

element in the communication mix.
Selling of services include prospect identification, sales call planning,

preparation of presentations, handling objectives and closing a sale.
George, Kelly and Marshall suggest seven guidelines for selling services.
They are:
a. Orchestration of the service purchase encounter
b. Facilitation of a quality assessment by customer
c. Making the service tangible
d. Emphasis on organization’s image
e. Use of reference from external sources
f. Recognition of importance of customer contact personnel, and
g. Recognition of customer involvement during the service design process
Lack of training and resistance to selling are two commonly faced problems
in many services businesses. A sales management structure supported by a
programme of sales training will help to improve the capacity of the sales
personnel. Market orientation development programmes are helpful to
overcome the problem of resistance to selling.
Sales Promotion:
Sales promotion includes any marketing activity designed to sell a product
or service. It involves many marketing tactics like price deals, bonus offers,
additional services and gifts.
Traditionally, sales promotion was used mainly in consumer’s goods market.

Now many service firms also adopt sales promotion programmers to a large
extent.
Sales promotion tools can be aimed at three groups:
1. Customers: Free offers, sample demonstrations, coupons cash refunds,
prizes, contests and warranties.

2. Intermediaries: Free goods, discounts, advertising allowances, co-

operative advertising, distribution contents and awards.
3. Sales Force: Bonuses, awards, contests and prizes for best performer.
Sales promotions are not always co-ordinated well with marketing objectives
and other components of the communications mix. In order to help to
develop, implement and test a promotions programme, the following steps
should be taken:
1. Decide the objectives of sales promotion and how they will support other
communications and marketing mix elements.
2. Determine the balance of promotions activity between customer’s
intermediaries and sales force.
3. Decide the sales promotion tools to be used.
4. For each element of sales promotions programme,
 Determine the amount of the incentive;
 Establish conditions for involvement;
 Decide on the length of the promotions;
 Choose the distribution method for promotions; and schedule the
promotion time-table.
5. Decide on the sales promotion budget.
6. Pre–test the sales promotion budget.
7. Launch the sales promotion programme.
8. Evaluate the sales promotion programme.
Public Relations:
The institute of public relations of England defines public relations practice
as “The planned and sustained effort to establish and maintain goodwill and
mutual understanding between an organization and its publics.” ‘Publics’
include all the groups of people and organizations which have an interest in

the service company. So the employees also can be included. As publics

are more diverse, public relations is essential to communicate with them.
Public relations is concerned with many marketing tasks like –

a. Building and maintaining image.
b. Handling problems and issues smoothly,
c. Reinforcing positioning,
d. Influencing the public to a position favourable to the marketer and
e. Preparing the public favorably while launching new services.
A service organization’s image is made up of the collective experiences,

views, attitudes and beliefs held about it. Public relations can use a range of
communication approaches to improve or maintain the image of a service
organisation. Overall objective with image is to ensure that an organisation
is viewed more favourably, and is more familiar than competitors in the
market segments it serves.
A wide range of tools can be used in the design of a public relation

programme. These include publications, including press releases, annual
reports, brochures, posters, articles and employee reports, Events, including
press conferences, seminars, speeches, and conferences. Investor relations
aimed at gaining support of investors and analysts’ stories which create
media coverage exhibitions including exhibits, displays, sponsorship of
charitable causes and community projects.
Word-of-Mouth:
One of the most distinctive features of promotion in service businesses is
the greater importance of referral and word-of-mouth communications. It
highlights the importance of the people factor in service promotions.
Customers utilizing a service, talk to other potential customers about their
experiences. Such an endorsement has more reliability and impact than an
advertisement or other mass or personal communications mix elements.

The multiplier effect from word-of-mouth is not uniform to all products. It

varies from industry to industry and situation to situation. But a service
marketer should be careful about negative referrals as they tend to have a
greater impact than positive experiences. Dissatisfied customers are likely
to talk about their experiences to more people and this can significantly
reduce the effectiveness of advertising and other elements of the
communications mix.
Direct Marketing:
Direct marketing is recognized as a low cost and effective method for
communicating with corporate customers due to increasing cost in direct
sales force. Developments in electronic media, telecommunications, internet
etc. provide great opportunities for developing integrated programmers for
direct marketing activities. Consequently, many service firms have begun to
take advantage of the benefits of a co-ordinated direct marketing program.

State whether the following statements are True or False:
1. The multiplier effect from word-of-mouth is uniform to all products..
2. Direct marketing is recognized as a low cost and effective method for
communicating with corporate customers.
3. Sales promotions are always co-ordinated well with marketing objectives
and other components of the communications mix.
1.3 Setting the Objectives of Personal Selling

Personal selling is used to meet the five objectives of promotion in the
following ways:
 Building Product Awareness – A common task of salespeople,
especially when selling in business markets, is to educate customers on
new product offerings. But building awareness using personal selling is

also important in consumer markets. As we will discuss, the advent of

controlled word-of-mouth marketing is leading to personal selling
becoming a useful mechanism for introducing consumers to new
products.
 Creating Interest – The fact that personal selling involves person-to-
person communication makes it a natural method for getting customers
to experience a product for the first time. In fact, creating interest goes
hand-in-hand with building product awareness as sales professionals
can often accomplish both objectives during the first encounter with a
potential customer.
 Providing Information – When salespeople engage customers a large
part of the conversation focuses on product information. Marketing
organizations provide their sales staff with large amount of sales support
including brochures, research reports, computer programs and many
other forms of informational material.
 Stimulating Demand – By far, the most important objective of personal
selling is to convince customers to make a purchase. In our next
tutorial, we will see how salespeople accomplish this when we offer
detailed coverage of the selling process used to gain customer orders.
 Reinforcing the Brand – Most personal selling is intended to build long-
term relationships with customers. A strong relationship can only be
built over time and requires regular communication with a customer.
Meeting with customers on a regular basis allows salespeople to
repeatedly discuss their company’s products and by doing so, help
strengthen customers’ knowledge of what the company has to offer.
1.4 Determining Sales-related Marketing Policies

If you are an organization spending $500,000 or more on marketing
expenses (e.g. advertising, trade shows, print materials, direct mail, etc.)

then STOP! We found it again. Do you ask why…? Because marketing

has the greatest potential of being very unproductive.
In fact, many marketing programs struggle to break even, and actually

frequently lose money. So, if we increase the overall effectiveness, then we
can eliminate 50% or more of your wasted marketing efforts, which
translates into $250,000 in cash. So now, let’s see how this actually works
in a real-life scenario.
1.4.1 Sales and Marketing Company Policy: Case Study

An organization with $500,000 in marketing expenses needed assistance.
We examined their sales and marketing process to understand and quantify
the lead flow, follow-up, and demand forecasting issues. Then we designed
and implemented a process to improve their sales cycle efficiency and tie it
closer to their customer’s buying cycles. After the marketing reductions, we
then reinvested $100,000 back into new processes for public relations and
Customer Relationship Management (CRM), both of which were suffering
badly.
The metrics we developed reduced their marketing expenses by 60%

overall and increased their sales cycle efficiency from 40% to 60% within 6
months of implementing the new procedures. With these new processes
and reports, the company now tracks sales cycle efficiency and life-time
value rather than just sales quota achievement, as the measure of their
sales & marketing effectiveness. The result: an extra $300,000 in cash plus
a 50% increase in process capability (capacity). As we have seen time and
time again, time can be our best friend, if only we let it.
1.4.2 Methods to Design the New Sales and Marketing Process

 Improve Follow-up: Only about two percent (2%) of sales occur on the
first contact. Eighty percent (80%) of sales will require five to eight

contacts before the sale closes. This means that if you are contacting
the prospect less than five times or more than eight times, then you
could have a problem with follow up.
 Sales Cycle Efficiency: Time kills deals. The speed at which a

prospect is converted into a customer and the number of prospects
required to make that conversion determines your sales cycle efficiency.
So ask yourself, are you taking the right steps to measure and reduce
lost sales?
 Life-time Value: How profitable a given customer is over time defines

your LTV or Life-time Value. Companies spend ten times more to
acquire a customer than to keep a customer. However, existing
customers are more likely to purchase again, spend more money, and
therefore become more profitable. If you don’t know your LTV, then how
do you know how much money to spend and on which customer
segment?
 Demand Forecasting: Every customer buys on a cycle. So this means

that you should track cycle times and variance to increase the accuracy
of your forecasting and the loyalty of the customer. Do you know when
your customers need to reorder?
 Improve Lead Quality: Do you have methods in place to measure the

conversion potential of each lead? Lead generation activities (i.e. forms)
should pre-qualify every new lead so that you can take the right follow
up actions for the marketing offer. Strong leads produce strong sales.
 Increase Awareness: To keep the sales pipeline full of good quality

leads, you must continuously increase the awareness of your company
and the solutions that it provides. Public relations is more efficient at
building awareness than advertising, yet many companies spend wildly

on advertising and trade shows while neglecting to fund public relations

efforts much at all. Increase your name recognition, not your budget.
 Reduce Discounting: Discounts represent deficiencies in the sales

and marketing processes, which means that you should use them
sparingly. Instead, determine the root cause and then fix the process
that’s causing the need to discount. Show customers the added value,
and they won’t focus on price.
 Train Personnel: Provide your sales and marketing personnel regular

formal training. This will arm them with better product knowledge as well
as presentation, negotiating and selling skills that will improve
effectiveness. This will boost both employee morale and the bottom line
– a win-win.
1.4.3 Control of Sales and Marketing Policy and Procedures

Improve your sales cycle efficiency. Reduce your marketing expenses. Tie
it closer to your customer’s buying cycles. And take control of your sales
and marketing program to let it work for you.
Improvement with Well-defined Policies and Procedures:
With well-defined processes and procedures in place, you will increase
efficiency by reducing ineffective sales and marketing programs. And, again,
we make such improvements to create more cash on hand – all toward that
million dollar goal and to cross the finish line.
1. Discounts represent deficiencies in the sales and marketing processes.
2. Many marketing programs struggle to break even, and actually
frequently lose money.
3. Well-defined processes and procedures in place will increase efficiency
by reducing ineffective sales and marketing programs.

1.5 Formulating Personal Selling Strategy

A personal selling strategy works best for a complex, technical, unique,
customized product with a poorly informed client. Such products are so
complex and technical that you need a trained, informed person to explain
them to their highly specialized customers. It is likely to have to be
customized for each individual sale, and its client doesn't have the time to
read up on all the different ones on the market and why yours is better (and
is thus uninformed).
To address all of these unique needs, you have to design your personal
selling strategy to have three key elements: a knowledgeable salesperson
or sales team, an understanding of your client, and a sales structure
designed to give the salesperson enough power to make an irregular sale
but still get rewarded for it.
The Salesperson
The salesperson is the key to your personal sales strategy. So when you're
recruiting salespeople, you should be willing to recruit the best and expect to
pay them a premium. There are two routes you can follow: You can hire
someone with a good sales background and teach them about the science
(or product); or you can hire someone with a good scientific background and
teach them about sales. Usually, the choice you make will depend on how
complicated your product is and who your customers are. An electronic
imaging product is likely to be pretty technical, and your customer will likely
be a doctor or a scientist, so you'll want a scientist to be your salesperson,
both for credibility reasons and to give the customer what he is looking for. If
the person buying your product is a hospital administrator, you might think
about hiring someone with sales experience instead, because the
administrator will be used to buying from non-technical people and will likely
be more bottom-line oriented.

The salesperson is your only link to the client. This means that they need to
know the product inside and out, so that when the customer has a question
or an issue with the product, it can be addressed immediately and not
shuffled off to another staff person. They also need to know the competitors'
products, so they can give accurate representations of why your imaging
technology is better. So to allow the salesperson to do their job well, you
need to give them lots of information. You also need to give your sales force
considerable power. Power to make a deal. Power to say "yes" to needed
product customizations. And, of course, the power to say "no" to a deal that
won't make the company money.
Remember, also, that the salesperson is more than just a sales agent:
They're a research and development tool. Their interactions with customers
give you more information about what modifications need to be done to your
product than any other source. They're market intelligence (because they
know what other products are being sold, and why) as well as a way of
making your own product more customer-oriented.
The Client
Throughout the marketing section, we've used the phrase "Know your
client." It is just as important here as anywhere else. By understanding what
your client needs in a product, you can better give the salesperson the tools
they can use to fulfill that need. By understanding what a customer wants in
a salesperson, you can tune your sales team to be just that. Do they want a
half-hour presentation or just a 12-second pitch? A customized product they
help to design or a ready-to-use product, in their lab, tomorrow? Or maybe
the purchaser isn't the user at all: A hospital administrator makes the
purchase decision, and a doctor uses the machine. Understanding this will
help keep you from wasting salesperson’s time on selling the machine to the
doctor, who's not authorized to buy it anyway.

The Sales Structure

Remember: In a personal selling strategy, your salesperson is your best
friend. But, depending on the system you've set up for them, that person
can also be your worst enemy. Determining an appropriate incentive system
for a sales force can be the most difficult job you'll have as a business
person. The key is to keep your sales force motivated, without any
loopholes that they can use to take advantage of the system. For example:
By giving quarterly sales quota-based bonuses but also giving the
salesperson the authority to make big discounts, chances are, you're going
to get a lot of sales late in the quarter (as the salesperson desperately tries
to make their quota). But you'll also see a cost to those sales: Chances are,
they'll be discounted quite significantly, affecting your company's profits.
Determining a good incentive system for your sales force is very difficult and
depends very much on what you're trying to do and the product you're trying
to sell. You can reward the sales team based on short-term sales goals,
long-term sales, repeat sales, customer support, number of new prospects,
under-budgeted expense reports, or a whole lot of other things, but chances
are, you'll have to fine-tune this structure as your business evolves, to
emphasize what you want your sales force to do. Above all else, remember
that your sales force isn't stupid and that they spend about as much time
thinking about their paycheck as they do trying to sell your product, so the
incentive structure you design will determine the behavior of your customer.

1. In a personal selling strategy, _____________ is one’s best friend.
2. A ___________ works best for a complex, technical, unique, customized
product with a poorly informed client.
3. The salesperson is one’s only link to _______.

1.6 Summary
 The sales management is the process of selling and buying goods and
services to the public with proper techniques.
 Personal selling has a vital role in service, because of the large

number of service businesses which involve personal interaction
between the service provider and the customer.
 Selling of services include prospect identification, sales call planning,

preparation of presentations, handling objectives and closing a sale.
 Sales promotion includes any marketing activity designed to sell a
product or service. Sales promotions are not always co-ordinated well
with marketing objectives and other components of the
communications mix.
 A service organization’s image is made up of the collective
experiences, views, attitudes and beliefs held about it.
 Direct marketing is recognized as a low cost and effective method for
communicating with corporate customers due to increasing cost in
direct sales force.
 A personal selling strategy works best for a complex, technical,
unique, customized product with a poorly informed client.

1. What is sales management? Explain.
2. Explain how a personal selling strategy can be formulated?
3. What is ‘direct marketing’?
4. State the five objectives of promotion that are met through personal
selling.

SAQs I
1. False 2. True 3. False
SAQs II
1. True 2. True 3. True
SAQs III
1. Salesperson
2. Personal selling strategy
3. The client
Answers to TQs:
1. Refer to 1.2
2. Refer to 1.5
3. Refer to 1.2
4. Refer to 1.3

Unit 2 Organizing the Sales Department
Structure:
2.1 Introduction
Objectives
2.2 Essential Duties and Responsibilities of a Sales Executive
2.3 The Sales Organization
2.3.1 Nine Steps to Building a Winning Sales Organization
2.4 Sales Department Relations
2.5 Distributive Network Relations
2.6 Summary
2.1 Introduction
A sales executive requires the ability to successfully prospect for new sales
opportunities in the mid-market sector across various vertical markets.
Additionally, one must be competent in developing and executing a winning
sales strategy. This includes developing new prospect opportunities. The
successful candidate should be able to use consultative selling skills to
clearly understand customers’ business requirements. The steps to building
a winning sales organization have been described briefly in this unit.
Objectives:
 State the essential job duties and responsibilities of a sales executive.
 Explain the steps involved in building a winning sales organization.

2.2 Essential Duties and Responsibilities of a Sales Executive

 Conducts cold calls, prospects and qualifies account opportunities;
 Develops pipeline of new opportunities while closing existing
opportunities;
 Identifies and creates business needs with senior executive decision
makers;
 Creates and communicates the value of Kronos’ solution with prospects
and clients;
 Builds relationships at all levels within organizations;
 Develops a detailed territory plan;
 Develops individual account strategies to effectively penetrate accounts;
 Develops thorough understanding of each account's industry and
business;
 Acts as a resource for multiple industries;
Uses understanding of internal processes and resources to effectively

execute the sale.
Essential Knowledge, Skills and Abilities:

Communication:
 For all levels (executive, management, and operational),
 Able to clearly present information through the spoken or written word;
 Read and interpret complex information;
 Probe customers to uncover hidden information;
 Listen well.
Influence & Persuasion:

 Able to convince others in both positive or negative circumstances;
 Use tact when expressing ideas or opinions;
 Present new ideas to decision makers;

 Adapt presentations to suit a particular audience; respond to objections

successfully.
Initiative:
 Able to bring about great results from ordinary circumstances;
 Prepare for problems or opportunities in advance;
 Transform leads into productive business outcomes;
 Undertake additional responsibilities and respond to situations as they
arise without supervision.
Negotiating:
 Able to obtain agreement from multiple parties throughout all stages of
the sales cycle;
 Earn trust;
 Use good timing and carefully calculated strategies when bargaining;
 Communicate high value of services over the competition;
 Identify hidden agendas that might interfere with resolution of terms.
Planning, Prioritizing, and Goal Setting:

 Able to prepare for emerging customer needs;
 Manage and close existing deals while cultivating new opportunities;
 Determine project urgency in a meaningful and practical way;
 Use goals to guide actions and create and execute detailed action plans.
Reading the System/Political Advantage:

 Able to identify key people to bring about change;
 Understand underlying political dynamics;
 Develop a network of contacts and target specific influential people to
reach goals;
 Be aware of significant contributing factors to manage change.

Benefits:
Competitive compensation and full benefit package, including executive,
incentive trip for high achievers that possess the drive and ambition to
surpass yearly quotas.
Requirements:
Education and Experience:
 Bachelor’s degree or equivalent preferred.
 Experience with Power Base Selling Methodology or similar program
desired.
 5-7 years with proven experience selling software solutions at the
C level in the mid-market space.
 Experience of selling HR and Payroll application-oriented software or
systems strongly preferred.
 Consistently exceeded a $1 Million + quota.
2.3 The Sales Organization

2.3.1 Nine Steps to Build a Winning Sales Organization
Is your sales team performing far below potential?
Step 1: Do nothing
Do nothing. When you first arrive on the scene of a sales office in distress,
don't do anything. Take the time to understand your organization's situation,
gather information about the people involved, and….
Step 2: Analyze your problem(s)
Analyze your problems. The example you set for your people is not enough,
because many salespeople emulate the actions of their peers. Since many
salespeople play "follow the leader," you've got to ask yourself which
salespeople your less experienced salespeople look up to. And, what kind of
example are these "leaders" setting? You can get peak performance out of

average producers if you can get average producers to emulate the success
habits demonstrated by a leading salesperson.
Step 3: Find your success role model

In sports, when a player assumes more of a leadership role on a team, it's
called "stepping up." Hopefully, you already have a few players capable of
stepping up. If so, talk to them. Help them see the importance of their
success example, and ask them to share more of their knowledge and
experience with less experienced salespeople.
Step 4: Don't tolerate mediocre sales performance

You've got to decide – you won't tolerate mediocre sales performance. Far
too often, poorly performing salespeople are allowed to continue their
lackluster ways. A manager may not want to face the hassle of recruiting a
replacement, or the manager may want to avoid confrontation. This is a big
mistake. A successful sales manager doesn't tie the ship to a poor
performer's anchor. Instead, successful managers take a "hands-on" role
with more performers by providing the coaching and training the poor
performer needs to improve performance.
Your objective is to bring those that are lagging behind to "the intersection of
choice." i.e. poor performers must make a decision themselves to either
a) recommit themselves to perform the necessary behaviours and activities,
or b) leave the company immediately. There is a saying, "There's only one
thing worse than somebody who quits and leaves – and that's somebody
who quits and stays." The key question is this: if you knew then what you
know now, is there anybody on your team you would not have hired? If so,
get "hands-on" and escort that individual to his or her intersection of choice.

Step 5: Install performance standards

Install performance standards. You've got to communicate your
expectations. So raise the BAR on everybody with standards that consist of
Behavior, Activity and Results. A behavior standard, for example, could be
to arrive in the office every morning before 8 a.m. An activity standard could
be to make a minimum of 25 telephone prospecting calls every day. A result
standard could be that a sales rep with seven to nine months’ sales
experience must sell a minimum of $50,000 per month. On results
standards, set two standards. One, a lower "keep your job" standard.
Salespeople who fall below the minimum standard for a three-month period
are placed on probation. If sales don't pick up in the next quarter, that
person must be "desired." Another standard performance is of course, a
higher sales quota.
Step 6: Desire those below minimum standards

Desire those below minimum standards. Your salespeople will be
wondering, "Do you really mean it?" The first person you desire will send a
loud and clear message – performance standards will be enforced. If you
don't enforce them, your standards are meaningless.
Step 7: Coach, coach, and coach some more

Coach, coach, and coach some more. Don't be a "desk jockey". Get out and
work with your salespeople. If the only way to grow your people and your
business.
Step 8: Cultivate a better "quality of life"

Cultivate a better "Quality of Life." Have more fun.
Step 9: Know what each salesperson wants

Know what each salesperson wants. Every person has his or her own
personal motivators. Your job is to find out what they are and help the

salesperson toward achievement. Sit down with each salesperson one-on-

one. Try to learn something about each of them: what are their goals with
your company and beyond? What is their past like? How can you help them
be, having, and do more?
Sidebar:
The five biggest mistakes a sales manager can make
1. Too focused on closing deals instead of developing salespeople.
2. Focused salespeople on "more calls" instead of "better calls."
3. Spend too much time sequestered in their office, instead of working
and interacting with salespeople.
4. Assume that because someone has been trained, they know how to
sell.
No common "language" of selling for diagnosing opportunities.
2.4 Sales Department Relations

 Providing professional and personalized support to customers.
 Providing accurate and complete information such as quotations,
invoices and reports to customers and to the management.
 Creative and effective communication skills to establish presentation
opportunities.
 Creating, updating and maintaining our Customers’ Database System.
2.5 Distributive Network Relations-A case Study

For instance, in the health group company the Distributive Network
Relations are stated.

Description
United Health Group is an innovative leader in the health and well-being
industry, serving more than 55 million Americans. The industry has
outstanding clinical insight with consumer-friendly services and advanced
technology to help people achieve optimal health.
Secure Horizons is a division of Ovations, the segment within United Health

Group exclusively focused on health and well-being for individuals age 50+.
Secure Horizons provides a portfolio of health care products and services to
individuals eligible for Medicare. Secure Horizons is the largest and longest
tenured Medicare Advantage business in the United States, with 2006
membership of 1.4 million and revenues exceeding $14 Billion. Secure
Horizons is comprised of over 2500 employees located across the U.S. who
pledge to help every senior Live Secure & Be Secure.
This key position within Ovations is responsible for leading the

organization's Network Relations function. Ovations is a complex enterprise
serving nearly 1.5 million Medicare and Medicaid-eligible customers through
a variety of products, programs and services that depend on supportive and
high performing networks of healthcare providers. Working closely with the
Ovations Network Operations Group, and counterparts throughout United
Health Group, the Director of Network Relations and his team will:
• Direct Ovations Provider Relations activity, in conjunction with Provider
Customer Service areas.
• Collaborate with United Healthcare’s emerging Provider Experience
agenda.
• Co-ordinate Legacy Provider Relations/United Health Networks team
activity, including capitation and gain-share related support where
appropriate.
• Drive national Ovations provider engagement standards.

• Support Ovations’ annual event planning calendar with Provider-oriented

materials, information, and education.
• Ensure regulatory and contractual provider notification requirements are
met.
• Drive improved UHG service channel use and quality metrics.
The success of this role will be determined by a well-organized and

thoughtfully executed network relations engagement plan, data-driven
evidence of favorable provider response to interactions with Ovations
customers, and progressively streamlined and effective internal processes
dedicated to serving network providers in their transactions with Ovations
administrative and service capabilities.

1. Poor performers must make a decision themselves either to recommit
themselves to perform the necessary behaviours and activities, or to
leave the company immediately.
2. In sports, when a player assumes more of a leadership role on a team,
it's called "stepping up."
2.6 Summary
The sales executives play a major role in selling goods and services to the
consumers. They are the direct sellers of the products of the company to the
consumers. The network relations are very important to them. The sales
department has a larger role in retaining the sales volume of the products.
The steps to building a winning sales organization have been described
briefly in this unit.


1. Explain in detail the duties of sales executives.
2. The network relations are very important for a company. Explain.
3. Write a short note on sales department relations.
4. State the nine steps involved in building a winning sales organization.
SAQs I
1. True
2. True
Answers to TQs:
1. Refer to 2.2
2. Refer to 2.5
3. Refer to 2.4
4. Refer to 2.3

Unit 3 Sales Force Management
Structure:
3.1 Introduction
Objectives
3.2 Principles of Personal Management
3.3 Recruiting Sales Personnel
3.4 Selecting Sales Personnel
3.5 Sales Personnel Training Programs
3.6 Motivating Sales Personnel
3.7 Compensating Sales Personnel
3.8 Managing Sales Expenses
3.9 Sales Meeting and Sales Contests
3.9.1 Sales Contest Psychology
3.9.2 Ten Sales Psychology Factors
Self Assessment Questions IV
3.10 Summary
3.1 Introduction
Providing knowledgeable and responsive customer service is a priority of
every organisation. Hence selection and training of sales personnel towards
achievement of this goal gains a lot of importance in any organization. Time
management is an essential skill for personal management. The essence of
time management is to organize and execute around priorities. This unit

focuses on this aspect while dealing with recruitment, selection and training
of sales personnel, in detail.
Objectives:
 Explain the meaning of personal management.
 Explain how to recruit sales personnel.
 Explain various sales personnel training programs.
 State why sales personnel need to be motivated.
 Explain the need for sales meeting and sales contests.
3.2 Principles of Personal Management

Put First Things First
Habit 1 – I am the Programmer.

Habit 2 – Write the Program.
Habit 3 – Execute the Program.
Habit 3 is Personal Management, the exercise of independent will to create

a life congruent with your values, goals and mission. The fourth human
endowment, Independent Will, is the ability to make decisions and choices
and act upon them. Integrity is our ability to make and keep commitments to
ourselves. Management involves developing the specific application of the
ideas. We should lead from the right brain (creatively) and manage from the
left brain (analytically).
In order to subordinate the feelings, impulses and moods to your values,

you must have a burning "YES!" inside, making it possible to say "No" to
other things. The "Yes" is our purpose, passion, clear sense of direction and
value.

Personal Management
Time management is an essential skill for personal management. The
essence of time management is to organize and execute around priorities.
Methods of time management have developed in these stages: 1) notes
and checklists - recognizing multiple demands on our time; 2) calendars
and appointment books - scheduling events and activities; 3) prioritizing,
clarifying values - integrating our daily planning with goal setting (The
downside of this approach is increasing efficiency can reduce the
spontaneity and relationships of life.); 4) managing ourselves rather than
managing time - focusing in preserving and enhancing relationships and
accomplishing results, thus maintaining the P/PC balance (production
versus building production capacity).
A matrix can be made of the characteristics of activities, classifying them as

urgent or not urgent, important or not important. List the activities screaming
for action as "Urgent." List the activities contributing to your mission, value
or high priority goals as "Important."
Quadrant I activities are urgent and important - called problems or crises.

Focusing on Quadrant I results in it getting bigger and bigger until it
dominates you.
Quadrant III activities are urgent and not important, and often misclassified
as Quadrant I.
Quadrant IV is the escape Quadrant - activities that are not urgent and not
important.
Effective people stay out of Quadrants III and IV because they aren't
important. They shrink Quadrant I down to size by spending more time in
Quadrant II.

Quadrant II activities are important, but not urgent. Working on this

Quadrant is the heart of personal time management. These are PC
activities.
Quadrant II activities are high impact - activities that when done regularly
would make a tremendous difference in your life. (Including implementing
the Seven Habits.)
Initially, the time for Quadrant II activities must come from Quadrants III and
IV. Quadrant I can't be ignored, but should eventually shrink with attention to
Quadrant II.
1) Prioritize 2) Organize around Priorities 3) Discipline yourself
Self-discipline isn't enough. Without a principle center and a personal
mission statement, we don't have the necessary foundation to sustain our
efforts.
Covey has developed a Quadrant II organizer meeting six criteria:

1. Coherence – Integrates roles, goals, and priorities.
2. Balance – Keeps various roles before you so they're not neglected.
3. Quadrant II Focus – Weekly - the key is not to prioritize what's in your
schedule, but to schedule your priorities.
4. A People Dimension – Think of efficiency when dealing with things, but
effectiveness when dealing with people. The first person to consider in
terms of effectiveness is yourself. Schedules are subordinated to
people.
5. Flexibility – The organizer is your servant, not your master.
6. Portability
There are four key activities in Quadrant II organizing, focusing on what you
want to accomplish for the next 7 days: 1) Identify Roles 2) Select Goals –
two or three items to accomplish for each role for the next week, including

some of your longer term goals and personal mission statement

3) Scheduling/Delegating – including the freedom and flexibility to handle
unanticipated events and the ability to be spontaneous 4) Daily Adapting –
each day respond to unanticipated events, relationships and experiences in
a meaningful way.
Here are five advantages of this organizer: 1) It is principle-centered – it

enables you to see your time in the context of what's important and what's
effective. 2) It is conscience-directed – it enables you to organize your life
around your deepest values. 3) It defines your unique mission, including
values and long-term goals. 4) It helps you balance your life by identifying
roles. 5) It gives greater perspective through weekly organizing.
The practical thread is a primary focus on relationships and a secondary

focus on time, because people are more important than things.
The second critical skill for personal management is delegation. Effectively

delegating to others is perhaps the single most powerful high-leverage
activity there is. Delegation enables you to devote your energies to high
level activities in addition to enabling personal growth for individuals and
organizations. Using delegation enables the managers to leverage the
results of their efforts as compared to functioning as a "producer."
There are two types of delegation: Gofer Delegation and Supervision of

Efforts (Stewardship).
Using Gofer Delegation requires dictating not only what to do, but how to do
it. The supervisor then must function as a "boss," micromanaging the
progress of the "subordinate." The supervisor thus loses a lot of the
leveraging benefits of delegation because of the demands on his time for
follow up. An adversarial relationship may also develop between the
supervisors and subordinate.

More effective managers use Stewardship Delegation, which focuses on

results instead of methods. People are able to choose the method to
achieve the results. It takes more time up front, but has greater benefits.
Stewardship Delegation depends on trust, but it takes time and patience.

The people may need training and development to acquire the competence
to rise to the level of that trust.
Stewardship Delegation requires a clear, up-front mutual understanding of

and commitment to expectations in five areas:
1. Desired Results – Have the person see it, describe it, make a quality
statement of what the results will look like and by when they will be
accomplished.
2. Guidelines – Identify the parameters within which the individual should
operate, and what potential "failure paths" might be. Keep the
responsibility for results with the person delegated to.
3. Resources – Identify the resources available to accomplish the required
results.
4. Accountability – Set standards of performance to be used in evaluating
the results and specific times when reporting and evaluation will take
place.
5. Consequences – Specify what will happen as a result of the evaluation,
including psychic or financial rewards and penalties.
Using Stewardship Delegation, we are developing a goose (to produce

golden eggs) based on internal commitment. We must avoid Gofer
Delegation to get the golden egg or we kill the goose - the worker reverts to
the gofer's credo: "Just tell me what to do and I'll do it."
This approach is a new paradigm of delegation. The steward becomes his

own boss governed by his own conscience, including the commitment to
agreed upon desired results. It also releases his creative energies toward

doing whatever is necessary in harmony with correct principles to achieve

those desired results.
Immature people can handle fewer results and need more guidelines and
more accountability interviews. Mature people can handle more challenging
desired results with fewer guidelines and accountability interviews.
3.4 Selecting Sales Personnel

Store Operations & Human Resources
A retail jewellery sale normally requires face-to-face interaction between the
customer and the sales associate, during which the items being considered
for purchase are removed from the display cases and presented one at a
time with their respective qualities explained to the customer. Consumer
surveys indicate that a key factor in the retail purchase of jewellery is the
customer’s confidence in the sales associate.
Customer Satisfaction
A customer satisfaction index covering 12 criteria was introduced during
2005/06 in certain trial stores and was expanded to all stores during
2006/07. Each store is benchmarked against others in its district, region and
across the division based on customer feedback. The scores are reported
on a monthly basis, highlighting areas of good performance and those for
improvement.

Training
Providing knowledgeable and responsive customer service is a priority, and
is regarded by management as a key point of differentiation. It is believed
that highly trained store sales staff, with the necessary product knowledge to
communicate the quality, attributes and competitive value of the
merchandise, is critical to the success of the business. The development of
the customer satisfaction index has improved the division’s ability to design
and implement its training programmes by identifying areas of strength and
opportunity.
The US division’s substantial training and incentive programmes, for all

levels of store staff, are designed to play an important role in recruiting,
educating and retaining qualified store staff. The preferred practice is to
promote managers at all levels from within the business in order to maintain
continuity and familiarity with the division’s procedures.
Retail sales personnel are encouraged to become certified demonologists

by graduating from comprehensive demonologists by graduating from a
comprehensive correspondence course provided by the Diamond Council of
America. Over 50% of the division’s full time sales staff who have completed
their probationary period are certified demonologists or are training to
become certified. All store managers are required to be thus qualified. The
number of certified demonologists employed by the US division increased
by 9% in 2006/07. Employees often continue their professional development
through completion of further courses on gemstones.
Goals and Incentives

All store employees are set daily performance standards and commit to
goals. Sales contests and incentive programs also reward the achievement
of specific targets with travel or additional cash awards. In addition to sales-
based incentives, bonuses are paid to store managers based on store

contribution and to district managers based on the achievement of key

performance objectives. In 2006/07 approximately 23% (2005/06: 24%) of
store personnel remuneration was commission and incentive-based. US
head office bonuses are based on the performance of the division against
predetermined annual profit targets. Promotion and salary decisions for
principally non-management head office personnel are based on
performance against service level and production goals; for managers they
are based on annual objectives and performance against individual job
requirements.
Store Manager
Each store is led by a store manager who is responsible for various store
level operations including overall store sales and branch level variable
costs; certain personnel matters such as recruitment and training; and
customer service. Administrative matters, including purchasing,
merchandising, payroll, preparation of training materials, credit operations
and divisional operating procedures are consolidated at divisional level. This
allows the store manager to focus on those tasks that can be best executed
at a store level, while enabling the business to benefit from economies of
scale in administration and to help ensure consistency of execution across
all the stores.
Recruitment, Retention and Promotion

Although staff recruitment is primarily the responsibility of store and district
managers, a central recruitment function supplies field recruiters from its US
head office in Akron, Ohio. Methods such as internet recruitment are used to
provide stores with a larger number of better-qualified candidates from
which to select new staff.
Management believes that the retention and recruitment of highly-qualified

and well-trained staff in the US head office is essential to support the stores.

A comprehensive in-house curriculum supplements specific job training and

emphasizes the importance of the working partnership between stores and
the head office.
A key motivator for all staff, and in particular for store based employees, is
the division’s practice of internal promotion. All District Managers and Vice
Presidents of Regional Operations have been a Store Manager within the
division.
UK
Training
Management regards customer service as an essential element in the
success of its business. The Signet Jewellery Academy, a multi-year
programme and framework for training and measuring standards of
capability, is operated for all store staff. As part of this programme, 1,000
sales associates and 1,100 store managers and assistant store managers
(representing 81% of store management) have now passed the Jewellery
Education & Training Level 1 qualification accredited by the National
Association of Goldsmiths. Upon completion of each of the four levels, staff
are better able to deal with customer requirements. The programme was
enhanced during 2006/07 to improve basic product knowledge and jewellery
repair skills and further developments are planned for 2007/08.

ACE, an improved customer service and training programme was

introduced in 2006/07 and will be developed further in 2007/08. ACE is a
flexible programme consisting of six elements that better enable store staff
to meet the needs of customers.
In conjunction with the Signet Jewellery Academy, training in management

skills for all tiers of store operations management was developed further last
year to support the enhanced store associate training programme and to
build general management skills.
All store personnel have daily performance targets. They are given training
and weekly feedback on their performance from store and field management
to help them achieve these targets.
Recruitment and retention

Recruitment procedures, including online facilities, continue to improve the
suitability of new store personnel, helping to ensure that they meet key basic
requirements and are motivated to work within a jewellery store
environment. Field and human resources management are responsible for
the recruitment, review, training and development of sales staff, thereby
ensuring consistency in operating standards and procedures throughout the
business. All new store staff receive a structured induction programme that
covers all aspects of store operations, product knowledge and customer
service. A financial reward is received upon completion.
The division-wide commission-based remuneration programme was in

operation for the whole year in 2006/07 for the first time. The level of
commission paid is dependent on a combination of store and individual
performance. To continue to improve the recruitment and retention of top
quality staff, a three year programme to enhance the employee benefits
package was begun in 2006/07.

Promotion
The division’s preferred policy is to promote store management from within
the business; approximately 80% of store management appointed in
2006/07 was so promoted. Each chain always has a number of sales staff
who is qualified to advance to store management level, thus assuring the
availability of newly trained managers familiar with the division’s operating
standards and procedures.
Store support
In order to increase staff selling time and to improve efficiency, operating
procedures are routinely reviewed to identify opportunities to enhance
customer service and reduce in-store administrative tasks. The Signet
intranet provides a computer-based platform for improved communication
between stores and head office, with sales floor and back office
administrative functions being simplified and standardized through this
medium.
Opportunities for better store procedures and employment practices were

identified through a staff opinion survey. It is believed that the results
provide a basis for further improvement in the motivation and retention of
staff.
Head Office
Management believes that successful recruitment, training and retention of
head office staff are important. Accordingly, structured recruitment, training
and performance management systems are in place. Internal career
advancement is encouraged and is supported by succession planning.
Teamwork and service to the stores are encouraged through a performance
bonus plan for head office staff, which is based on the division’s results. In
the first quarter of 2006/07 part of the divisional head office function was

relocated in order to enhance efficiency. The implementation of a three year

programme to improve training in head office will commence in 2007/08.

1. Teamwork and service to the stores are encouraged through a
performance bonus plan.
2. Opportunities for better store procedures and employment practices are
identified through a staff opinion survey.
3. All store personnel have daily performance targets.
3.5 Sales Personnel Training Programs

System provides clients with extraordinary information about their
customers, competition, sales representatives, other front-line personnel
and sales managers. By "extraordinary information" we mean
information you can't get any other way, along with tools you need to use
it productively.
We bring together skills from a number of different disciplines and focus

them, single-mindedly, on the goal of improving your company's sales
performance.
System has helped companies to:

 Increase sales;
 Reduce turnover of personnel ;
 Expand more efficiently ;
 Develop people faster and with less down time;
 Reduce training and development costs;
 Generate a significant return on investment ;
 Improve selection of sales people and sales managers;

Client Testimonials
System’s clients are continuously growing and reaping the benefits of the
System® on Track® system:
"This System program is really helping and working for me by putting
my priorities in order. My New Year’s resolution was to focus on my team
and this personal development program is helping me fulfill this
commitment."
"I am more aware of things I need to work on.”

"This process has helped focus my own development activity.”
"The program has basically called my attention to the necessary detail
required to be successful as a leader of sales reps."
"I like the participant materials I received, particularly the Action
Planner and Resources booklets.” – Since our corporate personal
development plans are due soon this is going to help me greatly. It would be
good for the District Sales Managers to get profiled as well!”
Regional Pharmaceutical Sales Manager going through Systema®

onTrack
"After being profiled and getting my plan and goals set on Systema®
CoachLink, and working with my accountability coach I have seen
incredible results. I have met with 2 new satellite managed care centers to
take our product on formulary and I've been coaching my reps which has
increased their motivation to sell more product!"
Attendees at Systema Advanced Sales Management Workshop (part of
Systema® onTrack):
"Love the fact that all material is specific and definite and written down
for future reference."
"Great discussion because it leverages all the experience in the room."

"Excellent models illustrated."

3.6 Motivating Sales Personnel

Motivating Sales People to Sell, What makes a good sales person tick?
What combination of rewards and incentives will bring out their best
performance? What can companies effectively do to motivate their sales
people to sell, while avoiding the peaks and valleys that so often accompany
sales achievement?
Every sales organization asks these kinds of questions – and when

production levels are down, revisits these issues over and over again. We
re-examine what we're doing, and try to fine tune our "systems" to extract a
little more horsepower. By the time we're finished tweaking and tinkering,
we often end up right back where we began!
What's wrong with this picture?

To find out I spoke with some of Gallatin Valley Montanas' most progressive
companies, and asked them to share with us their formulae for success.
Some of their answers may surprise you.
But first, I looked within my own organization, and asked my client services
manager, Rich Powell, for some words of wisdom. Rich joined my staff in
April, after a successful career in sales and business management in the
highly competitive environments of Seattle and Honolulu.
While Rich isn't opposed to commissions and profit shares, he made an
important point. In the long run, professional sales people are far more
motivated by their "belief" in the work they do, than in any particular
combination of bonuses, commissions and other incentives. Ultimately,
sales people sell because they love to sell - and love what they sell. They
see themselves as part of a dynamic, upward process. They identify
strongly with their customer, and with the product or service they provide.
They believe in the importance of what they are doing, and see their jobs as
having value and purpose.

A now-retired sales consultant for a daily newspaper trips to mind. Fred was
a delight to work with – a real "pro". He instilled in his customers, the
confidence that he truly cared about their interests, and would go the extra
mile to serve their needs. No hype. No pressure. Just excellent service, built
around integrity and credibility. In my opinion, he was the consummate
professional sales person. And guess what? Fred earned no commissions;
we worked on a salary basis only. What motivated Fred was not "turning
that next deal" or adding more commissions to his monthly tally. He was
driven by his professional attitude, his love for his work, and an intense
desire to serve his customers well.
Commissions: The good, the bad, the ugly

This is not an argument against paying sales commissions, but it is an
acknowledgement that for most forms of sales, commissions are an option,
not a necessity. The bottom line: if the employee you hired is not a true
salesperson, no amount of commissions will make them into one.
Techniques can be trained, but basic personality factors are essentially
unalterable. These personality traits are the single strongest prediction
of one's likelihood of success in the field of sales.
What makes commissions and performance bonuses so tricky, are the

unintended consequences associated with poorly thought out policies. One
of the biggest pitfalls is the tendency of individual sales commissions to
create negative competition within a sales organization, leading to
resentment, secrecy and plummeting morale. These side effects are even
more pronounced when contests are added to the equation. Employers
want to foster teamwork and open communication. Instead, they may end
up with sales people who are disgruntled and de-motivated, fighting over
customers and devising subtle methods of cheating the system.

Some creative ways successful companies do it

Successful companies have found creative ways to harness the competitive,
incentive-driven nature of good sales people, with a minimum of negative
backfires. For Mary Brown, Director of Western Region Sales Operations for
Right Now Technologies, this includes ingenious approaches that reward
individual performance while building camaraderie and teamwork.
For example, the company will sometimes sponsor raffles for trips or special
merchandise. The more a sales person achieves, the more "chances" they
get in the raffle – yet everyone who produces has a shot at winning. Often,
Mary provides non-monetary incentives that are fun for employees and their
families. A video camera. A mountain bike. A week-end at Big Sky (a local
resort). Or she may provide extra days off if sales quotas are met - to be
used at the employee’s discretion. The point is, great companies like Right
now use innovation and creativity to stay ahead of the employee motivation
curve. By developing incentive programs that are exciting and unifying, the
company and the employees both win.
What can a small business do?

To the century-old Owen House Hardware (an institution in downtown
Bozeman, Montana, a different creative approach is taken. As manager
Larry Bowman explains, the key to retailing is to serve with excellence,
every customer who walks through the door – whether they are buying a
riding lawn mower or a package of thumb tacks. Commissions and bonuses
based on individual sales numbers tend to counteract the Owen House
philosophy, and prompt sales personnel to "push" large ticket items and
compete over customers.
Larry has tried a number of things over the years, but is convinced that for
his type of business, incentives should be provided to all personnel (both full
and part time), based on store-wide performance parameters. Currently, the

company is giving to each employee, credit toward in-store purchases

based on monthly improvement in average ticket sales. The credit is
computed daily, and entered on a calendar where everyone can see their
collective progress. As with most incentive programs, it's difficult to
objectively measure its success. Larry isn't sure how many employees are
knowingly motivated to boost average sales, but at the very least, the
program focuses everyone's attention on the worthy goal.
Another Approach
Alan "Fish" Fishburn, manager of the Mini-Nickel, has his own philosophy
about employee incentives. Fish strives to build a sense of family among his
staff, recognizing that "there's more to a job than a paycheck." Failure isn't
part of Fish's vocabulary, and when the office has a poor month, there's no
finger pointing or blame-taking. But in the good months, he likes to reward
the whole staff, by taking them and their families out to dinner, bowling on
Saturday night or some other enjoyable, bonding activity.
Individual rewards are certainly part of Fish's program, too. But very often
these bonuses are given spontaneously, when the person least expects it,
rather than being a routine and predictable thing. He also believes that sales
people respond better to targets that frequently change, rather than settling
in on a regular system of rewards and bonuses that become a standard part
of their pay.
Most importantly, Fish believes in the concept of mutual trust. He doesn't

sweat the little things or keep his sales force on a time clock. He's strictly
results-oriented, building maximum flexibility into his company policies -
from minding kids (and occasional pets) at the office, to cheerfully giving
time off when it's needed. In the end, it's not about money, says Fish
(although he pays significantly higher than most others in his industry). "If
you need to continually bribe a person to sell, you've probably hired the

wrong person. What motivates the true sales person the most is pride in
their work and the positive feedback they get from their customers. And
feeling empowered and valued by the company for which they work."
The last word on motivating sales people

Obviously, employee incentive programs are not a ‘one-size fits all’
proposition. As these successful companies demonstrate, different
approaches work best in differing situations. But the conclusion is that
"motivating sales people" is a contradiction in terms. Sales people - if they
ARE sales people – are already motivated. The challenge employers face is
channeling that motivation, and maintaining it at peak levels, week in and
week out.
Creative, well-conceived commission programs and bonus plans can

certainly help in this regard. But ultimately, the most important factor lies
within the heart and soul of your business itself. If a sales person identifies
with the culture and mission of your company, and feels a sense of
ownership in your company's future, then you will most likely have a loyal,
motivated employee whose consistent performance levels will help you
reach for the top.

1. Employee incentive programs are a ‘one-size fits all’ proposition.

2. If you need to continually bribe a person to sell, you've probably hired
the wrong person.
3. By "extraordinary information" we mean information one can't get any

other way.

3.7 Compensating Sales Personnel

Sales Compensation and the E-world
With more customers ordering goods and services from the Web, questions
are being raised regarding sales commissions, account ownership and
quota allocation.
Will sales compensation become an e-relic of the 20th century? With the
rise of e-commerce, the sales department looks slated for decommissioning.
Why employ a salesperson when customers can use a mouse to point and
click their way to purchases?
While the volume of business that is sold through the Internet will soar to
almost incomprehensible levels, the death of the sales department is a
premature assumption. Even dot.com companies are finding they need to
hire salespeople to help promote their products. In fact, one of the fastest
growing sales employment segments is advertising sales representatives for
Web-portal companies. These companies have learned that when choice is
available, uncertainty is present and risk is inherent, a salesperson can help
guide customer decision making. Thus, the two criteria for sales
compensation use are customer contact and customer persuasion.
Therefore, selling will continue into the 21st century, as well as the use of
sales compensation. However, employers need to be prepared for major
challenges to sales pay programs. Consider these issues:
 Should the salesperson receive sales credit and thus incentive payment
for orders put through the Web?
 Who owns the customer – the salesperson or the Webmaster?
 Should salespeople encourage their customers to use the Web to order
products?
 What sales compensation practices should be avoided in a Web-
enabled environment?

These questions currently are being debated within sales departments.

Compensation managers can expect to have some of these issues land on
their desks. What follows are key concepts and suggested perspectives to
assist the sales team in sorting through these issues.
The Mysterious World of Sales Management Subsystems:

As a pay program, sales compensation is connected to several – and
sometimes mysterious – sales management subsystems such as account
assignment, sales crediting and quota allocation. Evaluation of the sales
compensation program cannot proceed without concurrent examination of
these complimentary supporting systems. While most of us are very familiar
with the typical features of a sales compensation plan – target
compensation, mix, leverage and incentive formula – it is the operation of
these sub-systems that dramatically affects payouts. The rise of e-
commerce, generically known as a sales channel, will require significant
revisions to these subsystems. Make these changes correctly and the sales
compensation pay system will continue to operate successfully; make a
mistake and the pay plan will fail.
A Web Site Held Hostage:

Point and Click Meets Brick and Mortar
The president of a major furniture Should salespeople get sales credit for
retailer explained her predicament. Web sales for out-of-region sales?
“Look, I know the Web site can give What about sales from first-time
me access to new customers, but customers?
20 percent of my customers account
for 80 percent of my revenue. And, Should salespeople get full credit for
my in-store decorating sales these non-store new Web customers?
counselors own those relationships.”
She added: “If I don't give them How can the Web support itself, if it must
sales credit from Web sales, my bear the burden of commission credits
best sales producers will quit.” back to the sales counselors?

The president was adamant. She will These and many related questions need
not risk the ire of her best immediate attention. Ultimately, she will
salespeople. “Unless, I give the have to decide if the Web site is a sales
credit for sales over the Web, they counselor tool, or a separate sales
will complain that I am taking money channel. Perhaps she needs two separate
out of their pockets.” Yet, still Web locations: one for value-added
unresolved are the following services provided by sales counselors and
questions: a second Web site for unassisted
purchases.
Which salespeople get what Web
credit?
Start with the Role of the Salesperson

To investigate all of these issues, begin with a reconfirmation of the seller’s
role. Answer this question: What is the salesperson expected to do?
 Get new customers.
 Sell new products to existing customers.
 Keep existing customers happy with their on-going purchases.
 Provide customer support and order fulfillment help.
What about the salespeople? Are they expected to do one, some or all of
these activities? Sales compensation plan design is related directly to the
content of the sales job. For sales jobs with more individual initiative and
persuasion, more at-risk/high upside variable pay should be used.
Conversely, jobs that focus on more reactive duties such as customer
service and order fulfillment should have less variable pay.
A Simple Rule: Pay for the Point of Persuasion

In sales compensation design, the rule of thumb is “pay for the point of
persuasion.” In other words, pay a salesperson for the job of persuading the
customer to act. This is where sales compensation fits. Not following this
rule gets many sales compensation plans into trouble. Such sales
compensation plans have too many performance measures, incorrect
measures, or provide rewards or punishment for results outside the

influencing scope of the salesperson. Finally, many sales compensation

plans simply become obsolete over the passage of time. For example, in a
start-up company where the selling role is 100 percent persuasion, the pay
system features a high risk/high reward design. As time passes and the
sales rep develops a large embedded base of business, the pay program
needs to migrate to an account management model with a higher base
salary component. The mistake is to leave the high risk/high reward pay
plan in place – an all too common occurrence.
How will E-commerce affect the Sales Force?

The primary role of the salesperson is to persuade. If other resources such
as the Web site can handle re-orders, then a salesperson should not be
distracted by these duties. If a customer already knows what he or she
wants to buy (a standard product with little uncertainty), then there is no
need to involve and reward a salesperson. In such cases, it is appropriate
for the customer to order the product via the Web, without the involvement
and reward of a salesperson.
Now comes the challenge: How should account ownership, sales crediting
and quota allocation be handled?
Making Adjustments to the Sales Management Subsystems:

As noted above, the sales compensation program is more than just a payout
formula, it depends on the effective application of critical subsystems such
as account assignment, sales crediting and quota allocation. Note how sales
management must augment these subsystems under the following e-
commerce conditions:
 E-commerce is primarily for order fulfillment of products sold by
the salesperson. In such cases, the salesperson is acting as the
persuading influence; therefore, the account “belongs” to the
salesperson, and all sales placed through the e-commerce site are

credited to the salesperson for compensation purposes. Quota

objectives include all sales volume placed through the Web and
contribute to quota performance accomplishment.
 E-commerce is used primarily by buyers who do not need sales

advice. These accounts should not belong to the salesperson, nor
should such volume contribute to retiring quota and, of course, no
compensation credit is given for such sales.
 E-commerce is the primary sales link with the customer, but

customers must be convinced to “sign-up.” This is known as
“matriculation selling” and the compensation program needs to reward
sales representatives for getting customers to use the Web site. These
accounts belong to the company and the salesperson receives an
incentive for “signing up” a new customer. In such cases, management
defines the quota by the number of new accounts matriculated on the
Web. Additionally, a compensation value is often placed on the amount
of sales volume the new customer places through the Web. Larger
volumes mean higher payouts. However, this adjustment has a time
limit. Therefore, after this pre-defined period, no additional revenue is
credited to the salesperson thus encouraging him/her to find and
matriculate new customers – the salesperson’s primary role.
As with all sales compensation design issues, look for the point of
persuasion. Reward those efforts where the salesperson can successfully
affect customers’ buying decisions.
What to Avoid?
The following are noted sales compensation design errors. Be on the
lookout for the following two most common errors:
 Landlording: A common, but mistaken, philosophy that promotes the
view that the “salesperson owns everything in their territory” and should

receive sales credit for all sales in a territory whether or not they affect
the sale. Not true. Such a mistaken perspective creates high payouts
without corresponding effort or contribution. And, unfortunately, the
sales person spends excessive time auditing sales credit reports from
various sales channels. Now, the persuasion resource has become an
accountant! This is a very ineffective use of the sales personnel’s time.
 Appeasement pay: Many sales leaders believe that they must credit all
sales generated through the Web site to the salesperson to ensure their
co-operation. Known as “appeasement pay,” such a practice avoids the
inevitable. While some token reward system may be necessary to
provide initial positive support for the Web site, the double cost of such a
practice will prove prohibitive over time.
Finally, employers should be prepared to help the sales management
team make changes to these critical subsystems to ensure continued
effective use of the sales compensation plan.
3.8 Managing Sales Expenses

Forced to do more with less? Wondering if you've made the right trade-offs?
You're not alone. Many senior managers need to increase earnings with the
same sales resources. How should executives manage expenses and,
when necessary, justify increasing the sales expense in an uncertain
economy?
Surprisingly, Mercer's research suggests that few organizations routinely
use basic analytical tools to manage their sales force investment. All too
often, management and the board focus on revenue and the overall selling,
general, and administrative (SG&A) budget. Many organizations appear to
be forgoing the use of ratio analyses, such as revenue per FTE and cost of
sales compensation per dollar of revenue. The implication: organizations are
managing line item budget performance in a vacuum (and probably only in

the context of budgeting or re-forecasting) rather than managing sales

effectiveness in a holistic way.
Managing simply to line item variances ignores the impact that sales
resources have on delivering value to the organization. The consequence
could be double trouble: sales operations may not be structured to meet
customer needs in a dynamic market, while the competition – armed with
better information – may be effectively responding to the market and
outperforming you.
The Research
Last year, Mercer surveyed 160 sales organizations to understand how they
are making decisions during the most difficult economy in decades. Our
research focused on how organizations manage their sales talent, use
compensation and incentives to attract and retain sales talent, and evaluate
key sales force investments.
Our findings include:

 Many organizations use multiple, lower-cost sales channels to
support their sales effort. Across all respondents, 94% said they use a
direct sales channel. Use of secondary or tertiary sales channels is
evenly distributed across telephone, Internet, value-added
resellers/distributors, and third-party partnerships and alliances.
 Multiple approaches are taken to balance cost management with

motivation and retention of top talent. The most common tactic used
across industries is changing the pay mix. A current practice is for
companies to increase commission opportunities by freezing salaries
and lowering sales goals, thus ensuring that pay is tied to both
performance and the variable portion of the cost structure. In addition,
one quarter of the firms surveyed used discretionary or special bonuses
for top performers, to head off unwanted turnover.

 Sixty-eight percent of the participants reported they were not

having problems attracting sales talent and were more likely to resize
their sales organization, change their pay mix, or adjust sales goals than
to open their wallets. Conversely, the remaining 32% of participating
organizations that reported difficulties attracting talent said they tend to
more frequently use discretionary awards, put increased focus on
commissions, and offer more-than-expected special bonuses. (See
Exhibit 1.)
Exhibit 1
Actions taken to manage sales force investments by ability to attract
qualified sales talent
Companies not Companies having

having difficulty difficulty in
in attracting attracting qualified
qualified sales sales talent
talent
Reduced sales force 27% 16%

Change pay mix 25% 20%
Discretionary awards 24% 32%
Lowered sales goals 24% 12%
Increase focus on commissions 21% 26%
Offered more than expected SPIFFS 14% 28%

Reduced incentives 12% 10%
Stock in lieu of cash 8% 6%
Other 4% 8%
Reduce focus on commissions 1% 6%

 Most organizations proactively manage under-performance of sales

professionals. Surprisingly, 80% of participants said they target specific
levels of involuntary turnover. The recession has made it imperative to
jettison poor performers quickly. This contrasts with conventional
wisdom that sales managers do not regularly weed out low performers –
choosing to carry these resources rather than make tough decisions.
 A startling 76% of participants do not manage to a cost-of-compensation

ratio, which is the total cash compensation divided by total revenue. The
only common users of these ratios are the high technology (40%) and
telecommunication (54%) sectors. Organizations not managing to this
ratio say they manage sales compensation expense as part of their
overall SG&A budget. (See Exhibit 2.)
Exhibit 2
If not managing to a targeted ratio, how are sales compensation
expenses managed in a down market?
Compensation expense is budgeted for and managed to accrued

47%
dollar amount
Overall SG&A is key ratio by which to manage expenses 19%
Do not closely manage sales compensation expense centrally 18%
Manage compensation expense by managing the FTEs in sales force 12%
Other 4%
The cost-of-compensation ratio allows management to talk a common

language in managing the business. For example, if sales management
wants to enter a new market, the response from leadership is often "it's not
in the budget." Using this ratio, the answer could be "let's enter the market,
but make sure we keep our cost of compensation in line." This means that
sales management will have to balance the headcount targeting this new
market and the level of compensation offered relative to the revenue

expected, as the business ramps up over a defined period of time.
In sum, companies are using multiple sales channels and a variety of tools
to manage the sales function during this difficult economy. Although our
survey respondents are using pay mechanics strategically, they continue to
view the cost of the sales effort one-dimensionally, which can hinder their
management capability. Therefore, when faced with a question of whether
to enter, expand, or exit a market, senior managers have inadequate data
with which to make decisions such as whether the projected sales force
investment is sufficient to achieve the go-to-market strategy.
Using key sales force ratios to manage the business

In our experience, companies that don't manage their sales force by using
several well-understood ratios (such as cost of compensation) run the risk of
over- or under-investing in this highly dynamic market. Today, a company
needs the following four indicators considered together, managed centrally,
monitored frequently, and reinforced consistently – to decide how the sales
force should be positioned, day in and day out, in the competitive market.
 Revenue per full-time equivalent (FTE): Sales or revenue dollars
divided by number of sales professionals across all sales roles. This
simple, straightforward ratio enables companies to determine the
average productivity of individual sales contributors.
 Compensation cost as a percentage of revenue: Total cash
compensation cost divided by total revenue per incumbent, per sales
team, per business unit, per channel, and globally.
 Turnover percentage: Number of FTE terminations divided by total
number of FTE at the beginning of the performance period. While not all
organizations regularly track this ratio, our research suggests that most
organizations actively manage and eliminate low performers. Effective

management of overall turnover means that companies are minimizing

turnover costs, minimizing the risk of customer turnover, and dealing
with poor performance.
 Operating profit percentage: Gross margin less selling expense

divided by total revenue. This percentage, and its improvement,
measures the raw financial contribution of the sales effort. In effect, how
well the other three indicators are managed drives operating profit.
Implementing sales force ratios

What prevents more companies from using these ratios? Our research
indicates the following:
 Habit: Companies are used to – and comfortable with – generating

sales and managing to budget rather than measuring operational
excellence relative to the competition.
 Organizational barriers: Resources and systems may not be in place

to track and analyze the key data elements.
 Calibration: Companies struggle with setting goals with appropriate

difficulty levels in the absence of competitor data.
Overcoming these barriers must start with a consensus that managing the
sales investment effectively requires monitoring relative internal and
external performance metrics. This may require educating not just the sales
team, but critical members of management as well.
An important next step is to form a partnership between the sales and

finance functions to validate the benchmarks that will drive the sales
management process. Frequently, IT must also be involved to identify how
the four internal indicators can be tracked to provide timely and accurate
data. A custom survey or industry association forum may be necessary to
secure relevant external data for relative performance measurement.

In addition to building a support infrastructure, a big challenge is to make the

metrics part of the organization's culture. Two critical aspects to achieving
that goal are to understand all the components of an effective sales force –
the sales strategy, sales management processes, and the infrastructure to
motivate and enable the sales effort – and work toward their
implementation.

1. Resources and systems should be in place to track and analyze the key
data elements.
2. Companies struggle with setting goals with appropriate difficulty levels in
the absence of competitor data.
3. The most common tactic used across industries is changing the pay mix.
3.9 Sales Meeting and Sales Contests

Most companies offer their employees competitive salaries and benefits. In
return, the vast majorities of these employees work hard and make a
concerted effort to do a good job to justify their compensation package. But
in this highly competitive world, a good job doesn’t necessarily do it
anymore, especially when industry leaders are using every means available
to motivate an extra level of performance from their sales reps.
Managers are commonly using incentives as part of their company’s

marketing mix to help accomplish a wide variety of business objectives.
They have found that these programs are more likely to accomplish the
objectives set for them when reps are motivated by positive, immediate and
certain consequences. They have found that these programs – when
properly designed and executed - pay dividends in added sales and profits
and happier employees.

According to Incentive Magazine, approximately two-thirds of American

companies are currently using sales incentives. The key reasons that these
contests are used are to boost sales, increase morale in the sales force,
and/or meet another outstanding business need.
We will discuss the answer to why sales incentives are important, what
makes a contest successful, and what the psychology behind a sales
contest is. Additionally, we will look at three sales channels to determine
their similarities and differences on this topic. These channels include:
Inside Sales, Field Sales, and Partner Sales.
3.9.1 Sales Contest Psychology

In this section, we will focus on the answer to 2 very specific questions:
1. What makes sales incentive programs work?
2. How do incentive programs differ between the following sales channels?
a. Inside sales
b. Field sales
c. Channel sales
What Makes Sales Incentive Programs Work?

Maslow’s Hierarchy of Needs:
Maslow theorized that every human being has a specific set of needs, and
each level of need must be realized before the next level of need is felt. In
other words an individual must have food, clothing and shelter prior to
feeling a need to have economic and physical security, and so on. Maslow
outlined five levels of human needs:
Thefirst two levels satisfy basic and monetary needs:

• Physical comfort is our number one priority – food, shelter and clothing.
• The need for security is second. One must feel safe in both physical and
economic security.

• Thenext three levels deal with our psychic income need – our need to
learn and grow as individuals, and the development of our self-esteem.
• The third level is Social Acceptance. As a member of a group, we have
specific roles and responsibilities. We look for recognition from these
groups.
• Next comes the need for Personal Esteem. This level is a function of our
achievements. Awards, job title and importance, and accomplishments
are all examples of our personal growth.
• At the very top of our needs is Self-Realization. This is the total
fulfillment of our potential. If we are always changing and learning,
theoretically we will never reach Self-Realization. BUT, we continue to
aspire to greater levels of success and personal satisfaction.
How it relates:
In a sales environment, the first two levels or monetary needs must be
realized by existing compensation prior to considering a sales incentive
program. Once monetary needs are realized, the next levels, or psychic
income needs, can be realized with sales incentives.
Additionally, cash as an incentive can be confusing because it can be used

to fulfill one’s monetary needs. An incentive program should offer unique
prizes that are appealing to the individual. These prizes will act as physical
manifestations of success, and contribute toward the psychic income needs
of social acceptance, personal esteem and self-realization.
The Behavioural Model

Behaviour can be dramatically impacted by positive reinforcement. Incentive
programs are based upon the idea of giving positive results for positive
behaviour that helps an organization to reach its goals. The rationale for
conducting an incentive program is grounded in B.F. Skinner’s Behavioural
Model.

Antecedents communicate what you want participants to do.

Make sure you define objectives clearly. Promote rules and awards.
Createexcitement at program launch. Provide ongoing communications.
Behaviour is what people do in a given situation.
Consequences are the reinforcement of behavior and what determines

whether it will be repeated. Provide a wide range of positive consequences
and recognition by management and peers.Rewards that have value,
choice and are easy to administer and right feedback encourage continuous
improved performance. Provide ongoing measurement and
feedback.Distributeconsistent and timely progress reports.
How it relates:
In order to change behaviour, sales reps must have a clear understanding
of their objectives (antecedents) and the payoff (consequences). Sales
incentive programs create a situation in which a short-term goal
(antecedent) and its payoff (consequence) are defined. The behaviour will
create success if the payoff is in line with the participant’s current needs
and/or wants.
Constant communication is essential for the success of a program. Provide

feedback so that participants know where they stand in relation to the goal.
Positive consequences can influence corporate goals.
The Bell Curve

The bell curve is a graphic depiction of the normal distribution of employee
performance in an organization. The majority of employees areaverage
performers. At either end are the top and bottom performers. Top
performers (10%) will always be at the top. They have theskills and are
self-motivated to consistently perform at a higher level.

The lower-end performers (10%) will always be at the bottom. Thereis little
anyone can do to move these people to perform at a higher level.
How it relates:
The objective on an incentive program will have the greatest impact if the
focus is on the middle 80%. This will move the bell curve driving more
individuals toward greater performance.
3.9.2 Ten Sales Psychology Factors

There are ten primary psychological factors that influence the thinking and
the performance of salespeople (Meredith & Fried). These factors are:
1. Personal Gain: Desire for personal gain is the sales professional’s
stereotype. This is what drives the sales rep to work for his/her
commission as well as any incentives. While compensation allows the
rep to chase possessions, incentives are not quite as simple. They are,
however, much more powerful.
2. Family Influence: Maritz Co. claimed that 85% of prize points

redeemed from their catalog are for home and family items, rather than
personal items. The family influence is multi-tiered. On one level, the
family expects a certain level of income to maintain its lifestyle. This is
realized through the salary and commissions. On another level, the
family gets to take advantage of the incentive itself. Finally, the family
and/or spouse can be considered highly effective “assistant sales
managers” in many incentive programs – for example, travel programs.
In an ideal world, the spouse should be invited to kick off programs,
included in mailings of catalogs, brochures and other collateral, and
invited to the final awards presentation, or on the trip. They should be
made aware of the incentive objectives, and the expectation of their
spouse.

3. Desire for Recognition: Need for recognition is a strong driving force in

most sales professionals’ psyches. A sales rep can win a contest, but if
his/her peers do not recognize it, it loses much of its motivational
oomph. A manager can never send praise too loudly or too often.
4. Pride: A good sales contest can create a strong sense of pride in one’s
work. As that is the case, if the sales rep is proud of the work s/he is
doing, it will affect his/her ability to work more effectively. Additionally,
when the rep is sitting in front of a customer, this pride is more likely
(than perhaps in any other profession) to attribute to the success of
winning the deal. Hence, the residual affect of the contest in this context
is more sales, even after the contest is over.
5. Stimulation of Imagination: Sales is a routine job. An incentive

program can help the sales rep to stimulate his/her imagination to find
new ways of doing his/her job. The residual affect of this is the possibility
to uncover new sales opportunities that may not have been noticed
before, or finding a new way to approach a prospect that makes them
stand up and take notice when other attempts have previously failed.
6. Need to be Desired: Sometimes in the day-to-day sales grind, the sales

rep can feel like a cog in a wheel. The incentive program gives
management the opportunity to direct the sales force’s attention to the
importance they play in the organization, and show appreciation for the
part they play.
7. Fear: Both fear and competition bring out the hardest work in
individuals. According to Meredith and Fried, “fear is the companion of a
surprising number of sales professionals.” A successful incentive
program can help to allay a rep’s fear by showing him/her the road to
success, and driving him/her to get there.

8. Competitive Instinct: Competition is also a driving force for most sales

professionals. A successful sales contest can drive friendly competition
between reps and/or sales offices, as well as create a need to
outperform one’s personal best.
9. Boredom Avoidance: Similar to the pride factor, a good sales incentive

program can add excitement to the job. This change of pace can drive
energy into the sales rep, and sales force, and can create a spark in the
way the sales rep handles his/her job.
10. Conscience: Contrary to the bad rap that sales carry, most sales
professionals have a very high sense of conscience. If a sales rep is not
doing well, not only does it play on their self-confidence, but also makes
them feel guilty. Many times, they feel as though they are letting their
manager down. A good incentive program can help to lift them back up
again, creating an upward trend in their sales numbers and in their self-
confidence as well.
Incentives for Different Sales Channels

When examining sales channels in relationship to incentive contests, there
are many similarities and also many differences. More specifically, the type
of sale may be an even greater determining factor than the channel itself. A
high end product can be sold over the phone, and have a longer sales cycle
than some products sold in the field. For example, life insurance can be sold
over the phone, and require several calls before someone buys a policy. On
the other hand, food products are usually sold to the restaurant market in a
one call close. In this case, the field rep would have similar expectations for
incentives as a “typical” call center agent, and the insurance agent selling by
phone, may have expectations more in line with a field sales rep. This
example illustrates the point that regardless of the sales channel, a major
issue is to know your audience prior to developing an incentive program.

The following paragraphs will outline the similarities and differences

between sales channels.
Self Assessment Questions IV
1. _________ theorized that every human being has a specific set of

needs, and each level of need must be realized before the next level of
need is felt.
2. The rationale for conducting an incentive program is grounded in B.F.
Skinner’s __________ Model.
3. Rewards that have value, choice and are easy to administer and right
___________ encourage continuous improved performance.
4. The __________ is a graphic depiction of the normal distribution of
employee performance in an organization.
3.10 Summary
The recruitment procedures in a company are very crucial when it comes to
the matter of selecting the required staff. The personnel department takes
care of selecting employees. The sales personnel training program is
something which is an integral part of sales department. Sales is a routine
job. An incentive program can help the sales rep to stimulate his/her
imagination to find new ways of doing his/her job. A successful incentive
program can help to allay a rep’s fear by showing him/her the road to
success, and driving him/her to get there.

1. What are the recruitment procedures? Explain.
2. Write a short note on Personal Management.
3. Explain sales personnel training programs.

4. How will a company manage sales expenses?

5. Write a short note on sales meeting and sales contests.
6. Explain the psychological factors that influence the thinking and the
performance of salespeople.
SAQs I
SAQs II
1. False 2. True 3. True
SAQs III
1. False 2. True 3. True
SAQs IV
1. Maslow
2. Behavioural
3. Feedback
4. Bell curve
Answers to TQs:
1. Refer to 3.3
2. Refer to 3.2
3. Refer to 3.5
4. Refer to 3.8
5. Refer to 3.9
6. Refer to 3.9

Unit 4 Directing and Controlling Sales Efforts
Structure:
4.1 Introduction
Objectives
4.2 What is a Sales Budget?
4.3 The Quotas
4.4 Sales Territories
4.5 Sales Control and Cost Analysis
4.6 Summary
4.1 Introduction
Preparation of a sales budget is the starting point in budgeting since sales
volume influences nearly all other aspects. A sales budget is an operating
plan for a period expressed in terms of sales volume and selling prices for
each class of product or service.
A sales budget is a plan expressed in quantitative, usually monetary term,

covering a specific period of time, usually one year. In other words a budget
is a systematic plan for the utilization of manpower and material resources.
Budgetary control is an important device for making the organization more

efficient on all fronts. It is an important tool for controlling costs and
achieving the overall objectives.
This unit deals with sales budget, sales territories, sales control and cost
analysis.

Objectives:
 Explain ‘sales budget’.
 State the advantages of a sales budget.
 Explain ‘sales territories’.
 Describe how to select the Quotas.
 Explain sales control and cost analysis
4.2 What is a Sales Budget?

In a business organization, a budget represents an estimate of future costs
and revenues. Budgets may be divided into two basic classes: Capital
Budgets and Operating Budgets.
Capital budgets are directed towards proposed expenditures for new

projects and often require special financing. The operating budgets are
directed towards achieving short-term operational goals of the organization,
for instance, production or profit goals in a business firm. Operating budgets
may be sub-divided into various departmental or functional budgets.
The main characteristics of a budget are:

1. It is prepared in advance and is derived from the long-term strategy of
the organization.
2. It relates to future period for which objectives or goals have already
been laid down.
It is expressed in quantitative form, physical or monetary units, or both.
Different types of budgets are prepared for different purposes e.g. Sales
Budget, Production Budget, Administrative Expense Budget, Raw Material
Budget etc. All these sectional budgets are afterwards integrated into a
master budget, which represents an overall plan of the organization.

Advantages of Budgets:
A budget helps us in the following ways:
1. It brings about efficiency and improvement in the working of the
organization.
2. It is a way of communicating the plans to various units of the
organization. By establishing the divisional, departmental, sectional
budgets, exact responsibilities are assigned. It, thus, minimizes the
possibilities of buck-passing if the budget figures are not met.
3. It is a way or motivating managers to achieve the goals set for the units.
4. It serves as a benchmark for controlling on-going operations.
5. It helps in developing a team spirit where participation in budgeting is
encouraged.
6. It helps in reducing wastage and losses by revealing them in time for
corrective action.
7. It serves as a basis for evaluating the performance of managers.
8. It serves as a means of educating the managers.
Budgetary Control
No system of planning can be successful without having an effective and
efficient system of control. Budgeting is closely connected with control. The
exercise of control in the organization with the help of budgets is known as
budgetary control. The process of budgetary control includes:
1. Preparation of various budgets.
2. Continuous comparison of actual performance with budgetary
performance.
3. Revision of budgets in the light of changed circumstances.
A system of budgetary control should not become rigid. There should be

enough scope of flexibility to provide for individual initiative and drive.

Making a forecast
Consideration of alternative combination of forecasts:
Alternative combinations of forecasts are considered with a view to contain
the most efficient overall plan so as to maximize profits. When the optimum -
profit combination of forecasts is selected, the forecasts should be regarded
as being finalized.
4.3 The Quotas

From the perspective of the sales manager, the subject of sales quotas
raises many potential questions and issues. Are they fair and equitable? Do
they drive the desired sales behavior? Are they a strategic tool that can be
utilized to achieve maximum business results? What types of data should be
considered when setting them? Are they too high or too low? Does their
attainment provide for the proper ratio of revenue to sales expense? Your
success as a sales manager, among the many other responsibilities
inherent in the position, may clearly be dependent on how well you address
these important issues.
The process of establishing normal and reasonable sales quotas can vary
greatly as a function of the business, industry, type and size of the sales
organization and product and/or service being sold. However, there can
often be a great deal of commonality in your approach to this important
sales-generating tool. Let us examine some of the more basic criteria that
you may want to consider in order to ensure the effective establishment of
sales quotas:
 Corporate revenue goals
 Historical revenue performance
 Current sales coverage model
 Planned increases in sales headcount
 Introduction of new products and services

 Current market share

 Stretch targets
Now let us explore each one of these important areas in detail.
Corporate Revenue Goals: This seems to be the likely starting point for the
establishment of sales quotas. Most often, the sum total or "roll-up" of your
individual sales team member's quotas will either meet or exceed the
corporate revenue goals for any given fiscal period. It is quite possible that
under certain exceptional situations they may not. However, for our
purposes let's assume that they will be on par.
One of the challenges that you will face in this process is the fair and
equitable distribution of the overall corporate revenue goals, including any
year-over-year increases. Over- or under-weighting any individual sales
quota could produce undesirable consequences such as sales attrition,
underutilization of resources and income disparity. Therefore, as you begin
planning your sales quotas, it is important to have a clear understanding of
your company's revenue goals and the extent to which they will affect this
process. A member of your executive team can provide you with all of the
necessary data.
Historical Revenue Performance: The historical performance of your

individual sales team members versus quota, and the respective "roll-up" is
also an important consideration to make when establishing sales goals.
There will likely be a number of factors that can cause disparity including,
but not limited to their territory configuration, sales experience, job tenure,
competition and others.
A close scrutiny of historical revenue performance data on individual sales

territories will be a valuable tool for you to utilize. Not only does it afford you
the opportunity to forecast future revenue trends, but it will also support the

proposed methodology that you establish for the distribution of increases or

decreases in individual and team quotas.
Current Sales Coverage Model: As it relates to the quota setting process,

it is important to review and understand your current coverage model on an
individual sales territory basis, i.e., number of territories, geographic size
and scope, historical revenue performance trends, business potential,
competitive presence, tenure and experience of the sales rep, etc. These
and other factors that may be unique to your business and industry will
impact how you establish sales quotas. Due to these types of factors, it is
often more desirable to create equitable quotas than equal ones.
For example, it may not be realistic to expect a larger territory with greater
business potential to produce revenue at the same levels and run rates as a
smaller one with less potential. Likewise, a sales rep with less tenure and
experience may not produce the same or better results than one who has
been with your company for a number of years. Also, the logistics
associated with managing a large, multi-state sales territory as compared to
one that is principally in a large metropolitan, heavily populated area will
impact both sales effectiveness and quota performance. Creating the proper
balance between individual sales territories and their respective quotas by
keeping these factors in mind will certainly be a key component of your
success with this process.
4.4 Sales Territories

Race horses project a rare combination of power and grace. The most
valuable ones have agility and speed-they're the runners that win the
trophies. Good sales representatives are like winning horses-they're in short
supply, and the ones who know the systems integration industry are rarer.
They have a rare ability to accept and absorb rejection without taking it

personally. They have an uncommon gift for communication, knowing what

to say and when to say it.
Outstanding salespeople differ in at least one way from winning horses-

winning salespeople choose their employers. To attract salespeople, you
have to create the right environment, a company that meets their needs and
allows them to prosper. If you fail to provide the right working environment,
they will leave for the greener pastures of another firm, maybe even a
competitor. Although compensation is important, there is more to maintain a
winning sales team than providing the opportunity to make a good living.
The most important step to building the right stable and the best sales talent
is to create concrete territories. Company owners succumb to a number of
myths regarding territories, including, the belief that territories make
salespeople inefficient and lazy; if we keep our network wide open,
everybody will be motivated to pursue every prospect.
There are several problems with this myth, including loss of accountability (if
an account is lost, no one is held responsible). Also, non-co-operation
among sales reps is a possible result. There was a one-year period in my
former company where we had two groups of sales reps calling on the same
target market. The animosity created between the warring groups of
salespeople was counter-productive. Some staff actually locked their desk
drawers, the result of paranoia that other reps would steal their leads.
Defining territories facilitates co-operation and creates a collaborative
environment that improves productivity and enhances sales. Lastly,
animosity among prospects may occur. Without territories, all of your reps
will call on the same most promising prospects, creating distrust and
animosity among potential clients.
Another misconception involves the belief that if a sales rep has an

outstanding month, and then assigns new prospects and hot leads to those

who fell behind in their quotas, a process often referred to as planned

earnings. If one of your racehorses wins too many races, you'll limit his
opportunity to win in the future and put your money behind a horse that isn't
doing well.
Another myth involves the mentality that a business is too small for
territories, and a market is so big that sales reps will never cross paths. This
line of reasoning assumes a firm will never grow.
Territories are important. They provide accountability, promote

entrepreneurial spirit and reduce turnover. Competition eats away at your
accounts, and internal competition creates a hostile corporate environment.
If you are trying to establish territories for the first time, you will experience
two conflicting issues-the ease of administration of territories and the
difficulty of making the change. Whether you are creating territories
geographically or by industry SIC code, the successful establishment of
territories follows several rules. Each territory must contain enough business
prospects to allow a sales rep to earn a good living. Moreover, in any
territory plan, the overriding rule to protect a rep's secured area is to make
them responsible for any development within their defined territory.
What do you do when a rep from another territory has an existing

relationship with a decision maker or architect associated with a project in
another rep's assigned territory? Maintain your territory plan, and suggest
that the two reps work together on projects, splitting or sharing the
commission. It's not a management mandate, but merely a suggestion. Most
reps will prefer this route because they'll know that working with each other
(and splitting commissions) is a two-way street. This informal policy builds
co-operation among the reps and maintains the objectives of your territory
plan-to assign responsibility and accountability.

In developing a territory plan, the primary goal is to maximize sales and

push accountability down to the sales rep's level. For many companies,
using geography is the easiest way to implement a successful plan. The
ideal geography-based plan should comply with a couple of conditions. The
geographical area should be contiguous to make it easier for the rep to
cover, translating into less travel time and more time with prospects and
clients. If possible, reps should live in their assigned territories. Although not
an absolute requirement, it makes sense. The more familiar they are with
their territory, the better they will know it and the better the results. A
territory plan based upon a specific industry is implemented when the
requirements of an industry are so specialized that it makes sense to have
one rep assigned to the niche on a full-time basis. An example is the federal
government, which has unique purchasing needs and requires specialized
sales skills.
A company with multiple sites may be assigned as a territory to a specific

sales rep. This makes sense when the account has multiple sites; decisions
are centralized, and the client is willing to enter a buying agreement for
future purchases.
Outside of the sales compensation plan, the creation of secured territories
(islands of responsibility, accountability and ownership) is the most
important step to attract (and keep) the best sales talent. Territories are a
first step; there are other sales management methods that need to be
applied to create an efficient, highly-desirable sales environment. These will
be discussed in a future issue of S&VC.
4.5 Sales Control and Cost Analysis

The cost cutting techniques are not limited to the very large operations in
their usefulness, and furthermore, that in some cases, simple procedures
can rapidly be put in place without expensive investment.

In addition to identifying and evaluating cost reduction possibilities, we can

help with:
 Cost benefit analysis;
 Overhead analysis;
 Product line and distribution channel cost analysis;
 Marketing and sales costs analysis;
 Direct costs analysis, & appropriate allocation of overhead;
 Make-vs.-buy analysis, lease-vs.buy analysis, & out-source analysis;
 Materials and procurement costs & supplier negotiations;
 Labor cost and efficiency analysis;
 Equipment acquisitions;
 Shipping, telecommunications, & travel costs;
 On-going cost control, budgeting, and forecasting;
 Key information identification and collection;
 Physical inventory; and,
 Trends, projections, benchmarks, & goal-setting.

1. No system of planning can be successful without having an effective and
efficient system of control.
2. Budgeting is closely connected with control.
3. A budget relates to bygone period for which objectives or goals had not
been laid down.
4. Capital budgets are directed towards proposed expenditures for new
projects.
5. The most important step to building the right, stable and the best sales
talent is to create concrete territories.

4.6 Summary
The sales budget of a company provides a platform for keeping the exact
budget for selling the products. A sales budget is a plan expressed in
quantitative, usually monetary term, covering a specific period of time,
usually one year. The sales quota of the company keeps the actual quantity
of the products. Territories are important. They provide accountability,
promote entrepreneurial spirit and reduce turnover. The most important step
to building the right stable and the best sales talent is to create concrete
territories. In developing a territory plan, the primary goal is to maximize
sales and push accountability down to the sales rep's level.

1. What is a sales budget?
2. What are the sales quotas?
3. How are the sales territories created?
4. Explain sales control and cost analysis.

SAQs I
1. True
2. True
3. False
4. True
5. True
Answers to TQs:
1. Refer to 4.2
2. Refer to 4.3
3. Refer to 4.4
4. Refer to 4.5

Unit 5 Logistics of Distribution
Structure:
5.1 Introduction
Objectives
5.2 Communication and Logistics
5.3 Functions of Logistics Management
5.4 Customer Services, Data Mining/Data Warehousing
5.5 Elements of Logistics
5.6 Application of Technology in Logistics and Channel Information
Systems
5.7 The Process of Logistics
5.8 Strategic Management in Logistics
5.9 Domestic and Global Challenges before Logistics
5.10 Summary
5.1 Introduction
The advantages of having a proper logistics management system in place
were so immense that commercial organizations immediately jumped at the
vast possibilities it offered. They also faced similar problems and situations
as in a war and winning a customer or market share was equivalent to
winning a war.

Commercial organizations started a logistics department with the

responsibility of overseeing the journey of the finished product from its
facilities to its retail outlets. The advantages were immediately realized.
Almost all the commercial organizations jumped into the fray and soon
logistics became a common buzz word in the commercial world as well.
However, the focus was always more on outbound logistics, i.e. the flow of
finished goods from the manufacturing unit to the distributors, to the retailers
and finally to the customers. Inbound logistics, i.e. the flow of basic
materials, components etc., into the organization was ignored. One of the
reasons was that traditionally, purchasing had been an isolated function in
an organization and hence rarely attracted the desired attention.
Hence, inbound logistics never got the same treatment as outbound

logistics. Also, the belief that profits came from the finished goods market
and that the more finished goods sold, the thicker the bottom-line, made
organizations concentrate on the so-called right side. But trying to look good
externally with the internal systems not in proper shape had its own
repercussions.
This unit deals with the meaning, functions and the process of logistics.
Objectives:
 Explain logistics and its importance.
 State the functions of logistics management.
 Brief on demand forecasting, inventory management and materials
handling.
 Describe strategic management in logistics.
 Discuss the domestic and global challenges before logistics.

5.2 Communication and Logistics

Logistics Management
The logic of including raw materials, components, manufactured parts and
packaging materials within an overall flow of materials, expanded the
responsibilities of management into a broader logistics concept. The
broader view of materials' flows within the business corresponded with a
new emphasis of strategic decision-making. In this broader context, logistics
can play a major role in determining the nature of the overall corporate
response to exploit market opportunities.
The exploration of any market opportunity commences with marketing

forecasts, which identify the overall potential and market segment volumes
available, the price/volume combinations, and the profiles of both the
customers and resellers. From this analysis, a profile of the market can be
made, which will identify the location and nature of demand, and the service
requirements of customers and intermediaries.
Such a profile will identify the infrastructure best suited to maximize the
opportunities available. The inclusion of a logistic activity enables a broader
view to be taken of how the opportunity might best be approached. If the
economics of logistic activities across a range of throughput volumes are
known, it is possible for management to review a number of production
options that may include total manufacturing of all components, a
predominantly assembly operation or a combination of manufacturing and
assembly of components.
The important characteristics of the decision usually concern the

relationship between fixed and variable costs, both initially and throughout
the product forecast life cycle. This requires a view of the market, its
competitors and an assessment of market risk. For many markets
(specifically those fashion-led), it is important for the business to ensure that

it can achieve sufficient sales volume to exceed the breakeven point and
generate profit. The implications for logistic decisions are for high levels of
service in terms of availability and delivery reliability; failure to do so may
result in loss of opportunity to establish a strong market position. The margin
(as a percentage of sales) is also important. The larger the margins, the
greater are the risk of competitors entering the market and of subsequent
price competition. The point at which the company should cease production
and distribution is another consideration.
5.3 Functions of logistics management

Logistics plays a dominant role in SCM. Supply chain and the philosophies
therein can create an opportunity while logistics management with its tools
and processes, fulfils an opportunity. It is essential to provide the exact
distinction between logistics and supply chain and thus define the exact role
of logistics in the broad framework of SCM.
Right Time: Customers have become very finicky and precise about time.
Hence it is essential that they get what they want as and when they demand
it. Supply chain with its tools and philosophies can schedule the production
and get the product ready but it is logistics management that has to ensure
that the product reaches the customer on time every time. Hence logistics
management becomes a very critical activity. There can be several
impediments to appropriate fulfillment. Transportation issues, traffic
problems, strikes, regulations, etc. are some of the problems that regularly
hamper the efficient functioning of logistics management. A good logistics
management system is essential to encash the opportunity created by
supply chain management.
Right Price: Immense competition and rising customer expectations have
put tremendous pressure on price. Companies have implemented supply
chain philosophies and tools to ensure price competitiveness. They have

also taken several measures to eliminate waste and hence cost bulge. And
logistics being the major cost component (almost 30 per cent) it becomes
critical. Hence, clearly if companies have to offer the right price to the
customers, logistics has to be cost competitive.
Right Quantity: How much does the customer want? SCM can identify how
much quantity the customer requires to get satisfied, while it is logistics
management that can ensure that the customer gets what he wants.
Right Place: Driven by the demanding customers and competition,

companies are going nearer and nearer to where the customer is. In this
context, the right place has become very relevant and critical. Right place
could be the retailers' end or the actual place where the customer is located.
Usually manufacturing companies leave this to the retailers. Implementing
'free home delivery' and other concepts ensure that right place lies with this
second last end of the supply chain. This also puts additional pressure of
'right time' on the supply chain as the distribution from wholesaler to the
retailer has to be completed in such a way that there is adequate time for
the last distribution from the retailer to the customer.
Right Quality: Once again, supply chain can ensure quality of product at
the company's end only. The responsibility of ensuring quality at the
customers' end rests with logistics management. Accidents, material lying in
godowns, posts, traffic jams can all hamper quality before they reach the
customer. Hence companies have to implement very good logistics systems
that will ensure quality at the customers' end also.

1. Supply chain can ensure quality of product at the company's end only.
2. The responsibility of ensuring quality at the customers' end rests with
logistics management.

3. Logistics management can identify how much quantity the customer

requires to get satisfied, while it is SCM that can ensure that the
customer gets what he wants.
5.4 Customer Services, Data Mining/Data Warehousing Services

The logistics industry is in the midst of a transformation as the companies
are increasing their dependence on the logistics providers and logistics
providers on the other hand are relying on IT to optimize storage and
movement of inventory on the one hand, while including managerial aspect
and offering to undertake the whole logistics operation for the company, on
the other hand. This paper looks into this transformation and identifies areas
of immediate opportunity for software, hardware and services organizations
targeting this segment. It also outlines the various activities performed by
the logistics providers.
Data Mining/Data Warehousing and Data Marts

The explosion of data stored has caused a corresponding explosion in the
need to analyze it. Traditionally, such data has been used only for the
common queries as given by a user. However, with so much of it, there has
been an increasing desire to mine it for more meaningful and useful
information. Thankfully, along with the increasing amount of data, there has
been a great increase in the computational power of computers (see the
chapter on Data Mining and Warehousing for details). This has made
techniques such as data mining, which might at one time have been too
computationally expensive, quite plausible. The excitement being generated
in this field can be explained by the tremendous potential benefits that could
come about from the implementation of a successful system. Data mining
results include:
• Associations, or when one event can be correlated to another event.

• Sequences, or one event leading to another later event (a rug purchase

followed by a purchase of curtains).
• Classification or the recognition of patterns and a resulting new
organization of data (for example, profiles of customers who make
purchases).
• Clustering, or finding and visualizing groups of facts not previously
known;
• Forecasting, or simply discovering patterns in the data that can lead to
predictions about the future.
The data warehouse concept is gaining acceptance in part because of the
possibility of fruitful data mining. The data warehouse is designed to store
and retrieve data. Data warehouses are built to contain enterprise-wide
information collected from multiple operational sources. In using a data
warehouse, businesses want to examine problems or possible problems
and determine their causes. To do this they need data from multiple
systems. For example, in order to determine whether or not a drop in sales
was due to too many salespersons being on vacation, the data warehouse
needs to contain information from both the product database and the
personnel database. Technologies such as the internet and intranet, along
with data mining tools need to be employed to ensure that all users can get
the information they need and when they need it.
A data warehouse typically has highly summarized views of the enterprise-
wide information along with the detailed information that are used by various
levels of management. In contrast, a data mart contains department or
division-wide information. They can be cheaper to deploy and operate than
a data warehouse, but they can become isolated pools of data that are not
consistent with the rest of the organization. Attempts to tie multiple data
marts together to create a data warehouse can be expensive and
complicated.

Warehousing and Warehouse Management

In outsourcing warehouse management activities, the business strategy is to
reduce costs associated with distribution and warehousing operations. The
value; in outsourcing warehousing activities results from reduction of fixed
assets associated with the physical warehouse(s), increased capacity for
executing transactional and tactical warehouse processes and overall
operating cost reduction.
In addition to capital and cost-related benefits, there are other reasons to

consider outsourcing of warehousing activities, including access to leading
practices, access to 'best of breed' warehouse management systems and
incentive or performance-based contracts that drive continuous
improvement.
These benefits should be balanced against potential weaknesses, including

a tendency for "one size fits all" approach by logistics service providers and
that efficiency gains may be limited to activities within a facility rather than
on the entire supply chain or distribution network. Transition from internal
management of warehousing operations to an external provider will require
significant upfront involvement in providing initial data, industry or customer
expertise and oversight during transfer of responsibilities.
5.5 Elements of Logistics

Logistics consists of several elements that need to be considered and
coordinated for successful results.
Elements of logistics have been classified into two categories: one that is
linked to operations and is responsible for undertaking the routine and reg-
ular responsibilities and the other that is linked to strategy and is responsible
for policy making. Some of these strategic activities listed above might not
be directly under the purview of logistics, but require inputs from logistics.

Modes of Transportation in Logistics

Rail, road, air, water and pipeline are the five modes of transportation used
by logistics management to transport material from one place to another.
Each of these modes has some advantages and some limitations. A
logistics expert needs to understand these and based on priorities, product
type, lead time, etc. decide the appropriate mode of transportation.
AIR
This mode of transportation is usually used for the delivery of goods from
distant suppliers, usually the ones that are not connected by any other mode
of transportation. This mode of transport is useful to deliver products with
short lead times, fragile goods and products that are not bulky. Also the
products that are in high demand and in short supply are also at times air
freighted in order to meet customer demands. The bulk/value ratio will be a
determining factor.
Advantages
• Fast delivery, usually between 24 and 48 hours.
• Faster fulfillment of customer orders.
• Ideal for perishable and other products with short life.
• Reduced lead time on supplier.
• Lesser inventory.
• Improved service levels.
Disadvantages
• Flight delays and/or cancellations especially when direct connections
are not available.
• Customs and excise formalities leading to delays.
High Cost
Suppliers/customers are not always located near a rail freight depot and
delivery to/from the depot can be costly and time consuming.

SEA
Sea transportation is used by businesses for the delivery of goods from
distant suppliers. Most sea transportation is conducted in containers which
vary in size. Goods can be grouped into a container (LCL) or fill a container
(FCL). Sea tankers are used for bulk shipments of loose goods such as oil,
grain and coal.
Advantages
• Ideal for transporting heavy and bulky goods.
• Suitable for products with long lead times.
Disadvantages
• Longer lead/delivery times.
• Problems arising due to bad weather.
• Difficult to monitor exact location of goods in transit.
• Customs and excise restrictions.
• High cost.
• Suppliers/customers are not always located near a rail freight depot and
RAIL
Rail transportation is popular with businesses for the delivery of a wide
range of goods including post, coal, steel and other heavy goods.
Advantages
• Faster and quicker.
• Ability to carry high capacity.
• Cost effective.
• Safe mode of transport.
• Reliable.

Disadvantages
• Subject to unforeseen delays and/or accidents.
• Completely governed by timetable and schedule of railways.
• Suppliers/customers are not always located near a rail freight depot and
Road
A very popular mode of transport used by suppliers and businesses to
deliver orders. Many transport companies provide scheduled delivery days
and next day delivery services, depending upon your needs. Goods can be
packed/grouped in box vans or in containers which are also used for sea
transportation.
Advantages
• Cost effective.
• Fast delivery.
• Ideal for any short distances.
• Refrigerated vans can be easily used for transporting perishables.
• Easy to monitor location of goods.
• Mass movement of goods.
• Point-to-point service.
• Easy to communicate with driver. Usually companies ask the driver to
call the company every couple of hours.
Disadvantages
• Delays due to traffic jams, etc.
• Problems due to vehicle breakdown, accidents, etc.
• Goods susceptible to damage and losing quality.
• Heavy dependability on weather.

Pipeline
Advantages
• Mass movement of liquids and gases.
• Low operating costs.
Disadvantages
• Limited applicability.
• Not widespread.

1. _____________ is popular with businesses for the delivery of a wide range
of goods including post, coal, steel and other heavy goods.
2. __________ is used by businesses for the delivery of goods from distant
suppliers.
3. ______________ are used for bulk shipments of loose goods such as oil,
grain and coal.
4. __________ mode is useful to deliver products with short lead times,
fragile goods and products that are not bulky.
5.6 Application of Technology in Logistics and Channel

Information Systems
Information Technology in Logistics
The application of IT can support logistics and help in resolving several
problems. Over and above assisting in managerial tasks such as planning,
deciding on the optimal route of transportation and allocation, distribution,
etc. IT can play a vital role in logistics.
Tracking goods in transit: One of the major problems in logistics has been
lost and untracked parcels thereby affecting inventory policies, etc. Real
time tracking of goods throughout the supply chain provides excellent
opportunities for improving customer service. Real time information on

delivery time supports just-in-time manufacture and retail, enabling

organizations to make strategic decisions with full confidence in the
availability of goods. Goods tracking are also important for direct end-
customer service. Several leading package delivery companies are offering
parcel tracking via the Internet as a fundamental element of the service.
There are many additional areas where accurate, real-time goods tracking
can deliver significant improvements. For example, lost luggage is estimated
to cost the airline industry in excess of $ 100 million annually. Any
improvements in this area not only reduce the cost of compensation
payments to customers but also significantly improve customer service. The
standard way to identify and follow a product on its journey through factories
and down the supply chain has long been the familiar bar code. However,
bar codes have a lot of problems and the use of bar codes also requires a
lot of labor. According to industry figures, as many as 60 per cent of the
workers in warehouses spend time validating bar codes. Items have to be
lined up individually for scanning, even in highly automated identification
systems such as those at major package-handling firms. Companies the
world over are trying smart tags, specifically, radio frequency identification
(RFID) for tracking parcels and other goods.
5.7 The Process of Logistics

Logistics is responsible for all the movement that takes place within the
organization. Whether it is the inbound logistics of incoming raw material or
movement within the company or the physical distribution of finished goods,
logistics encompasses all of these.
Physical Supply: Physical supply means linking of suppliers with the

internal operations. This is one of the most crucial elements of logistics as
production cannot start unless material from the suppliers is available.
Suppliers are scattered and have varying lead times, hence coordinating

and synchronizing this activity becomes a tough job. Associated with this
are the critical questions such as: From whom to order? How much to
order? When to order? Which mode of transportation should be used?
Where to store the material? etc. Companies prefer nearby suppliers unless
the price/quality differential is too glaring for the reason that the physical
supply quantity can be less and more frequent. The philosophy of JIT is
based on the principle of less quantity in lesser interval resulting in more
deliveries. This also means that companies have to carry less raw material
inventory which also frees up the working capital. The problem with this is,
of course, congestion on roads as trucks have to constantly ferry material to
the manufacturing units from suppliers. More burden on logistics. For
suppliers who are located at a distance and cannot send the material often,
vendor-managed inventory (VMI) is the solution. Under VMI the supplier
maintains a warehouse near the manufacturing facility and supplies as and
when material is desired and required.
In order to reduce the burden on logistics, some of the manufacturing

companies send their own trucks to some suppliers who lie on a predefined
route and get the material picked up themselves instead of the supplier
doing it. The truck makes a round trip and will pick up material from 7-8
nearby suppliers. This way one truck does the job of otherwise 7-8 trucks
reducing load on logistics. This is an innovative method used by several
companies to reduce burden on logistics. "Physical supply also sometimes
doubles as a cash carrying activity, i.e. after the raw material is delivered it
collects cash for the quantity of raw material and takes it back to the
supplier."
This of course is difficult to implement in the event of JIT delivery. In such an

ease usually the settlement is done over a period of time.

Internal Operations: This means moving the material internally within the
manufacturing facility. That is, raw material when it comes from the supplier
is stored in the incoming warehouse; material from there has to be taken to
the shop floor. In case of batch production, the WIP material has to be
moved from one place to another. The finished product needs once again to
be moved to another warehouse for packaging or for physical distribution.
This also requires coordination between various activities and functions.
However, being internal to the organization, the load on logistics is not
much.
Physical Distribution: This encompasses the outbound material

movement, which links the operations with the customer. This is a most
crucial part of logistics and can make or mar the company's prospects in the
eyes of the customers. This is responsible for achieving all the five rights
discussed above. This part of logistics addresses some of the critical
aspects such as expected level of customer service, cost associated With
servicing the customer at the prescribed level, product to be stocked at each
distribution facility, transportation modes and transportation services to be
used.
This type of logistics also has to perform some other vital activity – that of
carrying information and in some cases even of carrying cash. The logistics
providers or the truck driver needs to be properly trained to pick up
information more than: what is provided. That is, he needs to understand
whether he is welcome when he reaches the retailer, whether there is a
stock-out situation when he delivers the material or whether adequate
material is still available that could have lasted some more days, any
customer response or reaction in case any sale transaction takes place in
his presence, how and where the material is placed after he delivers, etc. All
of this is extremely vital information, which needs to be read through. Some

companies are exploring the idea of having a truck drivers training program
where they would be trained to understand the body language of the retailer
and also pick up other relevant information. Settling of bills and carrying
cash is another activity sometimes performed by this part of logistics
management.
5.8 Strategic Management in Logistics

Strategic Decisions in Supply Chain
One way of helping to ensure success is to ensure that strategic changes in
the supply chain organisation are routed through a strategy. A strategy is a
set of important decisions derived from a systematic decision-making
process conducted at the highest levels of the organisation.
The earliest work on manufacturing strategy is credited to Skinner (1969).

Work on manufacturing strategy has been relatively recent in the history of
the discipline of manufacturing with significant evolution evident between
1969 and 1988. Within the context of supply chain re-engineering, many of
the best practices have been well documented elsewhere. Three areas core
to the infrastructure of the supply chain, and which have come to the fore
more recently in manufacturing strategy, are the 'make versus buy' decision,
the sourcing decision and the organisation design which will be discussed in
more detail.
Strategic decisions basically have long-term implications and affect the

organisation in a major way. The sources of uncertainty are more
pronounced. The top management makes these decisions. Successful
execution of these decisions would give a cutting edge to the organisation.
The following are the broad areas where strategic decisions are required in
managing the supply chain:
• Warehousing
• Transportation

• Information Technology Solutions and Integration

• Make versus Buy
Warehousing
Warehousing can be defined as the segment of an enterprise logistics
function for the storage and handling of inventories beginning with supplier
receipt and ending at the point of consumption. The management of this
process includes the maintenance of accurate and timely information
relating to the inventory status, location and disbursement. The optimal
warehouse decision should permit the firm to leverage inventory levels and
transportation modes that effectively support marketing, sales, order
processing and inventory planning in the quest for competitive advantage.
Factors that influence warehouse decisions include the type of distribution
industry, the firm's value, quantity and potential for obsolescence, strength
of the competition and state of the economy. Warehousing performs many
roles in the typical distribution organisation. The basic functions are material
handling, storage and information transfer. Materials handling consists of
receiving, storing and shipping. The objective of warehouse storage is to
maximize on customer service by improving product and location
positioning. Information transfer ensures timely and accurate information on
inventory status, throughput levels, and space utilization, equipment and
manpower availability and transportation capacities. An effective
methodology for developing a warehouse strategy consists of several steps:
Document existing warehousing operations, determine and document the
warehouse storage and throughput requirement over the specified planning
horizon, identify and document deficiencies in existing warehouse
operations, identify and document alternative warehouse plans, select
alternative warehouse plans, select the recommended solution and finally
update the warehouse strategic plan.

Transportation
Transportation is the movement of products from one node in the
distribution channel to another. By providing for the swift and uninterrupted
flow of products back and forth through the distribution channel,
transportation permits wider and deeper penetration of new markets far from
the point of production. In addition, by maximizing vehicle and material
handling capacities and cargo requirements, effective transportation permits
distributors to leverage economies of scale by lowering the per unit cost of
transporting the product, Efficient transportation enables distributors to
reduce the selling price by holding costs down, thereby providing for more
competitive product positioning. Finally, transportation provides other
business functions with essential information concerning products, market-
place and time utilities, and transit costs and capabilities necessary for
effective enterprise planning and operational execution.
The first step in the management process is to establish the cost

effectiveness of private transportation fleets and the search for and selection
of public carriers. The goal is to ensure the highest level of customer service
at the lowest possible price. The selection of a carrier is normally a
combination of the price of service, the carrier's financial stability, reliability,
mode availability and subjective elements.
The second step involves the ongoing choice of selecting the transport
mode to meet daily shipment requirements. Modes should be chosen that
will perform the service at a cost that will satisfy any special shipping needs
required by the customer, exceed the rates and services offered by
competing carriers and minimize the likelihood of loss, damage or delivery
delay. Once the mode and carrier have been selected, shippers, as a third
step, must work with carriers to establish an effective schedule and the
proper vehicle routing to ensure timely customer delivery. The next step of
the process is the preparation and completion of the necessary shipping

documentation. Finally, managers must be diligent in developing

transportation performance measurements that will provide them with
quantifiable data necessary for increased productivity and competitive
advantage.

1. A _____________ is a set of important decisions derived from a
systematic decision-making process conducted at the highest levels of
the organisation.
2. The earliest work on manufacturing strategy is credited to __________.
3. _____________ can be defined as the segment of an enterprise
logistics function for the storage and handling of inventories.
5.9 Domestic and Global Challenges before Logistics

Future Trends
Logistics providers will soon become the lead logistics provider for the
company and have the responsibility of playing an end-to-end role in the
company's logistics function. Their role will, however, be much more broad
based and will also include activities such as training of vendors in customer
service, communication relating to shipping, enabling and training vendors
with web-based tracking, etc. These training programmes are aimed at
updating the vendors with the latest in shipping and logistics.
5.10 Summary
Logistics plays a dominant role in SCM. Elements of logistics have been
classified into two categories: one that is linked to operations and is
responsible for undertaking the routine and regular responsibilities and the
other that is linked to strategy and is responsible for policy making.
Rail, road, air, water and pipeline are the five modes of transportation used
by logistics management to transport material from one place to another.

One of the major problems in logistics has been lost and untracked parcels
thereby affecting inventory policies, etc. Real time tracking of goods
throughout the supply chain provides excellent opportunities for improving
customer service.
The logistics industry is in the midst of a transformation as the companies

are increasing their dependence on the logistics providers and logistics
providers on the other hand are relying on IT to optimize storage and
movement of inventory on the one hand, while including managerial aspect
and offering to undertake the whole logistics operation for the company, on
the other hand.

1. Write a short note on ‘Communication and logistics’.
2. What are functions of logistics management?
3. Explain in detail demand forecasting, inventory management and
materials handling.
4. Write briefly about the application of technology in logistics and channel
information systems.
5. What is strategic management in logistics?
6. Explain the domestic and global challenges before logistics.

SAQs I
1. True 2. True 3. False
SAQs II
1. Rail transportation
2. Sea transportation
3. Sea tankers
4. Air transportation

SAQs III
1. Strategy
2. Skinner
3. Warehousing
Answers to TQs:
1. Refer to 5.2
2. Refer to 5.3
3. Refer to 5.4
4. Refer to 5.6
5. Refer to 5.8
6. Refer to 5.9

Unit 6 Channel Management
Structure:
6.1 Introduction
Objectives
6.2 Policies of Marketing Channels
6.3 Designing Marketing Channels
6.4 Assessing Channel Performance
6.5 Marketing Channel Integration and Hybrid Channel Systems
6.6 Recruiting Channel Partners and Criteria
6.7 Motivating and Evaluating Channel Members
6.8 Managing Channel Relationships
6.9 Conflicts of Channel Management
6.10 Summary
6.1 Introduction
A channel to market is the method of getting your product into the
customer’s (the end user’s) hand. This can either be through direct sales, or
through a reseller. Direct sales can occur in person, via the phone, the web
or mail. Indirect, or channel sales typically refers to sales through a reseller.
A reseller can order from you directly (one tier between you and the end
user), or from a wholesale distributor you would sell to a wholesale
distributor and they in turn would sell to multiple resellers (two tiers between
you and the end user (hence the common term “two-tier” distribution).

This unit deals with the policies of marketing channels, designing channels,
assessing channel performance and managing channel relationships.
Objectives:
 Explain the meaning of channel marketing.

 Explain the policies of marketing channels.
 Describe how marketing channels are designed.
 Describe how channel performance is assessed.
 Explain how channel relationships are managed.
6.2 Policies of Marketing Channels

Channel Marketing
Some companies or divisions (for example, Motorola semiconductor, etc.)
call the reseller the distributor (or distributory) this is correct, but not in the
typical and more common two-tier distribution model. Hence, it is important
to get the channel terminology down whenever talking about the channel to
avoid confusion.
Which Channel to Use?

The first question to address is whether you should go direct or indirect.
Often the answer is both -especially since the popularity of the Internet. The
key, however is to avoid most of the channel conflict.
Channel conflict occurs when the vendor (you) and the reseller, or different
reseller types (retail, VAR, mail order, Internet) compete for the same
business. It is appropriate to say “most” of the channel conflict, since it is
fine to have some conflict resellers may compete, and there may be some
of the business that you can take direct. For example, you might go direct
with massive deals that are too big for a reseller to finance (such as a 1.3
billion deal overseas), or very small deals that don’t require any special

training/installation/consulting hence won’t provide margins for your

resellers who make money on their ‘value added’ services.
To minimize conflict you could:

 Segment the products (different products are sold through different
reseller types or channels).
 Setup exclusive or limited territories.
 Sell direct at a higher price than the average street price.
 Setup different promotions for different resellers rotating so they all
have advantages at different times.
 Provide MDF/Co-op and let the resellers choose to establish their own
competitive advantage.
 Setup reseller levels rewarding higher margins and support for higher
authorization (the resellers choose whether they can be competitive).
 Setup a process to determine if a customer has worked with a reseller
prior to taking the business direct (so you don’t steal business they
cultivated), etc.
There are multiple ways that you can reduce conflict – the key is to be
aware that it could exist and of your ramifications (short and long-term), and
that you do something about it to keep your reseller and revenue targets
satisfied.
One vendor long gone, Ashton Tate, had a terrible problem with channel
conflict (they would sell direct and undercut a prospect the reseller had
cultivated) as a result, their resellers hated them. They still sold their
products since they were so popular (dBase), but were rooting for a
competitor to take them out which happened.
It is also a problem if you have no conflict, since it usually indicates that you
don’t have enough sales coverage there could be parts of the market you

are not covering (missing RFQ’s, not knowing about the opportunities, your
product is not sold where the customers traffic, etc.).
Direct or Indirect?
The question to go direct, indirect or both is often determined by the
following:
1. Ability to recruit resellers. If you cannot get your product into distribution,
or find resellers, the answer is simple, you go direct.
2. Product type. If you are selling a product that requires a lot of training,
installation and support, you may go direct until you get your resellers
trained and certified or, if you have a large enough sales force, you may
stay direct. However, if you have enough sales people to only cover the
largest customers (10 sales people to cover top 100 telcos, but not
enough to cover the middle 5,000 telcos), you may wish to use resellers
to cover the middle market – then segment your product line, one for
direct and one for resellers.
3. Market dynamics. As the market technology adoption changes and
products that used to require support become easier to use, and
customers know what they want – you may go direct (like Dell (it was
actually a modest model in the early days, since most users needed
more support but became effective
4. Price point. High-end premium quality consumer products (such as
expensive cookware, the best vacuums, etc.) are sometimes sold direct
(and usually person-to-person) since the benefits (which are real, but not
always obvious) must be sold. However, this does not mean that high-
priced products can’t be sold via the channel (boats, planes, million
dollar SFA products, etc.).
5. Customer requirements. Some customers require mandate a direct
relationship with the vendor to ensure their needs are met. In some

cases, when an account insists on going direct, the reseller can still earn
a bounty for delivering the qualified, pre-sold lead.
6. Ability to manage resellers. Much of the decision to go direct or indirect
is also dependent on the company’s ability to understand how the
channel functions, come up with a competitive program, and manage
the reseller programs and relationships.
The final decision on direct or indirect is based on your business model

and how you address the questions above.
6.3 Designing Marketing Channels

Channel Management
Channel sale is the overall account liaison and is primarily responsible for
selling product into distribution and the reseller channel (retail, VARs,
system integrators). Channel marketing is responsible for ensuring that
product in distributor and reseller locations gets sold out. In essence
Channel sales ensures sell-in, Channel Marketing ensures channel sell-
through.
A Channel Marketing Manager is typically responsible for the sell-through

function. There are cases where a Channel Marketing Manager handles all
sell-in and sell through via the channel, and the internal sales people
concentrate on selling direct this may vary according to your organization.
This section of Channel is primarily for the Channel Marketing Manager who
works in partnership with the head of Channel Sales to:
1. Establish a competitive reseller program (authorization, margins,
levels, etc.)
2. Help recruit resellers
3. Prepare the proper reseller collateral

4. Create reseller kits (sell sheets, product slicks, catalogs, reseller

pricing, NFR product, distribution part numbers, contact information,
reviews, etc.),
5. Manage reseller database and Partner Relationship Management
(PRM) software
6. Jointly invest the market development (MDF) and Co-op funds to
increase channel sell-through.
7. This sell-through is accomplished through managing store, VAR and
distributor promotions (spiffs, contest, rebates, specials, training,
promotions, etc.),
8. Ensuring proper merchandising (retail only)
9. Ensuring adequate stocking levels
10. Running reseller education
11. Setting up motivational contest to reward sales
12. Manage seeding programs.

1. A Channel Marketing Manager is typically responsible for the sell-
through function.
2. Channel marketing is responsible for ensuring that product in distributor
and reseller locations gets sold out.
6.4 Assessing Channel Performance

The performance of a distribution channel can be assessed by considering a
number of performance dimensions, including channel effectiveness,
channel efficiency, channel productivity, and channel profitability.

6.5 Marketing Channel Integration and Hybrid Channel System

Many marketers resist integrating their customer communication efforts
across online, offline, and retail sales channels. Why? They fail to see the
value of integration or fear it muddies their message. Some believe it
cannibalizes sales from one channel to another.
Looking at it from the perspective of the consumer, however, choosing

which channel to use when communicating with a marketer is entirely
situational. An urgent request or need is likely to prompt a phone call. When
in research mode, many look to the Web as their preferred source. And
when a customer is ready to make a purchase decision, there typically is a
need for some sort of physical interaction in the form of literature (such as a
direct mail brochure) or contact with the product or service.
How well a marketer integrates its mix of channels for prospects and
customers will determine how well it delivers incremental benefit for all
parties. To that point, here are current data to debunk common channel
integration myths.
Myth #1: Most loyal customers still prefer interacting via one channel.
A marketer’s most loyal customer now uses at least two channels. An
August 2004 report from Jupiter Research revealed that “consumers are
influenced to spend $6 offline for each $1 they spend online,” indicating that
loyalty can and does migrate across channels. It is a marketer’s mission,
then, to use known information about individual customers (with proper opt-
in methods) to meet individual channel preference needs.
Myth #2: Most people shop and buy via the same channel. People use
different channels for different reasons. Consider that, again according to
Jupiter Research, “43% of Internet users bought products from a retailer’s
offline store after viewing them on the seller’s Website.” Additionally,
experience shows that television support for a direct marketing campaign

can improve direct marketing response rates significantly. Each channel

influences the others.
Myth #3: Most people do not like direct mail. While each medium has its
own strengths, surveys continue to show that consumers prefer direct mail
over other forms of communication, including e-mail, telephone, and
personal contact. Mail is considered less intrusive than other media. In a
world where consumers are exposed to thousands of marketing messages
daily, often it’s the message in the mailbox that has the power to rise above
the chatter. The lesson here is not to be afraid to test direct mail to reach out
to consumers and prospects alike.
Myth #4: Online marketing cannibalizes offline efforts. An individual’s

media preference influences receptivity to any given channel. The reality is
that multi-channel contact can yield better overall results. People now
regularly use a combination of media when considering and responding to
an offer. Adding a response channel (such as the Web) can dramatically
improve results. Remember that direct marketing buyers are more likely to
have Internet access. The Internet has changed the face of direct marketing,
but not by displacing channels or making them obsolete.
Myth #5: Becoming a multichannel company does not require internal

restructuring. Many companies are “siloed” when it comes to their
marketing channels, making the sharing of information difficult, if not
impossible. When embarking on a multichannel infrastructure, marketers
must work to establish a customer-centric point of view and develop
common offerings, transaction processing, customer service, messaging,
and themes. There must not be conflicted branding and communication
elements if a marketer is to drive a singular message home successfully.
Myth #6: The 55-plus audience is not Web-savvy. The Web can be a
viable channel for reaching audiences up to 69 years of age. “Young

seniors” those ages 55 to 59 have a huge online presence, and “retiring

seniors” (ages 60-64) experienced the birth of the Internet at their places of
employment. These two groups alone accounted for more than 15.5 million
Internet users as of 2003, according to an October 2003 Nielsen/Net
Ratings report. Additionally, “retired seniors,” those 65-69, have good
discretionary income, and most own computers; that same Nielsen/Net
Ratings report indicated that some 9.5 million of them were using the
Internet by 2003. Clearly the Internet can be a powerful tool for reaching
senior audiences with a wide variety of messages.
Myth #7: Each channel is a separate user experience. The opposite is in

fact true: Multiple channels converge into a unified user experience. That is
to say, if channels fail to offer a unified voice, look, and feel, a marketer is
not acting as a multi-channel company and may disappoint or frustrate
customers. A multi-channel user expects an integrated experience across all
touch points with a brand or information source, and delivering on this
expectation is the challenge for marketers.
1. ____________ expects an integrated experience across all touch points

with a brand.
2. Online marketing cannibalizes _____________
3. Many marketers resist integrating their _________ efforts across online.
6.6 Recruiting Channel Partners and Criteria

Recruit
Companies count on their channel partnerships to maximize profits,
increase market penetration, and enhance customer satisfaction. Recruiting
the right business partners is the key to developing or expanding your
channel programs.

CGS has developed, implemented, and managed recruitment programs

seamlessly for some of the world's largest IT vendors.
Business Partner Recruitment Readiness

The importance of using well-defined criteria for identifying, qualifying, and
recruiting business partners that align to your specific channel development
initiatives cannot be overstated. CGS will work with you to clarify your
recruitment goals and rank the desired competencies and business models
you are seeking in potential new business partners. CGS will work with you
to:
 Understand your specific recruitment goals and criteria for success
 Define your compelling business partner program benefits, product
positioning and messaging
 Translate your business partner program benefits into a telemarketing
script and outbound email messaging
 Acquire business partner prospect lists and sorting business partner
prospects that align to your specific recruitment objectives
 Train the CGS business partner recruitment telemarketing sales team
about your business partner programs and objectives
 Create standardized documentation to streamline partner management
 Develop collateral to market your business partner program and
products to qualified business partner candidates
 Establish metrics and reports for benchmarking the recruitment
campaign performance
6.7 Motivating and Evaluating Channel Members

Identifying, reaching and motivating key influencers may be the difference
between effective and ineffective channels strategies. The importance of
influencers in the purchase decision process arises from positive impact

they have when they support a company’s products or services.
A key influencer is defined as:
“Any party(ies) which exerts significant influence over the purchase

decision”
Key influencers may be directly involved in the purchasing decision or

indirectly influence the decision. Key influencers should be included in
marketing channels strategies.
It is important to note that key influencers are not always members of a

company’s distribution channels. Their influence over a purchase is the
reason they are important. Key influencers can impact the purchase
decision of channel members when considering a purchase from a supplier
and can also influence end customers when considering which channel
member to buy from and the brand selected.

Identifying Key Influencers

Some examples of key influencers in marketing channels strategies...
Industry Key Influencers Include:

 Financial Services  Accountants, Trade Unions
 Consumer Services and
 Family and Friends
Entertainment
 Specifiers, Consultants, Builders
 Construction and Building Products
and Architects
 Supplier and Channel Members eg
 Automotive Retail
fitters
 Heavy Machinery  Supplier (or Agent)
 Automotive Smash Repair  Insurance Companies
 Computers  Consultants
 Decorative Paints & Hardware  Retailers and Store Staff
The examples above illustrate the influencer may be overt as in the building
products industry or more subtle as in consumer services and entertainment
industries.
To more clearly identify key influencers and determine the best strategy to
reach them it is necessary to:
 Talk to end customers and channel partners
 Analyse business sources
 Review sales by channel and market segment
 Perform a marketing channels audit
Why Are Key Influencers Important?

Companies often don’t recognise influencers’ importance or are unable to
determine how to effectively reach them. The risks of neglecting influencers
are expensive and the rewards from reaching them are significant.

Rewards of Reaching and Motivating Risks of Failing to Reach or Neglecting

Key Influencers Key Influencers
More lead referrals, new and repeat Potential loss of customers to suppliers
customers who successfully reach key influencers
Stagnant or declining sales and market
Improved sales and market share
share
Greater market power and channel Alienation of key influencers and
member loyalty reduced loyalty
Sustainable competitive advantage A disadvantage in the marketplace
which differentiates from competitors
Endorsements which enhance image A deteriorating image and reputation
and reputation
Reaching Key Influencers

Problems and Obstacles
A company may face several issues when trying to reach its key influencers:
1. Reluctance by a company to change its traditional business methods
2. The cost and logistics of dealing with all the industry’s key influencers
3. Key influencers don’t want to be too closely associated with a single
supplier
4. Key influencers are already aligned with a competitor
5. A company is unable to differentiate itself as the best choice for key
influencers
6. Key influencers do not respond to a supplier’s approach
7. The supplier does not understand the key influencer’s needs
How to motivate key influencers

By positively motivating key influencers companies will resolve many of the
issues outlined above and ensure influencers’ commitment to their products
or services. Tools which will help suppliers reach key influencers include:
 Training
 Product and technical information

 Advertising and promotional support

 Technical support and giveaways
 Exclusive deals
 Excellent customer service
 Sponsorships
 Recognition
 Pricing, margins and discounts
 Regular communication
Some key influencers require independence from suppliers but will respond
to service and support motivators who meet their own business and
professional needs. An example of this is in the computer industry where
consultants are a key influencer. The consultant will identify the needs of a
client and specify the system/s capable of fulfilling those needs. As
consultants their reputations are at stake when preparing specifications and
therefore need to have confidence in the products and suppliers they are
recommending. The motivators in this case are excellent communication,
technical information and training.
Other Key Influencers do not require the same degree of independence

from suppliers. e.g. building products. Effective motivators may include
exclusive deals, advertising support and product and technical information.
Three important steps are involved to include key influencers in a

company’s channel strategy. These steps are:

Reaching and motivating key influencers will enhance a company’s image

and reputation and help it achieve a sustainable competitive advantage
through loyalty.
6.8 Managing Channel Relationships

Channel relationships are increasingly important in creating market value
and sustainable competitive advantage. This elective provides an up-to-date
perspective of the relationships among marketing channels using the
channel relationship model (CRM). It looks at challenges and opportunities
in the external channel environment, behavioral issues that beset channel
relationships (internal channel environment), coordinations, conflict,
cooperation, the economics of exchange and the development of channel
relationships, including the implication of acquiring strategic partners.
Topics covered
 Where mission meets market.
 Channel roles in a dynamic marketplace.
 Conventional marketing systems.
 Marketing mix and relationship marketing.
 Environmental scanning: managing uncertainty.
 Legal developments in marketing channels.
 Ethical issues in relationship marketing.
 Global challenges and opportunities.
 Channel climate.
 Conflict resolution strategies.
 Information systems and relationship logistics.
 Cultivating positive channel relationships.
 Transaction costs in marketing channels.
 Vertical marketing systems.
 Franchising: an emerging global trend.

 Long-term interfirm relationships.

 The emerging role of strategic alliances.
 Strategic implications for the twenty-first century.
The traditional partnership between manufacturers and electrical

wholesalers is marching steadily toward a rebirth.
The market's consolidation, emergence of new channels, difficulty in

differentiating products, market share battles that ultimately drive efficiency
gains and lower prices to customers, and the share garnered by European
wholesalers is dramatically changing the electrical marketplace.
These changes are forcing electrical distributors and manufacturers to

rethink their partnership strategies. In the not-too-distant future, channel
relationships will emphasize results, accountability and data over goodwill,
relations and personal interactions; redefine or eliminate territory and
product authorizations and restrictions; and add service revenue to the
traditional compensation earned by distributors and manufacturers.
Distributors and manufacturers must pay attention to these changes for

several reasons. They still need each other — a truth all too often ignored.
Also, companies that don't work to define a new partnership will find they
must live with terms set by others. Worse, they may find themselves locked
out as competitor’s partner up.

Most importantly, these new partnerships will divide profits differently than
before. New terms will be required to ensure the customer's spending is
fairly allocated among supply-chain partners according to the investments
made and costs incurred.
To drive home the importance of reinventing distributor/manufacturer

partnerships, this article will explore how several new strategies can change
the roles, functions and responsibilities of manufacturers and distributors in
their channel partnership.
Distributors must sell value

Too many distributors just position their companies as places to buy
electrical products. More enlightened companies are repositioning
themselves by selling custom, turnkey solutions that guarantee real,
measurable, bottom-line impact for customers. On the vendor side, they are
also repackaging their services to be sold upstream to their manufacturer
suppliers. They are reinventing themselves to survive because the profit
squeeze will not evaporate as the business cycle eases. Two factors drive
this reality.
The first is the continuing success of alternate channels such as catalog

houses, big-box retailers, wire-and-cable distributors, energy-services
companies and high-tech distributors. Alternate-channel companies focus
on high-margin business and are happy to leave less profitable business for
full-line distributors.
Adding fuel to this fire, electrical distributors now see their traditional service
functions being unbundled. For example, customers can now access
product information over the Internet, bypassing an important role of the
distributor's salesperson. Also, third-party logistics providers (3PLs) are
assuming direct-shipment responsibilities and may even perform installation,
repair and other activities. This second factor opens the door for new

distributor strategies. If buyers are willing to unbundle traditional roles, they

will consider new bundles if a strong case can be made for economic gain.
Consider the following examples.
Full-service Warranty Management

Leading-edge warranty strategies go far beyond paperwork administration
and field repairs. Rather, they seek to generate a bottom-line profit and to
stand alone as a business. New warranty strategies do this by creating
electronic databases of customer interactions and product performance,
keeping up with shorter product life cycles, marketing extended warranties,
and enhancing relations between manufacturers and distributors. If
distributors can demonstrate that their customer base can be mined for new
revenue and profits, they have a compelling case to pitch manufacturers.
Reverse Logistics
Distributors are discovering that after they deliver products to customers,
they can create value by hauling other materials away. For example,
commercial properties and factories need to get rid of recyclable materials,
especially those requiring special handling like batteries or mercury-bearing
lamps. Again, distributors can present a strong business case, independent
of their traditional product offerings. Ultimate success depends on following
through with bottom-line gains for customers.
Manufacturers want a return on their investment in the distribution channel.

Like it or not, new manufacturer strategies start in a different place
questioning the cost of selling through distribution channels and wondering
what returns are gained on their considerable investments.
Few manufacturers expend the effort to understand the total costs of selling
through specific channel partners. Even fewer go the extra mile to
objectively compare those costs with real, measurable marketing returns.
They are running blind, overstating the value of some partners and under

investing in those best able to drive their strategies forward. There are two
critical points. First, while calculating a return on channel investment isn't
easy, it can be done. If it isn't, decision-making will continue to be ad hoc,
uninformed and sometimes just plain wrong.
When manufacturers calculate their return on investment in the distribution

channel, they roll up channel investments (measured as discounts and
rebates) from the product level to determine the cost of doing business with
specific channel partners. People costs incurred for sales, marketing,
channel management and product support are added to generate a total
cost. Each partner's contribution to driving strategy is then investigated to
complete the ROI. Returns should go beyond common measures such as
sales, profits and share to consider broader contributions to marketplace
objectives.
As these new strategies are developed, manufacturers should consider new

roles for those distributors that deliver excellent ROI. Thinking creatively,
electrical manufacturers have many strategy opportunities that can be
improved by effectively working with their distributors. Manufacturers and
distributors typically share these competencies, creating the opportunity for
new partnerships. Here are a few examples:
Brand co-ordination and leverage

The reputation of electrical products is greatly affected by the channel's
performance. Poor availability, delivery, installation and problem resolution
reflect negatively on the manufacturer even though it's the distributor that
performs many of these activities. Customers want results and aren't
interested in assigning blame.
Going a giant step further, most electrical manufacturers neglect and under
develop their brand equity. Some have confused the market by acquiring
complementary products with overlapping brands. Great brand challenges

exist ahead for electrical product manufacturers, and success will hinge on
effective coordination with their channels. New roles will evolve and new
measures of success will follow.
Turnkey repair and maintenance

These services create value by combining several competencies to offer
customers hardwired guarantees of improved uptime and reductions in
maintenance costs. In the automation arena, distributors do this by knowing
the customer's application and performance requirements, capturing the
customer's operational data electronically by factory automation equipment
and offering predictive maintenance programs and repair parts acquisition.
Strategies for success

To improve their partnerships with each other, distributors and
manufacturers should consider these strategies:
Emphasize results, accountability and data over goodwill, relations

and personal interactions. For manufacturers, this means communicating
exactly what is needed from partners, backed up with significant rewards
and penalties for good and bad execution. Surprisingly, many manufacturers
are afraid to make this commitment, worrying that they will offend their
partners.
Both parties can put teeth in measurement by tying compensation to

performance results. They must also work together to share customer, sales
and operational data. Distributors can lead from the middle by developing
detailed supplier metrics that measure performance and by making sure
senior management in strategic relationships keep informed of the results.
Redefine or eliminate territory, market and product authorizations and

restrictions. Limiting conflict is not the same as encouraging cooperation.
As new strategies gain traction, customers will require that manufacturers

and distributors work together in new ways. As a result, territory, market and
product policies will fall by the wayside. These policies were once useful for
coordinating efforts and limiting price erosion, but they must be reinvented if
they are to survive.
Manufacturers and distributors can start by examining the new requirements

of serving large accounts. These customers are demanding consistent
support and pricing across all of their locations. The mechanisms for
ensuring these goals are met while limiting destructive behavior among
partners are not yet clear, particularly since the mix of new services and
traditional product sales is still evolving.
Add service revenue to the traditional compensation earned by

distributors and manufacturers. Services will grow because they fit an
established trend buying-power and supply-chain efficiencies eventually
flow to the customer. Services also stretch suppliers to add new
competencies, or to look for partners with established track records.
Because of all this, distributors and manufacturers should pursue service

strategies, but they should avoid the knee-jerk tendency to go it alone.
Going further, manufacturers should consider distributors when making

outsourcing decisions. If functional compensation is part of the discount and
rebate structure, service fees should be considered in the mix.
Distributors should develop service offerings packaged for sale to

manufacturers and customers. As they do so, they will be challenged to get
involved in a part of marketing traditionally assigned to manufacturers new
product development. In turn, this need creates an opportunity to expand
the channel relationship to include partnering for joint service development.
Electrical distributors should consider retooling their business model. New

asset, cost and profit models will be required as profits earned through

markup shift toward fees earned for services. New strategies are driving
new channel relationships and redefining the long-standing terms of the
manufacturer/distributor partnership. The early returns are in and the
emerging terms of the partnership are evident.
That's not to say there isn't a lot of work, frustration and even pain ahead. At
times, each partner has viewed the other as underperforming, overcharging
or lacking commitment. Because of this, many will be cautious and
skeptical, and prefer to sit back and watch developments. However, if you
aren't working to rewire your channel relationships, someone else will do it
for you. And like all partnerships, if you are not involved at the start, you can
bet you won't be happy at the finish.
6.9 Conflicts of Channel Management

If you think adding new distribution channels will only result in increased
sales volume, then think again. The consequence could be a spurt of
channel wars.
Welcome to a world where an infinite number of distribution channels are

chasing a finite number of customers. The emergence of the Internet has
added considerable complexity to distribution channels by offering a variety
of e-market places such as B2B auctions (PEFA.com), reverse auctions
(Freemarkets.com), B2C operations (Amazon), C2B auctions
(Priceline.com), and C2C formats (Ebay.com).
As a result, the various types of distribution channels available in industries

such as airlines, financial services, music industry, publishing, and
telecommunication services are exploding. And manufacturers who took
pride in the integrity of their distribution channels with specific channels
reaching specific customer segments are suddenly facing a dizzying array of
choices.

The addition of new distribution channels brings with it the potential for
additional sales volume at the cost of greater channel conflict. A new
channel, regardless of whether it is the Internet, an emerging low cost
indirect channel, or a new manufacturer sales force will increase channel
conflict.
Channel conflict occurs because now there is another type of distribution

channel that is perceived by the existing channels to be chasing after the
same customers with the same brand.
The fear of conflict with existing channels can paralyse a company. But on
the other hand much of what channel members call channel conflict is
healthy channel competition. Therefore the objective of conflict management
should not be to eliminate channel conflict but rather manage it so that it
does not escalate to destructive levels.
From the manufacturer's perspective, channel conflict becomes destructive

when the existing distribution channels react to channel migration by
reducing support or shelf space for the manufacturer.
For example, when Estée Lauder set up a website to sell its Clinique and
Bobbi Brown brands, the department store Dayton Hudson reduced space
on Estée Lauder products. In extreme cases, an existing distributor may
drop the brand as happened when Levi's began expanding its distribution.
Gap decided to stop stocking Levis and concentrate on their own Gap
brands.
Channel conflict becomes particularly destructive when parties take actions

that hurt themselves in order to hurt the other party. For example, in 2002,
Albert Heijn, the largest Dutch supermarket chain, boycotted some Unilever
brands for sometime in order to retaliate against the manufacturer.

While this was resolved quickly, it was an action that could have potentially
hurt both parties. Albert Heijn would have lost some brands such as Bertoli
mayonnaise and Cif cleaning products that have very high brand loyalty
amongst Dutch consumers.
As described below, several channel conflict management strategies exist,

none of which is a panacea, but the judicious use of them can help avoid
destructive conflict. These are part of the arsenal of any multi-channel
marketer.
Clear segmentation: The rationale for having multiple types of channels

should always be built on a clear end user segmentation strategy. When the
convenience store complains to the manufacturer about the prices at which
Wal-Mart is selling their products, it has to be explained that there is no way
that a convenience store can compete with Wal-Mart on prices for the price
seeking customer.
Instead the convenience store has to compete on saving the consumer time
vis-à-vis travel, shopping and transaction processing, all at a reasonable
price premium.
They serve two different segments and each should be encouraged to

specialise on its target segment. Of course, the brand owner should ensure
that the number of distribution points that they have within a particular type
of distribution channel is balanced against the size of the segment that the
channel reaches.
Dedicated products: Many designers who have pushed for sales through
outlet stores have managed the conflict with their existing retailers by
developing special products for these outlet stores.
Similarly, many luxury brand companies, like Camus Cognac and Guylian
chocolates, offer special pack sizes and products that are attractive to

travellers at duty-free airports in order to minimise the conflict with their

regular high street retailers.
On the Internet, manufacturers can offer those SKUs which retailers are
usually not willing to carry. At the extreme, some manufacturers dedicate
different brands to different channels, sometimes referred to as channel
brands.
Expanding sales: Having a new 'hit' product helps facilitate channel

migration. Goodyear managed the migration to the mass merchandisers
with only a reasonable amount of conflict by simultaneously restricting the
distribution of its new Aquatred tyre to the independent dealers.
This allowed the independent dealer to protect their profit-ability and sales
volume through the higher margin, higher value, Aquatred tyre. It is easier to
expand channels when revenues are growing as existing dealers are less
likely to see absolute declines in sales and profits.
Dual compensation and role differentiation: Some manufacturers agree

to compensate the existing channels for sales through the new channel.
While it may be perceived as just buying off the support of the existing
channels for the channel migration, it can be useful if the existing distribution
is given a role to perform in support of the new channel.
For example, when Allstate started selling insurance directly off the Web,
they agreed to pay agents 2% commission if they provided face-to-face
service to customers who get their quotes off the web. However, since this
was lower than the 10% commission that agents typically received for offline
transactions, many agents did not like it.
Yet, it does help lower the negative backlash. Using the existing channel
partner can be a useful complement.

Equitable treatment: Some retailers will be upset that the prices at which
they purchase from the manufacturer are higher than those charged to other
retailers or the direct sales force. There is often the feeling that the
manufacturer is favoring other channels at their expense.
While one may never fully be able to overcome these concerns, the best
antidote is to treat channels equitably and in a transparent manner. If the
manufacturer's prices differ across channels, it should be based on the
functions that the particular channel member performs.
So, yes, Tesco and Wal-Mart receive lower prices, but it is because they
engage in practices (buying large quantities, not demanding in-store help
and promotions) that lower the manufacturer's cost to serve them.
Final thoughts
The temptation for manufacturers is always to expand the number of
distribution points as it usually results in an immediate increase in sales.
However, having too many channels chase too few consumers results in
channels dropping the level of support to the brand.
In the long run, this can have a deleterious impact on sales as well as brand
image. On the other hand changing customer preferences modify industry
structures. Traditional industry leaders have frequently neglected the fastest
growing new distribution channels.
A delicate balance must be maintained between moving too quickly and

unleashing destructive channel conflict versus clinging too long to declining
distribution networks.

1. Channel relationships are increasingly important in creating market
value and sustainable competitive advantage.

2. From the manufacturer's perspective, channel conflict becomes

destructive when the existing distribution channels react to channel
migration by reducing support or shelf space for the manufacturer.
3. The rationale for having multiple types of channels should always be
built on a clear end user segmentation strategy.
6.10 Summary
A channel to market is the method of getting your product into the
customer’s (the end user’s) hand. Channel conflict occurs when the vendor
(you) and the reseller, or different reseller types (retail, VAR, mail order,
Internet) compete for the same business.
Channel sale is the overall account liaison and is primarily responsible for
selling product into distribution and the reseller channel (retail, VARs,
system integrators). Channel marketing is responsible for ensuring that
product in distributor and reseller locations gets sold out.
A Channel Marketing Manager is typically responsible for the sell-through

function. The performance of a distribution channel can be assessed by
considering a number of performance dimensions, including channel
effectiveness, channel efficiency, channel productivity, and channel
profitability.
Companies count on their channel partnerships to maximize profits,

increase market penetration, and enhance customer satisfaction.

1. Explain the policies of marketing channels.
2. How is the channel performance assessed?
3. Describe in detail management of channel relationships.
4. Discuss the conflicts of channel management.

SAQs I
1. True 2. True
SAQs II
1. A multi channel user
2. Offline efforts
3. Customer communication
SAQs III
Answers to TQs:
1. Refer to 6.2
2. Refer to 6.4
3. Refer to 6.8
4. Refer to 6.9

Unit 7 Recent Trends in Channel Management
Structure:
7.1 Introduction
Objectives
7.2 Wholesaling
7.3 Retailing
7.4 Ethical and Social Issues in Sales and Distribution Management
7.5 Summary
7.1 Introduction
Wholesaling refers to the activities involved in selling goods to
organizational buyers who intend to either resell or use for their own
purposes. Retailing consists of the sale of goods or merchandise for
personal or household consumption either from a fixed location such as a
department store or kiosk, or from a fixed location and related subordinated
services. This unit discusses wholesaling and retailing, while throwing light
on the ethical and social issues in sales and distribution management,
taking an example.
Objectives:
 Explain the meaning of ‘wholesaling’.
 Explain the meaning of ‘retailing’.
 Bring out the ethical and social issues in sales and distribution with an
example.

7.2 Wholesaling
Wholesaling refers to the activities involved in selling to organizational
buyers who intend to either resell or use for their own purposes. A
wholesaler is an organization providing the necessary means to: 1) allow
suppliers (e.g., manufacturers) to reach organizational buyers (e.g.,
retailers, business buyers), and 2) allow certain business buyers to
purchase products which they may not be able to purchase otherwise.
According to the 2002 Census of Wholesale trade, there are over 430,000
wholesale operations in the United States.
While many large retailers and even manufacturers have centralized

facilities and carry out the same tasks as wholesalers, we do not classify
these as wholesalers since these relationships only involve one other party,
the buyer. Thus, a distinguishing characteristic of wholesalers is that they
offer distribution activities both for a supplying party and for a purchasing
party. For our discussion of wholesalers we will primarily focus on
wholesalers who sell to other resellers such as retailers.
7.3 Retailing
The term ‘retailing’ refers to ‘the activities involved in selling commodities
directly to consumers’.
Definition
Retailing consists of the sale of goods or merchandise for personal or
household consumption either from a fixed location such as a department
store or kiosk, or from a fixed location and related subordinated services.
Defined here as sales of goods between two distant parties where the
deliverer has no direct interest in the transaction, the earliest instances of
distance retailing probably coincided with the first regular delivery or postal

services. Such services would have started in earnest once man had
learned how to ride a camel, horse, etc.
Why?
When individuals or groups left their community and settled elsewhere,
some missed foodstuffs and other goods that were only available in their
birthplace. They arranged for some of these goods to be sent to them.
Others in their newly adopted community enjoyed these goods and demand
grew. Similarly, new settlers discovered goods in their new surroundings
that they dispatched back to their birthplace, and once again, demand grew.
This soon turned into a regular trade. Although such trading routes
expanded mainly through the growth of traveling salesmen and then
wholesalers, there were still instances where individuals purchased goods at
long distance for their own use.
A second reason that distance selling increased was through war. As armies
marched through territories, they laid down communication lines stretching
from their home base to the front. As well as garnering goods from
whichever locality they found themselves in, they would have also taken
advantage of the lines of communication to order goods from home.
In commerce, a retailer buys goods or products in large quantities from

manufacturers or importers, either directly or through wholesalers, and then
sells individual items or small quantities to the general public or end-user
customers, usually in a shop, also called a store. Retailers are at the end of
the supply chain. Marketers see retailing as part of their overall distribution
strategy.
Shops may be on residential streets, or in shopping streets with few or no

houses, or in shopping centers. Shopping streets may or may not be for
pedestrians only. Sometimes a shopping street has a partial or full rooftop to

protect customers from precipitation. Online retailing, also known as e-

commerce, is the latest form of non-shop retailing.
Shopping generally refers to the act of buying products. Sometimes, this is

done to obtain necessities such as food and clothing; sometimes, it is done
as a recreational activity. Recreational shopping often involves window
shopping (just looking, not buying) and browsing and does not always result
in a purchase.
7.4 Ethical and Social Issues in Sales and Distribution

Management
An example of how HP view this aspect has been given below:
Awareness of social and environmental issues in the electronics industry

supply chain is increasing among the public, our customers, NGOs,
investors and the media.
These stakeholders expect us to demonstrate that our long-standing

commitment to global citizenship extends to our supply chain and to show
evidence of improved performance and greater transparency in this area.
Our supply chain SER program responds to these stakeholder expectations.
Today, the majority of our products are manufactured for HP through

alliances and partnerships. The global scope of HP’s supply chain and our
value as a customer provide us the opportunity to impact the human rights,
health, and safety, environmental and ethical performance of the businesses
worldwide that constitute our supply chain.
Our supply chain spans about 600 suppliers worldwide, with more than
300,000 workers at the supplier sites at which our products are made. The
expectations we set for suppliers that manufacture HP's parts, components
and products, are a key aspect of our social and environmental
performance. Beyond product manufacturing, social and environmental

impacts also occur during the transport of our products throughout our
supply chain. These suppliers are the focus of HP's Supply Chain Social
and Environmental Responsibility Program.
Supplier's SER Conformance Requirements

Essential to HP’s program is our Supply Chain Social and Environmental
Responsibility (SER) Policy and HP’s Electronic Industry Code of Conduct,
which commit us to work with our suppliers to ensure they operate in a
socially and environmentally responsible manner. HP’s approach to
implementing social and environmental responsibility in our supply chain is
based on early, frequent, and proactive involvement with key suppliers to
develop a partnership for improvement.
To ensure that we minimize the social and environmental impact of our

worldwide supply chain practices, we have:
 Implemented the use of a Supply Chain Social and Environmental
Policy.
 Adopted the use of the new Electronic Industry Code of Conduct, which
formalizes hp's supplier labor, human rights, health, safety,
environmental and ethical expectations.
 Re-emphasized HP's requirement for conformance with the product
content restrictions covered in HP's General Specification for the
Environment (GSE).
 Strengthened our supplier contract and purchasing agreements to reflect
our new expectations.
 Communicated our SER conformance monitoring process.
 Began auditing of our supplier's facilities.
 Developed requirements for supplier performance reporting and

corrective actions for non-conformance.

 Expanded performance results of supply chain SER conformance in

HP's annual global citizenship marketing.
Our long-term commitment is to achieve sustained improvement by building

our suppliers’ social and environmental capability. During 2006, we began
training suppliers to increase their understanding of how raising their SER
standards and practices will benefit their business.
Partnerships
Collaborative efforts within our industry are an effective way to leverage the
work of each individual company or organization to raise supply chain
standards. Suppliers generally work with several major corporate customers
and receiving a consistent message from those customers is likely to have
the greatest impact.
Industry groups also enable participants to share resources and knowledge,

standardize tools and processes, avoid duplication of effort and develop
consistent approaches to the industry’s most difficult issues.
Some of the key lessons we have learned from participating and

benchmarking with various industry sector groups are:
 Multiple codes, surveys and audits increase costs and result in fatigue
and fraud.
 Programs cannot be managed from U.S. corporate headquarters and
require a solid understanding of the local context.
 Disagreement within an industry on a small number of issues can
outweigh agreement on the vast majority of issues.
 Inspection-only and enforcement-only approaches and lack of focus on
management systems fail to create long-term behavioral and
sustainable change.
 Approaches must be both top-down and bottom-up and must focus on
addressing root causes of issues.

 A balance of internal and external monitoring and verification can

provide the most long-term change; external monitors may not be
granted equal access to facilities, they may lack influence due to their
non-purchasing role and they do not have the same long-term
responsibility to create change.
 Standards for monitoring social and ethical compliance need to be
formalized.
 It is essential to integrate the SER program into business-sourcing
decisions, from qualification through potential termination.
 Capacity-building programs for suppliers are essential to success.
We have made considerable investments in recent years to establish

partnerships, develop processes and build systems, enabling us to mitigate
our SER impact and risks, affect change, and realize tangible business
benefits. We invite other electronics companies as well as customers,
shareowners, governments and stakeholders worldwide to share in
developing sustainable solutions that protect workers’ rights, health, safety
and the environment.
1. Wholesaling is defined as the activities involved in selling to __________

who intend to either resell or use for their own purposes.
2. According to the 2002 Census of Wholesale trade, there are over
__________ wholesale operations in the United States.
3. A distinguishing characteristic of _____________ is that they offer

distribution activities both for a supplying party and for a purchasing
party.
4. The term __________ -refers to ‘the activities involved in selling
commodities directly to consumers’

5. In commerce, a retailer buys goods or products in large quantities from

_____________, either directly or through wholesalers, and then sells
individual items or small quantities to the general public.
7.5 Summary
Retailing consists of the sale of goods or merchandise for personal or
household consumption either from a fixed location such as a department
store or kiosk, or from a fixed location and related subordinated services.
In commerce, a retailer buys goods or products in large quantities from
manufacturers or importers, either directly or through wholesalers, and then
sells individual items or small quantities to the general public or end-user
customers, usually in a shop, also called a store.
Shopping generally refers to the act of buying products. Ethical and Social
Issues need to be taken care of in Sales and Distribution Management.

1. What is wholesaling? Explain.
2. Explain the retailing? Explain.

SAQs I
1. Organizational buyers
2. 430,000
3. Wholesalers
4. Retailing
5. Manufacturers or importers
Answers to TQs:
1. Refer to 7.2
2. Refer to 7.3

Unit 8 Introduction to Supply Chain Management
Structure:
8.1 Introduction
Objectives
8.2 Meaning and Definition of Supply Chain
8.3 Components of Supply Chain
8.4 Schools of Thoughts
8.5 The Process of Supply Chain Management
8.6 Objectives of Supply Chain Management
8.7 Summary
8.1 Introduction
A ‘supply chain’ consists of all of the entities necessary to transform ideas
into delivered products and services. Supply chain management directs and
transforms a firm's resources in order to design, purchase, produce, and
deliver high-quality goods and services. As goods and services flow from
supplier to producer, to customer to final user, supply chain management is
particularly concerned with the interfaces between organizations. One way
to view supply chain management is as the management of linkages
between organizations.
The competitive and global nature of today's business environment dictates

that this direction and transformation take place in a way that is as efficient
and effective as possible. Continuing emphases on time, cost, and quality
improvements have sharpened the need to co-ordinate and co-operate with

trading partners around the world to achieve results that allow customers to
be successful. Thus, supply chain management focuses on the integration
of activities across several companies to manage the flow of products,
services, people, equipment, facilities, and other resources. Supply chain
management is also concerned with recycling, reuse, and final disposal of
products. This unit throws light on various aspects of supply chain
management.
Objectives:
 Explain the meaning of supply chain.
 Name the components of supply chain.
 Describe the process of supply chain management.
 State the objectives of supply chain management.
8.2 Meaning and Definition of Supply Chain

Defining SCM
A supply chain includes all the processes that add customer-desired value
to material and bring it to the customer. This value gets added at various
stages of the journey that material takes till it reaches the customer. Supply
chain encompasses all these value-adding stages.
Supply chain literature is full of various definitions of supply chains. Given

below are some of the famous SCM definitions:
• MIT official definition (Demystifying Supply Chain Management by Peter
J. Metz from Supply Chain Management Review Winter 1998).
"Integrated Supply Chain Management (ISCM) is a process-oriented,

integrated approach to procuring, producing and delivering products and
services to customers.

ISCM has a broad scope that includes sub-suppliers, suppliers, internal

operations, trade customers, retail customers and end users. It covers
the management of materials, information and funds flows."
• Ganeshan and Harrison, Supply Chain Management
"A supply chain is a network of facilities and distribution options that
performs the junctions of procurement of materials, transformation of
these materials into intermediate and finished products, and the
distribution of these finished products to customers."
• Ohio State University's Global SCM Forum
"The integration of business processes from end user through original
suppliers, that provide products, services and information that add value
for customers."
• Cisco
"SCM aims to increase sales, reduce costs, and make frill use of assets
by streamlining the interaction and communication of all participants
along the supply chain. SCM solutions use networking technology to link
suppliers, distributors, and business partners to better satisfy the end
customer, while feeding real time data about customer demand into the
partners' production and distribution processes. "
Existence of so many definitions can be confusing and frightening.

Several executives across companies often wonder whether they, their
suppliers and their logistics providers are all reading the same book and
same definition and whether they are all interpreting it the same way.
Supply Chain Types:

In the course of research and industry study, the authors came across many
definitions of supply chain and worse, several interpretations of supply
chain. Based on the study, supply chains can be categorized as:
1. Raw Supply Chains

2. Ripe Supply Chains

3. Internal Supply Chains
4. Extended Supply Chains
5. Self-monitored Supply Chains
6. Outsourced Supply Chains
7. Production-oriented Supply Chains
8. Financial-oriented Supply Chains
9. Market-oriented Supply Chains.
10. Value Chains (Complete Supply Chains).
Raw supply chains are the basic type that were loosely organized and
mostly conformed to the legacy style. The departmental silos are still there
but there is better co-ordination between them. This gave them better
visibility into the company's operations than before. This is called a supply
chain as there is some improvement over the processes followed otherwise.
These so called supply chains are found in ancillary units and small scale
industries.
Ripe supply chains are the ones where companies thought this was fit and
they have achieved all that there is to achieve. All the activities are done in
an organized manner, companies have improved relationships with their
suppliers and distributors and there was some amount of information flowing
in through the chain. However, there are no other supply chain initiatives in
the pipeline. These chains exist in the food sector.
Internal supply chains are the most commonly found where the companies
have implemented sophisticated enterprise resource planning packages and
their internal operations are absolutely fine tuned and well co-ordinated.
However, they have not brought their suppliers or distributors into their fold.
These companies are completely besotted by achieving internal
optimization. The companies in this category are from all sectors and
include all types of companies.

Extended supply chains are the internally optimized chains that extend well
beyond the company's boundaries to include the suppliers and distributors
into their fold. These companies, however, concentrate only on the top
suppliers and the top distributors. In that sense, there is a partial integration.
Websites and specific web pages are used to communicate with external
partners. However, complete integration wherein one Enterprise Resource
Planning talks to the other and exchanges information smoothly without
human intervention is missing. Once again, this is a very commonly found
supply chain spanning all sectors but specifically common in the automotive
sector.
Self-monitored supply chains are the ones where the manufacturing

company takes the lead in bringing all partners in its fold and hence these
supply chains are company-centric and not customer-centric. Although they
are able to achieve a considerable speed to market, it is not because of total
optimization.
Outsourced supply chains are where the logistics partner (a 3 PL) usually
takes care of everything – outbound logistics, inbound logistics,
relationships, information flow, etc. They make decisions and they monitor
the supply chain. This is very rare and is found to exist in some of the export
houses. As there are only activities such as procuring and exporting (no
production) this is the most feasible alternative.
Production-oriented supply chains have a one point agenda: produce to

optimize the capacity and labour. All other activities precede production.
This is mostly found where low value items are made and sold through
various channels. Hence, marketing and distribution are relatively the non-
issues.
Financial-oriented supply chain or more fondly known as "cash-to-cash

cycle" chain provides a company with negative working capital (accounts

receivables plus inventories less accounts payables). This leaves a

company with high cash holding for use elsewhere. Goods flow quickly.
Upon demand, they are converted or distributed and sold to customers who
pay before the supplier's accounts payable is settled. This chain
emphasizes a financial goal first, and then logistics and planning are built
from that end. This was found in big companies particularly in the fast-
moving consumer goods sector.
Market-oriented supply chains or customer supply chains are the typical

built-to-order type of chains that get triggered when the customer places an
order. Most commonly found in computer hardware sector, and other
sectors which are dominated by consumer tastes, these supply chains are
highly responsive and agile.
A value chain is the ultimate integration that is aimed at total optimization

and not optimization in parts. These supply chains also addressed allied
issues such as waste disposal, improving productivity, etc. Not very
commonly found, but several companies have such ultimate supply chains
on their agenda.
What is SCM?
Very simply put, SCM is a network of the manufacturer's suppliers, and
suppliers' suppliers on the one hand and customers and customer's
customers on the other hand. This network exists to ensure a free and
smooth flow of information, goods, services and profits among all its
participants. Every node or link stands to gain from this association. In
supply chain parlance each player is a supplier and supplies to the next
player either basic raw materials, or components or semi-finished products
or the finished goods that manufacturer supplies to the distributor, who turn
supplies them to the retailer and who then supplies to the end user. It is
equivalent of a relay race where there are four players running one after the

other. The first one hands the baton to the next, who then tries to maintain
and even improves upon the performance of the earlier runner and passes
on the bents so derived to the next player and the process goes on till all the
players have performed. The race cannot be won by best performance of
any single player. It is to be a collective effort, a joint endeavour.
They supply to the second set of nodes (suppliers supplier), which represent
the second tier of suppliers. They add value to the basic materials procured
from the first tier of suppliers and pass them on to the next nodes who are
the key suppliers. These key suppliers add more value to the material
procured by them and supply it to the manufacturer. He procures the
different types of raw materials, components and manufactures the finished
product that he is known for. He then supplies (he is also a supplier to the
next set of nodes) the finished product to the next tier of supplier who is
more popularly known as the distributor.
The next set of nodes, i.e. the distributor, supplies the finished products to
the retailers. They add value by supplying the right product at the right time
in the right quality to the retailer who is the buying arm of the customer.
A retailer exists to supply the finished product to the customer, the end user.
He is the face of the manufacturer and as mentioned earlier, the buying arm
of the customer. He is the first contact point with the customer and to a large
extent, responsible for sales volumes.
And finally, there is the customer who buys a product for use. All the nodes
and the entire supply chain exist for this customer. If the customer is happy
with the product, service and quality it will be reflected in the sales figures
and profits.
That is the first step in obtaining a customer order, followed by production,

storage and distribution of products and supplies to the customer site.
Managing the chain of events in this process is known as supply chain

management. Effective management must take into account co-ordinating

all the different pieces of this chain as quickly as possible without losing
quality or customer satisfaction, while still keeping costs down.
In addition, the key to the success of a supply chain is the speed with which
these activities can be accomplished and the realization that customer
needs and customer satisfaction are the very reasons for the network.
Reduced inventories, lower operating costs, product availability and
customer satisfaction are all benefits which grow out of effective supply
chain management.
This is a hypothetical example and hence the supply chain looks simple and
uncomplicated but in reality when the manufacturer typically buys thousands
of products from hundreds of suppliers and distributes the finished product
through another large set of distributors, things become quite intricate and
complex. It is therefore very important to identify each and every node that
constitutes the suppliers and make them participate in the information flow
and smooth product flow. Even one small bit of information loss could lead
to loss of sale. The situation becomes more complicated when the company
makes and distributes several products and each product necessitates a
detailing of its supply chain.
8.3 Components of Supply Chain Management

SCM is the most dominant paradigm in contemporary business and is
emerging to be one of the most powerful creators of sales and revenue
growth and soundly based and sustainable competitive expansion. As we
are entering the twenty-first century, the rapidly-exploding liberalised global
market-place is creating enormously diversified customers, products and
services. Organisational, informational and managerial demands are being
redefined. The new millennium is creating new conditions and an entirely

different type of challenge, which are being manifested in innovative supply

chain developments.
Several developments of the last 50 years are the fundamental drivers of

new vitality throughout industry and commerce that are the launching pad
for the new millennium- an integrating process based on flawless delivery of
basic and customized services; systematic effort to provide integrated
management to meet customer needs and expectation from the suppliers of
raw materials through manufacturing to end-customers.
Management of material and information flows, both in and between

facilities such as vendors, manufacturing and assembly plants and
distribution centers.
The first driver is demonstrated by a remarkable behavioral change in the

top management of global companies. This has dramatically altered the way
people think, learn, decide, act and believe in how they can improve their
responsiveness towards their clientele groups.
The second driver is concerned with the principle that 'making products
better is the way to retain customers'. To win differentiated advantages, the
business has not only to make and deliver them quicker and cheaper, but
what is being done must be done everywhere in the extended enterprise.
The third driver is the urgency of the discipline of supply chain cost-
economics. This challenges the kind of corporate strategy and planning
whereby companies still do not know what things really cost. The
ambiguous costing concept has been primary reason for the kind of ‘slash
and burn’ cost reduction and control that have created islands of separation.
The fourth driver is that the creation of value has become an international
business language. The value innovation concept has created a process of
management, which discards traditional management processes.

The fifth driver is today's widespread managerial recognition of the u

necessity for fact-based decision making. Fact-based decision making is the
principal driver at every stage of the management process to empowerment
and accountability.
In summary, five forces of change are driving the new opportunity taking
competitive advantages through supply chain management:
1. The first force deals with the fundamental shift in customer expectation
2. The second force is a corollary to the first, i.e. the basic change
marketplace.
3. The third force of fundamental change in value perception is the demand
an emphasis in closer supplier-manufacturer-customer partnering.
4. The fourth force is the challenge of the rapidly-emerging new technology
and products.
5. The fifth force has to do with the business performance metrics.
The ensuing chapters attempt to highlight the essentials of supply chain in

an integrated manner.

1. SCM is a network of the manufacturer's suppliers, and suppliers'

suppliers on the one hand and customers and customer's customers on
the other hand.
2. Ripe supply chains are the internally optimized chains that extend well
beyond the company's boundaries to include the suppliers and
distributors into their fold.
3. Self-monitored supply chains are customer-centric and not company-
centric.

8.4 Schools of Thoughts

Historical Background
The working of the economic system by which goods and services are
supplied to consumers involves four basic market functions: production,
distribution, exchange, and consumption. Logistics assists in the efficient
performance of each of these functions. Production transforms raw
materials into finished goods (i.e., it creates form utility). In doing so, a long
and intricate logistical chain is activated to bring the material together in the
proper quality and quantity at the right time in support of the productive
process. The function of distribution places raw materials in the hands of
producers, and finished goods in the hands of consumers when and where
wanted (i.e., it creates time and place utility). Transportation comes into play
as a key element in this chain; but getting goods where and when needed
involves much more than just the services of carrying products from here to
there.
The function of exchange transfers goods from the wholesale to the retail
links in the chain, while consumption ends the process. All this might sound
simple enough; but when the consumer is regarded as the "king", the sheer
enormity of the logistical task can boggle the imagination. Apparently,
logistics has been woven into the very fabric of modern life. How else could
the seemingly insatiable public appetite for automobiles, houses, television,
stereo sets, household appliances and entertainment be satisfied?
Traditionally, materials management was responsible for various aspects

related to material flow within an organization. Materials management
includes the services of transportation, inventory management, the
acquisition of materials (or purchasing), the storage of materials once
acquired, and the handling of the materials while in the process of
manufacture. Physical distribution continues the process.

Physical distribution also includes transportation, but this time, out-bound

from the plant or storage facility to the customers. The management of the
finished goods inventory is included here, along with the protective
packaging of goods to reduce damage in transit (marketing handles the type
of packaging designed to attract purchasers and sell products), and storage
and materials handling. Traditional management saw physical distribution
playing a key role in creating and maintaining brand loyalty and market
share. Effective physical distribution involved addressing the issues of
inventory, transportation, warehousing/ storage, and communications.
Logistics, thus, bridges the gap between consumer demand and producer
supply, although the consumer can include both the individual user of a
product and the user of raw materials or finished goods produced by
someone else.
Prior to World War II, businesses were generally small enough to solve their
logistical problems by the personal experience and intuition of their
personnel. Input materials were both cheap and plentiful, and the means of
hauling everything around were readily available. World War II, with
problems involving the movement of huge quantities of supplies and large
troop units under the most adverse conditions, raised logistics from glorified
troubleshooting to a distinct technical field.
Rising interest rates and the oil embargo-induced leap in energy bills
focussed the attention of businesses on the costs of their operations.
Suddenly, cost control became an important element in profitability, and
logistics took its place in cost control systems. As the 1980s approached,
the legal and regulatory climate in which business operated became more
complex.
Logistics quickly became involved in every major function of management.

Planning, for example, involves looking ahead to determine the most

efficient (i.e., cost or profit-effective) way of achieving company objectives.

This would require an orderly flow of materials into and out of a company,
while at the same time achieving a low-cost operation. Similarly, organising
brings together tasks and a mixture of human and material resources to
achieve company objectives.
As corporate enterprises become larger and more complex, an easy error to

fall into is forgetting that a business is frequently greater than the sum of its
organizational elements. Responsibilities become fragmented into smaller
and smaller specialties. The members of these small, concentrated units are
then judged how well their fragment performs, rather than how much of
contribution the fragment makes to the total operation of the firm.
For example, customer service gets assigned to sales; production goes to

manufacturing, and inventory control gets split between purchasing and
warehousing. Almost instantly the problems of the trade-off arise. Sales
wants the best possible customer services, but this noble aspiration requires
high inventories for the desired instant response to customer orders.
Production must also be flexible to meet sudden shifts in demand. Thus, if
sales get what it wants, the performance of manufacturing, purchasing and
warehousing deteriorates due to the high cost of carrying large inventories
and scheduling irregular production runs in the factory.
What manufacturing really wants is a nice, long, uninterrupted production

run. Unfortunately, this too requires large inventories, what may be an
unacceptable loss of flexibility in meeting changing customer demand, and
some delay in filling customer orders that arrive just as a production run is
started to refill a depleted finished goods inventory. The result is frequently
sub-optimization. Each organizational element strives for perfection in its
own area of responsibility without regard for the impact on the total company
system.

Against this background, it may be necessary to review the concept of

value. Customer service is concerned with making the product available to
the customer. There is no value in a product or service until it is in the hands
of the customer. Availability, in itself, is a complex concept, impacted by
many factors that may include delivery frequency and reliability, stock levels
and order-cycle time. Ultimately, customer service is determined by the
interaction of all those factors that affect the process of making products and
services available to the buyer.
Customer service may be seen as a way in which value is added to the

product-service package purchased by the customer. Value becomes the
amount a customer is willing to pay for the product/service provided by a
supplier. Value added is the difference between what the customer pays
and the cost of providing the service.
The supplier must approach the problem from the stance which simply asks:
if we provide this service, will the marginal cost be exceeded by the
marginal revenue it earns? The issue confronting the retailer is which of the
services to select and which to provide internally. This is the classical make
or buy decision.
During the early eighties, customer service was seen as an opportunity to

develop competitive advantage. Typically, the services offered were generic,
i.e. there was no major attempt at differentiation. However, by the mid to late
eighties, information availability made it possible to differentiate customer
service offers; and selective service packages began to form the basis of
specific supplier/ distributor relationships. Today, this is further eased by
availability of enterprise wide information systems such as enterprise
resource planning (ERP).
The service emphasis for most companies implied a focus on minimizing

costs around a pre-determined level of service achievement. For some

organizations, a view emerged which suggested that customer service, if

viewed as a means by which the overall package could be differentiated,
should be seen as a revenue or profit centre activity.
8.5 The Process of Supply Chain Management

If logistics management is to exert a large influence on strategy, a structured
or formal approach to making this contribution is necessary. This structured
approach is available through the concept of the supply chain.
The concept of the supply chain is not new. The practitioners' views
concerning supply chain management (SCM) are much the same as of
integrated logistics. The major difference seems to be that supply chain
management is the preferred name for the actualization of integrated logistic
theory and enabled through the development in information technology (IT).
As somebody has put it: supply chain management is simply a loop; it starts
with the customer and it ends with the customer. Through the loop flow all
materials and finished goods, information, and even all transactions. It
requires looking at the business as one continuous process. This process
absorbs traditionally distinct functions as forecasting, purchasing,
manufacturing, distribution, and sales and marketing into a continuous flow
of business interactions. Gone are the functional silos of corporate activity;
instead, they are restructured as a seamless pipeline that stretches between
a company's suppliers and its customers.
The cost of making information available to more people has steadily gone
down while the physical costs of business such as facilities and inventory
have steadily risen. IT has been important to the development of the
logistics activity, not only because of the fact that costs have decreased,
and accuracy and frequency have become accepted, but, more importantly,
information offers the facility to co-ordinate activities and to opt for control by
information.

8.6 Objectives of a Supply Chain

The most important objective is unification of all the functions and activities
that are required throughout the product life cycle from lust to dust. This
unification or integration allows a smooth passage of information and
products throughout the system. Managing the complete product life cycle
includes managing the design, source, make and delivery. The principal
objectives are:
• To reduce the physical supply chain links;
• To define supply chain responsibilities to a specific core service
competency; and
• To decrease the time and cost of getting end user customer products in
volume to markets worldwide.

1. Supply chain management is a loop; it starts with the __________ and
ends with the customer.
2. The service emphasis for most companies implied a focus on _____
around a pre-determined level of service achievement.
3. __________ is the difference between what the customer pays and the
cost of providing the service.
8.7 Summary
A supply chain includes all the processes that add customer-desired value
to material and bring it to the customer.
Integrated Supply Chain Management (ISCM) is a process-oriented,
integrated approach to procuring, producing and delivering products and
services to customers.
SCM is a network of the manufacturer's suppliers, and suppliers' suppliers
on the one hand and customers and customer's customers on the other

hand. This network exists to ensure a free and smooth flow of information,
goods, services and profits among all its participants.
The concept of the supply chain is not new. The practitioners' views
concerning supply chain management (SCM) are much the same as of
integrated logistics.

1. Define ‘supply chain’.
2. What are the components of supply chain?
3. Describe the historical background of supply chain management.
4. Describe the process of supply chain management.
5. What are the objectives of supply chain management?

SAQs I
1. True
2. False
3. False
SAQs II
1. Customer
2. Minimizing costs
3. Value added
Answers to TQS:
1. Refer to 8.2
2. Refer to 8.3
3. Refer to 8.4
4. Refer to 8.5
5. Refer to 8.6

Unit 9 Planning and Designing Supply Chain
Structure:
9.1 Introduction
Objectives
9.2 Supply Chain Integration
9.3 Forecasting in Supply Chain
9.4 Managing Demand and Supply
9.5 Network Design
9.6 Summary
9.1 Introduction
The objective of the supply chain concept is to synchronise the service
requirements of the customer with the flow of materials from suppliers, such
that the apparent contradictory situation of conflicting goals of high customer
service, low inventory investment and low operating costs may be balanced
(or optimized). It follows that the design and operation of an effective supply
chain is of fundamental importance.
This unit throws light on forecasting in supply chain and managing demand
and supply.
Objectives:
 Explain supply chain integration.
 Explain forecasting in supply chain.
 Describe the way of managing demand and supply.

9.2 Supply Chain Integration

Stevens (1989) proposed a model in which the balance within the supply
chain involved functional trade-off.
The development of an integrated supply chain requires the management of

material and information flows to be viewed from three perspectives:
strategic, tactical and operational. At each level, the use of facilities, people,
finance and systems must be co-ordinated and harmonized as a whole.
The focus at the strategic level should develop:

• Objectives and policies for the supply chain in order to achieve
competitive superiority.
• The physical components of the supply chain.
• A statement of customer service intent by the product market, customer
group, or perhaps by a large customer.
• An organisation structure capable of bridging the functional barriers and
thereby, ensuring an integrated value delivery based supply chain.
The tactical perspective focusses on the means by which the strategic

objectives may be realized. Objectives for each element of the supply chain
provide the directions for achieving balance within the supply chain. The
tactical perspective involves identifying the necessary resources with which
the balance may be achieved.
The third phase is supply chain development in which the supply chain
strategy and plans for implementation are evolved. The strategy should be
examined to ensure that the relevant customers (and customer service
expectations) have been identified and that this is consistent with
management's perception of market development trends. Implementation
plans require a time-phased program for resource allocation throughout the
supply chain.

Stevens makes an interesting comment concerning supply chain

development. While the impetus for the development of the strategy may be
a top-down approach, its success is likely to be achieved by a bottom-up
approach.
• Stage 1 is a situation in which the company approaches supply chain
tasks in discrete decisions with responsibility lodged in each of the task
centers. The result is usually a lack of control across the supply chain
function because of organizational boundaries preventing the co-
ordinated decisions from achieving an overall customer service
objective.
• Stage 2 of development is typified by the functional integration of the
inward flow of goods through materials management, manufacturing
management and distribution. The emphasis is usually on cost reduction
rather than on performance achievement and is focused on the discrete
business functions with some attempts at achieving internal trade-off
between, for example, purchasing discounts and inventory investment,
and perhaps, plant operating costs and batch volumes. Customer
service is reactive.
• Stage 3 accepts the necessity of managing the flow of goods to the
customer by integrating the internal activities. At this stage, integrated
planning is achieved by using systems such as distribution requirements
planning (DRP), JIT, manufacturing techniques, etc. This level of internal
integration is essential before the company can consider integrating
customer demand in an overall demand management activity. IT
becomes an effective enabler in this process.
• Stage 4 extends the integration to external activities. In doing so, the
company becomes customer oriented by linking the customer's
procurement activities with its own procurement and marketing activities.

The value chain/supply chain management approach enables a company to

respond to market changes. However, for the full potential to be realised,
the connection and inter-relationships between the component parts of the
supply chain must first be identified, and an integrated system designed to
ensure that the system which evolves can be managed such that customer
product and service expectations may be met cost-effectively.
Christopher (1992) gives the following reasons for not following the
integrated supply chain view:
• Few managers retain a grasp of a process from one end of the pipeline
to the other. As a result, the way things get done can reflect
convenience for doers, a desire to protect functional boundaries and a
lack of understanding of the consequences, both up and down streams
of individual processes.
• Initiatives for change are largely functional and seldom reflect the total
cost of the system. So, for example, manufacturing based on JIT may
simply push inventory back on to the suppliers or into finished goods
warehouses. On some occasions, this can actually increase the total
cost and also reduce flexibility.
• Their custodians as a means of providing breathing space and as a way

of providing some hidden flexibility respond to protect lead times.
Individual functional lead times inevitably contain some slack, and where
these become embodied in a company's processing systems, and then
they are institutionalized.
Perhaps, in addition, there is a maturity aspect where it is only companies

that have gained experience from implementing best practices successfully,
that gain the knowledge and confidence to move forward. The
developments in ERP, IT and business process re-engineering (BPR) have

motivated many organisations to pursue the theme of integration vigorously.

IT is fast becoming an enabler in integration.
This structured approach to the design of supply chain results in an

organisation that is an appropriate mix of the company's own capabilities
with those of partners or suppliers in a relationship enabled by IT that is
appropriate to the strategy of the business.
Make versus Buy

This is indeed a strategic decision. The organisational focus today is
concentrating on core competencies and outsourcing of the non-critical
components. These decisions could be taken based on a number of factors
such as capacity, leverage that an organisation gets by outsourcing, quality
and confidence in working with the vendor, etc.
One area that needs to be addressed is the development of a total cost

model for the make/buy decision. The information in this establishes the key
criteria upon which to make the sourcing decision. It is seen that having a
supplier that can work in a simultaneous engineering way with the company
is a key aspect in order to avoid costs associated with unnecessary design
complexity and proliferation. This may mean having a supplier which can
provide simultaneous engineering input through a guest engineer who works
on site as a new product development team member or has the relevant IT
to be able to effectively achieve the same.
In addition, the direct labour element indicates that choosing a supplier that
has competitive direct labour hour rates is also important. In considering
suppliers which are in off-shore areas with low labour rates, the need for
simultaneous engineering needs to be taken into account; but in addition,
the effect of other issues such as labour rate inflation and any challenges
associated with overseas sourcing would also need to be considered in a
structured manner. In doing this, critical elements to be actively managed in

preparing the organisation for the shift in disciplines and values that is likely
to progressively accompany become a networked organisation through
outsourcing and using IT aggressively.
The challenge for the modern manufacturing company is to maintain a

holistic approach to the management of the changes necessary for
remaining competitive on an international basis. In order to do this, it is
necessary to keep up-to-date with the tools and techniques that are
available and to apply them in a holistic manner such as by taking a
systems engineering approach to examine the complete supply chain.
Typically, strategic decisions are required for warehousing, transportation,
IT solutions and 'make versus buy'.
9.3 Forecasting in Supply Chain

Supply Chain Constituents
These are the elements that are the backbone of SCM. These are the
support structures on which the SCM rests and functions effectively. The
most important and vital element is information. All the activities within a
supply chain get triggered with a single piece of information that the
customer desires the product. Hence capturing, analyzing and
disseminating the right information is the key to the success of any
operation. An efficient SCM system has the capacity to capture and
disseminate the right information to the right people at the right time or in
real time.
The next vital constituent is supply or everything that will cause a flawless or
efficient supply of basic materials to the production facilities. This includes
relationship with suppliers. Companies must carefully select suppliers for
basic materials. When choosing a supplier, focus should be on developing
velocity, quality and flexibility while at the same time reducing costs or
maintaining low cost levels. In short, strategic decisions should be made to

determine the core capabilities of a facility and outsourcing partnerships

should grow from these decisions.
Production is the next key constituent of SCM. Production relates to making

what the customer wants. Hence this key component takes decisions
related to what and how many products to produce, and what, if any, parts
or components should be produced at which plants or outsourced to
capable suppliers. These strategic decisions regarding production must also
focus on capacity, quality and volume of goods, keeping in mind that
customer demand and satisfaction must be met. Operational decisions, on
the other hand, focus on scheduling workloads, maintenance of equipment
and meeting immediate client/market demands. Quality control and
workload balancing are issues which need to be considered when making
these decisions.
Distribution both into the production facility and out of the facility can
contribute significantly towards enhancing the competitiveness of the
manufacturer. It is a cost centre that can contribute effectively by
maintaining high service levels. Reaching the customer on time without
compromising on quality and other features of the product are vital. Modes
of transportation to be used, frequency of distribution, etc. are some of the
key decisions that require to be taken based on the field situation.
Supply stock (inventory) is another key constituent of SCM. Achieving a fine

balance between overstocking and understocking is the biggest challenge of
SCM. The situation becomes extremely critical as there are numerous
points or echelons through which the product passes and spends some time
before embarking on its next journey. And till it reaches its penultimate point,
i.e. the customer, its existence is not justified. The entire investment that has
gone into making the product and distributing realized only after the
customer pays for the product. Therefore the faster it happens, the better it

is for the company. So it is important that the product moves swiftly through
the various stop-overs and this is true not for one or two products, but for all
the products of the company. Excess inventory is caused when these
products spend more time than required at one particular point and finally a
stage comes when they may remain stagnant. Hence this is one extremely
critical area in SCM and finding an appropriate solution is the key to
achieving flexibility and agility in the market.

1. Production is not a key constituent of SCM.
2. Achieving a fine balance between overstocking and understocking is the
biggest challenge of SCM.
3. Distribution both into the production facility and out of the facility can
contribute significantly towards enhancing the competitiveness of the
manufacturer.
9.4 Managing Demand and Supply

Essentials of Supply Chain Management – Value Chain for Supply
Chain Management:
Much of the interest in the developing areas of logistics as a discipline has
been focussed upon the interrelation of functions, activities, companies and
cultural intermediaries within developing partnerships and alliances. A useful
analytical model, with which to explore the tasks and roles within the overall
process of delivering customer satisfaction, is the value chain. The value
chain (Porter, 1985) identifies the linkages and interdependencies between
(and among) suppliers, buyers, intermediaries and end-users. Its primary
benefit is the ability to examine these linkages and identify the value that is
created for customers (or that which may be created), and how this, in turn,

creates competitive advantage for a company. The value may take the form
of selling an undifferentiated product at below the competitors' price, or it
may be that the value takes the form of unique benefits that justify premium
pricing. Thus, Porter's argument is that the value chain may be used to
identify and understand the specific sources of competitive advantage and
how they relate to creating added value for customers. The value chain
provides a systematic way of component companies within an overall
pipeline or supply chain. It has been shown to be of practical use in
determining how to achieve and maintain competitive advantage in a
dynamic marketplace.
Business often refers to customer value and added value without providing
corresponding definitions or understanding of what value is to the customer.
Indeed, value for money is probably the most frequent question to appear
on trade and consumer research questionnaires. But what is value? Clearly
from a logistics strategy viewpoint, a detailed understanding of value is
necessary. Furthermore, there may well be a range of definitions as the
customers' expectations for or of value vary from one market segment to
another. Thus, value may be quality, exclusivity, convenience or possibly
service response (an intrinsic value); the common denominator is cost to the
customer. This raises an interesting view concerning how the delivery of
value may be affected. Kotler (1994) shows how this approach may be used
in the context of marketing.
Clearly, the value delivered to the customer is a function of all three items.
The primary activities of the company combine in specific producer service
combinations which meet the criteria specified by individual customers or
the criteria, which although a little flexible, do meet the needs of a specific
customer segment. Pricing and sourcing are important elements in the
package as they reflect specific aspects of the product. Pricing reflects a
negotiated overall value (value for both supplier and customer) while

sourcing reflects the tasks involved in producing both the tangible product
and the intangible service package that differentiates and increases the
value added to the tangible element of the product package.
9.5 Network Design

Analysis of a Supply Chain
Structuring the supply chain requires an understanding of the demand
patterns, service level requirements, distance considerations, cost elements
and other related factors. It is easy to see that these factors are highly
variable in nature and this variability needs to be considered during the
supply chain analysis process. Moreover, the interplay of these complex
considerations could have a significant bearing on the outcome of the
supply chain analysis process.
When organizations explore the applications of IT solutions, implementers

must ask several critical questions focused around the proper alignment of
information technology tools and the perceived increase in enterprise
productivity and serviceability. Perhaps, the most important decision is to
identify the scope of business problems to be solved. This step will
significantly narrow the range of possible IT solutions and ensure that the
effort is focused around core business issues. Equally important is charting
the effect IT implementation will have on the organisation and its
capabilities, In fact, the more encompassing the implementation, the more
levels of learning and adjustment are required to utilize it.
The alignment of the organisation with the proposed IT system impacts the
enterprise in three ways. To begin with, the integrated process requires
managers to restructure the culture and capabilities of their organisations
around values promoting continuous improvement and teamwork. Second,
integrated IT systems enable the organisation to not only rethink traditional
enterprise information flows but also to leverage new information such as

graphics, workstation technology and network-to-network computer

integration. Finally, the effective application of new information technologies
requires a redefinition of the goals and skills of the enterprise's people
resources.
The early response to the issue of managing the supply chain included
having a fully integrated business. Some of the early Western vehicle
manufacturing companies were structured in this manner where the input to
the factory was virtually the raw materials and the output was the finished
product. However, the driving forces for global manufacturers have ranged
from becoming a tiered global supply system in the West to a Japanese
Kereitsu based company supply system; although examples of near fully
integrated factories still exist in developing countries.

1. The effective application of new information technologies requires a
redefinition of the goals and skills of the enterprise's ________.
2. The _________ provides a systematic way of component companies
within an overall pipeline or supply chain.
9.6. Summary
The development of an integrated supply chain requires the management of
material and information flows to be viewed from three perspectives:
strategic, tactical and operational.
The organisational focus today is concentrating on core competencies and

outsourcing of the non-critical components. The challenge for the modern
manufacturing company is to maintain a holistic approach to the
management of the changes necessary for remaining competitive on an
international basis.

An efficient SCM system has the capacity to capture and disseminate the
right information to the right people at the right time or in real time.
Production is the next key constituent of SCM. Production relates to making

what the customer wants. The strategic decisions regarding production must
also focus on capacity, quality and volume of goods, keeping in mind that
customer demand and satisfaction must be met. Operational decisions, on
the other hand, focus on scheduling workloads, maintenance of equipment
and meeting immediate client/market demands. Quality control and
workload balancing are issues which need to be considered when making
these decisions.

1. Explain supply chain integration.
2. Describe forecasting in supply chain.
3. Describe the way of managing demand and supply.
SAQs I
1. False
2. True
3. True
SAQs II
1. People resources 2. Value chain
Answers to TQs:
1. Refer to 9.2
2. Refer to 9.3
3. Refer to 9.4

Unit 10 Co-ordination in Supply Chain
Structure:
10.1 Introduction
Objectives
10.2 Partnering in Supply Chain
10.3 Obstacles in Supply Chain Co-ordination
10.4 Managerial Leverages to Achieve Co-ordination
10.5 Outsourcing and Supply Chain
10.6 Supply Chain Performance
10.7 Summary
10.1 Introduction
Developing an effective supply chain is not easy. A company must have the
right technology and the support of the best suppliers for it to work. Supply
chains can be tremendous assets to companies and their vendors, but they
often come with a price. Businesses must be willing to change their
attitudes, their routines, and their ideas of how things need to run. A failure
to do this means that not only will the supply chain fail, but the businesses
involved will likely lose a great deal of money in the process.
This unit throws light on obstacles in supply chain co-ordination and

managerial leverages to achieve co-ordination while discussing the need for
outsourcing in supply chain management.

Objectives:
 Explain the concept of partnering in supply chain.
 State the obstacles in supply chain co-ordination.
 Explain the managerial leverages to achieve co-ordination.
 Explain the need for outsourcing in supply chain management.
10.2 Partnering in Supply Chain

The following are the imperatives for the growth of supply chain (Hicks,
1999):
• Enhanced Customer Expectations
• Pressure for Quick Response
• Impact of Globalisation
• Organisational Integration
Enhanced Customer Expectations:

Increased competition has led to greater emphasis on customer service.
Customer service may be defined as the consistent provision of time and
place utility. In other words, the product has no value until it is in the hands
of the customer at the time and place required. Customer service has
received considerable importance owing to the recognition that if a product
or service is not delivered to a customer when he needs it, the sale will be
lost to a competitor if he offers a close substitute. Customer service could be
examined under three headings: pre-transaction elements, transaction
elements and post-transaction elements.
The pre-transaction elements of customer service relate to corporate

policies or programmes; for example, written statements of service policy,
adequacy of organisational structure and system flexibility. The transaction
elements are those customer service variables directly involved in

performing physical distribution; for example, product and delivery reliability.

The post-transaction elements of customer service are generally supportive
of the product while in use; for instance, product warranty, parts repair
service, procedures for customer complaints and product replacement. SCM
clearly offers potential to address these concerns.
Pressure for Quick Response

Most customers today expect a quick response to their request. The
pressure for quick response is due to shortened product life cycles,
customer's drive for reduced inventories and volatile markets, making
reliance on forecasts dangerous.
Several complex activities occur across the entire supply chain - order
acceptance, procurement of materials and components, manufacturing
and/or assembly, distribution, cash realization and after-sales support. The
key to quick response is pipeline management, a process where the
manufacturing and procurement lead times are linked to the needs of the
market place. Pipeline management seeks to meet the competitive
challenge of increasing the speed of response to those market needs.
10.3 Obstacles in Supply Chain Co-ordination

Developing an effective supply chain is not easy. A company must have the
right technology and the support of the best suppliers for it to work.
However, even once that obstacle has been overcome, another major issue
may still loom ahead: finding real cost-reduction in the supply chain.
Unfortunately, the unanticipated costs of running the supply chain often
surprise managers and force companies to make some tough decisions.
Thankfully, understanding what causes or drives these costs is half the
battle.

There are actually six main causes of cost problems in supply chains.
Usually a supply chain will not exhibit all of these problems but they
commonly do have a combination of numerous ones since many of them
are related. One of those causes is simply that the business and its partners
have not clearly thought about what they are doing.
Anyone who has ever put together a supply chain knows that it is a truly
ambitious endeavor that is truly worth doing right. However, many
companies lack sufficient direction to accomplish such a goal. Along those
same lines is a second cause: confusion. When so many different elements
come together, confusion is almost inevitable initially, especially if there was
not enough planning, training, or communication among those elements.
Another problem deals with the way supply chain success is measured. Too
many companies continue to use outdated financial yardsticks as the sole
indicator of the success of a project or of the business. This approach does
not work for supply chains since its main goal is not necessarily to only to
improve profits but to balance supply and demand among all of the chain's
elements. Using profits and revenues as the main unit of success
measurement means that many partners may begin to sacrifice quality or to
make other drastic changes which seem to help the bottom line but which
destroy the supply chain's foundation.
A third cause of extra costs involves barriers. Those already involved with
supply chains probably already understand that small changes are
magnified at each level of the supply chain. A minor price cut at the
distributor level may be a major problem for vendors supplying the raw
materials. In order to minimize these effects, businesses must be able to
overcome the barriers that exist between each separate organization
involved in the supply and between the different departments operating
within one's own company. Unfortunately crossing these boundaries is not

always as easy as it sounds. However, dealing with these situations before

they arise and choosing supply chain partners who are open to that level of
collaboration can help alleviate many of these problems.
Finally, supply chains often suffer because either one or several links in the
chain are unable or are resistant to change or when attempts are made to
make everyone involved in the link adhere to strict guidelines. Being willing
to adapt and to be flexible is one of the biggest challenges supply chain
partners must face. An insistence that the status quo be the way to go will
ultimately cost all parties involved a great deal and might actually destroy
the supply chain.
While there are a number of ways to avoid these cost problems, they all boil
down to one thing: take pre-emptive action. When a supply chain waits for a
problem to arise and then deals with it, the consequences have already
occurred and the damage may not be able to be reversed. Instead,
companies need to sit down with their supply chain partners and discuss
issues like flexibility, barriers, metrics, and direction. By going over these
concepts in advance, the companies can ensure that everyone is on the
same page and that anyone who is not willing to be part of the group can
get out before they get too deeply involved.
Overall supply chains can be tremendous assets to companies and their

vendors, but they often come with a price. Businesses must be willing to
change their attitudes, their routines, and their ideas of how things need to
run. A failure to do this means that not only will the supply chain fail, but the
businesses involved will likely lose a great deal of money in the process.

1. The post-transaction elements of customer service are generally
supportive of the product while in use

2. A supply chain should wait for a problem to arise and then deal with it.
3. Supply chains often suffer because either one or several links in the
chain are unable or are resistant to change.
10.4 Managerial Leverages to Achieve Co-ordination

Major Trends in Supply Chain Management are:
• Co-makership
• Use of Third Party Logistics
• Principle of Postponement
• Use of ERP/DRP Techniques
Co-makership
Co-makership is defined as the development of a long-term relationship with
a limited number of suppliers on the basis of mutual confidence. The
common benefits of co-makership are shorter delivery lead times, reliable
delivery promises, less schedule disruption, lower stock levels, faster
implementation of design changes, fewer quality problems, stable
competitive prices and higher priority given to orders. The basic philosophy
of co-makership is that the supplier should be treated as an extension of the
customer's factory with the emphasis on continuity and a seamless end-to-
end pipeline. The trend towards co-maker ship should increase with the
growth in trend towards outsourcing. The principle of co-makership can be
extended in both directions in the supply chain – upstream to customers and
downstream to distributor retailers and even end users.
Use of Third Party Logistics

Outsourcing operations like storage, transportation, delivery, etc., improve
service levels, enhance flexibility and reduce costs. Outsourcing also helps
to reduce investments in assets like trucks and warehouses, and enables
organizations to access new technologies more easily and even penetrate

new markets. However, certain issues need examination. The service

provider may offer the same service to a competitor to recover the
investment costs and hence, the pay off may not materialize. The
organization’s image is closely linked to that of the service provider, Hence,
a decision to use third party logistics should be based on the organisation's
needs, the service provider's capabilities, the terms and conditions, and the
resulting pay off.
Principle of Postponement
Organisations can determine the appropriate point in the supply chain at
which the product is completed in its saleable form. Delaying the final
labelling, assembly or packaging until the last moment is known as principle
of postponement. The objective of this principle is to minimize the risk of
carrying finished product inventory at various points in the supply chain by
delaying product differentiation to the latest possible moment before
customer purchase. Stocking and transportation cost savings are attained
by keeping products at the highest echelon level as possible and by moving
goods through the supply chain in large, generic quantities. Some examples
of postponement are – delaying the labeling process till the customer's order
is received, shipping products in bulk and transferring them to smaller
containers at warehouses, delaying final assembly until actual receipt of a
customer's order, and stocking petroleum, paints, etc., in unblended state
and performing blending operations against actual orders. However,
postponement should not lead to a compromise on the desired service level.
Use of ERP/DRP Techniques

Enterprise Resource Planning (ERP) systems are information integrators
and they help to bind various business processes in an enterprise. ERP also
helps in the streamlining and re-engineering of various processes. It helps in
focusing on value-added activities and eliminating the non-value adding

activities. Because of tremendous developments in information technology

(IT), ERP has led to improvements in various activities related to in-bound
logistics, transportation, materials management, accounting, finance, etc.
DRP is a tool which estimates inventory requirements at stocking locations,

and ensures that supply sources are able to meet the demand. DRP
incorporates policies on safety stocks and information as well as the relation
between demand forecasts, inventory levels, and manufacturing and
distribution schedules. The logic used is analogous to material requirements
planning. The manufacturing lead times, in turn, are linked to manufacturing
schedules. DRP assists not only in short-term distribution planning, but also
in anticipating future production and distribution resources so as to match
supply and demand. It helps to quickly adjust to vagaries of the market
place with minimum inventories. Its potential is particularly significant in a
multi-echelon environment owing to its approach to incorporate
dependencies at various echelon levels. Since minimal inventories are held,
DRP can be viewed as a key requirement for a just-in-time production and
logistics system.
10.5 Outsourcing Logistics

Outsourcing, listed by Harvard Business Review as one of the most
important management concepts of the past 75 years, has become a readily
accepted means of increasing performance of non-core supply chain
activities. Outsourcing allows organizations to focus on their core
competencies, to provide a differentiated level of customer service, and to
take advantage of greater operational flexibility.
As late as the 1990s, companies only trusted themselves and as a result

they kept a firm grip on everything-procurement and production as well as
the supply or distribution of the finished products to the markets. Companies

believed that they could do everything better than anybody else and this
belief also applied to the logistics sector.
The business enterprises owned a fleet of trucks and had extensive

warehouses of their own. However, in the course of the years, industry
began to get away from this full autonomy in the field of logistics. The
importance of having an outsider catering to the services without companies
bothering to take care of the fleet, their maintenance, etc. was overwhelming
indeed to consider outsourcing. Traditional transportation, warehousing and
transshipment services were increasingly subcontracted to specialized
forwarding companies that assumed 1 the responsibility for transporting the
goods and managing the warehouses.
With the emergence of IT and information systems and its subsequent

application to logistics, the sector then took another leap forward.
Companies with the technological tools that provided unhindered
information needed to make processes more effective. In the past, the
supply of production facilities and the markets had to be safeguarded by
keeping high inventory levels. With the advent of the new technologies,
production losses and supply bottlenecks could be avoided through perfectly
co-ordinated procurement, production and distribution networks.
The problems, however, persisted as the supply chains found in many

companies were not capable of meeting these requirements. The use of
more flexible production processes while at the same time cutting down
inventories meant that the service providers had to manage to deliver the
materials to the assembly lines exactly when they were needed in order to
ensure a smooth production flow. As a result, Justin time delivery as well as
electronic shipment tracking at the national level became established
standards among the major logistics service providers.

The other side of the spectrum, the customer was becoming more and more
demanding and was refusing to accept what the companies were making for
him. He wanted to dictate not only the product but also the quantity, quality
and place of delivery. This put more responsibility and onus on logistics
providers. As a result, the logistics companies considerably improved their
internal workflows by establishing hubs (transshipment centres where
product flows are bundled and distributed) and by introducing state-of-the-
art traffic routing systems. Outsourcing of logistics became an industry
norm.
Reasons for Outsourcing Logistics:

There are several reasons why companies outsource – strategic reasons,
financial reasons and service related reasons.
Financial Strategic reasons Service-related

reasons reasons
Asset release Non core Flexibility
Cost reduction Access to the best in breed More service focused
capabilities
Consolidation Ability to use flexible manufacturing To become more agile
systems and responsive
Exert greater control on supply chain
10.6 Supply Chain Performance

The following are the performances of supply chain:
a) Supply chain management
Several companies wanting to globalize their operations need help in
designing their global supply chain. They have little or no understanding of
the markets they want to venture into. Usually such a 4PL is a global
company having clients and relevant experience in several countries. This
gives them not only the required skill to handle international operations but
they also provide necessary infra-structural support required for handling

such operations. This gives company’s confidence to venture out in

unknown markets.
b) Consolidation and vendor services
International forwarding, documentation and compliance are a vital
requirement and can prove to be very difficult and challenging especially for
small companies who do not possess much relevant experience in the field.
4PLs with their wide network and capacity make this process easy by
consolidating merchandise, information and documents close to the origin or
sourcing locations.
c) Warehousing and distribution
The core competency of businesses engaged in manufacturing is
manufacturing and they need a solution that will allow them to focus on that
without having to bother about warehousing and distribution issues. 4PLs,
by providing customized warehousing and distribution solutions improve
inventory management, reduce operating costs and speed order cycle times
and most importantly allow companies to focus on their core competency.
d) Global freight management
Most of the leading logistics providers provide comprehensive transportation
and forwarding services. This gives them international purchasing power to
negotiate. The best rates are from top-rated carriers.
e) Manufacturing support
Manufacturers can reap the benefits of just-in-time inventory management
by utilizing the specialized facilities, high technology capacity of the 4PL.
f) IT solutions
IT is another constantly evolving area which requires constant updating. 4PL
with their reach and understanding of global trends take up the responsibility
of providing the best practices and innovative applications of proven supply
chain technologies. This automatically creates a competitive advantage for
the company's business.


1. ______________ allows organizations to focus on their core
competencies.
2. _________ is a tool which estimates inventory requirements at stocking
locations, and ensures that supply sources are able to meet the
demand.
3. _____________ as well as electronic shipment tracking at the national
level have become established standards among the major logistics
service providers.
10.7 Summary
Increased competition has led to greater emphasis on customer service.
Customer service may be defined as the consistent provision of time and
place utility.
Co-makership is defined as the development of a long-term relationship with

a limited number of suppliers on the basis of mutual confidence. The
common benefits of co-makership are shorter delivery lead times, reliable
delivery promises, less schedule disruption, lower stock levels, faster
implementation of design changes, fewer quality problems, stable
competitive prices and higher priority given to orders.
Outsourcing operations like storage, transportation, delivery, etc., improve

service levels, enhance flexibility and reduce costs.

1. What is partnering in supply chain?
2. Describe the obstacles in supply chain co-ordination.
3. Describe the managerial leverages to achieve co-ordination.
4. Explain the need for outsourcing in supply chain.

SAQs I
1. True 2. False 3. True
SAQs II
1. Outsourcing
2. DRP
3. Justin time delivery
Answers to TQs:
1. Refer to 10.2
2. Refer to 10.3
3. Refer to 10.4
4. Refer to 10.5

Unit 11 Issues Regarding Information

Technology and Supply Chain
Structure:
11.1 Introduction
Objectives
11.2 Technology in Supply Chain Management
11.3 E-business and Supply Chain
11.4 Summary
11.1 Introduction
The focus of management has to change over time. In recent years,
conducting business has become increasingly complex. The various factors
leading to this development are: increasing product variety and volumes,
increasing competition, shrinking product life cycles and growing customer
demands. To manage this complexity effectively on a real time basis for a
business, information sharing across functions and locations has become
critical. Flexibility and responsiveness have become key business drivers for
the 21st century, forcing businesses to orient themselves along processes
instead of functions. It is in this aspect of management that the use of
information technology assumes a greater significance.
Objectives:
 Explain the use of technology in supply chain management.
 Explain Electronic Data Interchange.

 Explain IT based supply chain operations.

 Describe the E-business applications.
 Explain E-Procurement and E-Collaboration.
11.2 Technology in Supply Chain Management

Supply chain management, enabled by advances in technology, aims to
develop a technical infrastructure linking technology and people, in an effort
to align advances in Information Technology (IT) with the capability of the
organisation for facilitating customer satisfaction. This integration is aimed at
leveraging information tools to address the following business concerns:
flexibility and variety; quality; responsiveness, and edging toward agility.
IT Solutions
The developments in IT have resulted in many possible alternative solutions
for managing the supply chain effectively. Some of the major developments
in IT which are transforming the supply chains today are as follows:
1. Electronic Data Interchange (EDI)
2. Intranet/Extranet
3. Data Mining/Data Warehousing/Data Marts
4. E-commerce
Electronic Data Interchange (EDI)

EDI is defined as the inter-company computer to computer communication
of standard business transactions in a standard format that permits the
receiver to perform the intended transaction without human intervention. In
the EDI environment, a computer can directly use the data sent by other
computers in electronic form. Other communication technologies such as
FAX and email are not considered to be a part of EDI because they do not
support automation facilities and information sent using such communication
has to be rearranged or rekeyed into a computer for further use. EDI

involves three basic processes:
1. Directing and gathering data from different application programmes;

2. Converting data from propriety formats (used by application
programmes) to standard formats (as transmitted by the communication
network) and reversing this process at the other end; and,
3. Actual transmission of data between trading partners over a
communication network.
EDI is the inter-organisational exchange of business documentation in a

structured machine processable form. It consists of standardised electronic
message formats (called transaction sets) for common business documents
such as requests for quotations, purchase orders, invoices, shipping notices
and other standard business correspondence documents. These electronic
transaction sets enable the computer in one company/organisation to
communicate with the computer in the other organisation without actually
producing paper documents. All human efforts required to sort and transport
the documents are eliminated.
In the case of EDI, it is not necessary for the sender and the recipient to
have an identical document processing system. The buyer generates a
purchase order and passes the data through a special translator software
that converts it into the standard agreed form of data format or transaction
set. The translator also wraps the document in an electronic envelope that
has identification indicating for which department in the seller's organisation
the message is intended. The communication programme then dials the
VAN and places it in the correct mailbox. The seller's computer modem then
calls the VAN, retrieves everything and distributes every thing in the mailbox
to the appropriate departmental computers.
An EDI facility provides various functions. The basic function is to provide

compatibility between different systems; the interchange facility translates

codes and formats operated by the individual companies, allowing easier

and direct data exchange without the need for rekeying. EDI provides a
function known as store and forward. This allows businesses that operate
different time-cycles to use EDI without changing their approach. For
example, if a manufacturer wishes to send orders on an ad hoc basis, but
the supplier wants to accept orders weekly, the store and forward facility will
receive the orders, store them and release them to the supplier when
timetabled.
Transmission of the data is through a communications network. For

example, for a company, an EDI service, called EDICT uses the company's
own data network known as INFOTRAC; the network covers 95 per cent of
businesses on a local call basis. The final function offered is application
support. For EDI to function effectively, the provider has to understand the
industries it is working with and must support the users.
The benefits of EDI are becoming very apparent despite being relatively
new in India. One of the obvious benefits is cost. However, cost is not the
key benefit. EDI has much more to do with the overall improvements of
return on investment and, for many users, has made a significant impact on
sales revenues, giving those that use it a new form of competitive
advantage and new forms of relationships between manufacturers and
suppliers.
EDI also has an effect on investment, particularly investment in the form of

inventory, because it cuts down on errors in document processing and
reduces the transmission time of documents. Many of the benefits that have
been achieved have been specific to particular companies. Some
companies, as part of their stance, deliberately put themselves forward as
technological leaders – using EDI can enhance that stance. Others use it as
a competitive tool in their industry.

If implemented properly and utilised efficiently, a fully integrated EDI solution

adds speed and efficiency to business process enabling the organisation to
maximise resources, minimise waste and increase customer satisfaction.
Intranet/Extranet competitive pressures are ever-increasing in global

manufacturing environments. Assemblies are becoming more complex while
product cycles are getting shorter. These factors combined with the
requirements for ISO 9000 certification drive, the requirements for systems
that document processes and distribute factory information.
Intranet is a means of distributing information. It also allows real time

feedback to flow from the manufacturing area to design and engineering
groups. It is the internal web of an organisation. The intranet allows the user
to share data through messaging by publishing it electronically over the
network for access to all. An intranet allows internal users to access data
from external sources, while restricting access to it from those outside.
When access to intranet is extended to external users such as channel

partners, clients, customers and suppliers it becomes an extranet. Different
members in the supply chain have different access powers and a unique
identification. The process web intranet system enables additional
functionality in several areas.
Benefits of Intranet/Extranet
• It facilitates two way communications between the manufacturing floor
and other areas of the plant
• It allows distribution of many categories of information. These can be
presented with a common look and feel, eliminating user-interface
proliferation
• It ensures a common process for multiple functions and enhances
overall performance.

Data Mining/Data Warehousing and Data Marts

The explosion of data stored has caused a corresponding explosion in the
need to analyze it. Traditionally, such data has been used only for the
common queries as given by a user. However, with so much of it, there has
been an increasing desire to mine it for more meaningful and useful
information. Thankfully, along with the increasing amount of data, there has
been a great increase in the computational power of computers (see the
chapter on Data Mining and Warehousing for details).
This has made techniques such as data mining, which might at one time
have been too computationally expensive, quite plausible. The excitement
being generated in this field can be explained by the tremendous potential
benefits that could come about from the implementation of a successful
system. Data mining results include:
• Associations, or when one event can be correlated to another event
• Sequences, or one event leading to another later event (a rug purchase

followed by a purchase of curtains)
• Classification or the recognition of patterns and a resulting new

organization of data (for example, profiles of customers who make
purchases)
• Clustering, or finding and visualizing groups of facts not previously

known;
• Forecasting, or simply discovering patterns in the data that can lead to

predictions about the future.

and retrieve data. Data warehouses are built to contain enterprise-wide
information collected from multiple operational sources. In using a data

warehouse, businesses want to examine problems or possible problems

and determine their causes.
To do this, they need data from multiple systems. For example, in order to
determine whether or not a drop in sales was due to too many salespersons
being on vacation, the data warehouse needs to contain information from
both the product database and the personnel database. Technologies such
as the internet and intranet, along with data mining tools need to be
employed to ensure that all users can get the information they need and
when they need it.
A data warehouse typically has highly summarized views of the enterprise-
wide information along with the detailed information that are used by various
levels of management. In contrast, a data mart contains department or
division-wide information. They can be cheaper to deploy and operate than
a data warehouse, but they can become isolated pools of data that are not
consistent with the rest of the organisation. Attempts to tie multiple data
marts together to create a data warehouse can be expensive and
complicated.
E-Commerce
ERP and EDI have gained tremendous importance as the world is gearing
itself towards strong business process integration. And the time is near for
the paper-based business to give way to electronic business when suppliers
and customers will transact electronically. Once isolated economies are now
slowly integrating into a global village.
This is also because suppliers are working hard to offer products/services at

lower and lower prices. To offer at lower and lower prices, cost saving, and
cost cutting is essential. By reducing and even eliminating inventory and
distribution costs dramatically, the total cost of products/services lowered by
electronic commerce. In many cases, online prices will be lower than what

consumers find elsewhere. As the wired situation is increasing, it can create

higher levels of operational efficiency, which basically reduces cost and
saves money for the end consumer.
As the supply and demand positions move online, demand can be

aggregated in real time. The website, www.onsale.com, for online auctions
aggregates supply by grouping all kinds of things for auctioning and then
offers people for bidding. On the other hand, www.priceline.com aggregates
price bids of people for products/ services. What happen actually are a
much more real supply and real demand match, which take a lot of waste
out of the value chain? Websites like www.247customer.com,
www.planetcustomers.com even provide third party customer response.
IT-enabled Supply Chain

The internet has vastly expanded the value of the goods and services
business trade electronically. The internet era has revolutionized commerce,
making electronic commerce a reality. The major force of electronic
commerce is driven by the fact that it results in lowering purchasing cost, a
reduction of inventories, lowering cycle time, more efficient and effective
customer services, lowering sales and marketing cost and new sales
opportunities. E-commerce has three dimensions.
1. Reach is about access and connection. It means simply how many
customers a business can access or how many products it can offer.
Reach is the most visible difference between electronic and physical
businesses, and it has been the primary competitive differentiation for
business thus far.
2. Richness is the depth and detail of the information that the business
gives the customer or collects about the customer. Richness holds
enormous potential for building close relationships with customers in a
future dominated by e-commerce.

Affiliation is about whose interests in business it represents. Until now,

affiliation hasn't been a serious competitive factor in physical commerce
because, in general, no company ever devised a way to make money by
taking the customer’s side. E-retailers with navigational functions are shifting
their affiliation towards customers. Traditionally, manufacturers and retailers
must find ways to fight, co-opt, or imitate their e-commerce competitors'
affiliation strategies.
Improved productivity, faster financial flows, improved quality, improved

customer service, reduced costs, shortened supply chain, faster product
development, reaching new markets, improvement in cash flows etc. are the
advantages of IT.
IT has helped in making the supply chain faster, flexible and responsive. An
organisation needs to invest in IT carefully to make its supply chain more
responsive. Various flows in supply chain such as material, information and
money can be effectively managed through IT. Specifically:
• Strategic decisions on the supply chain design can increase customer
satisfaction and save money at the same time – the classic win-win
situation through IT.
• By sharing information, supply chain partners are able to respond more
rapidly to known demand and to do so with less inventory in the system
as a whole and, hence, at lower cost.
• Reduction of operating costs by proper coordination of the planning of
various stages of the supply chain is enabled through IT.
• By minimising the need for excess parts and simplifying the overall
design, it will be easier for companies to customise or vary the product
according to each customer's needs and requirements.
• Rapid introduction of a new or modified product is possible through IT.

• Greater product customisation, or manufacturing to order, would come

at relatively low unit cost through IT.
• There is sharing of planning and scheduling information due to
collaboration and integration among departments within the company
and outside departments. This is something that is highly correlated to
the supply chain performance.
• Effective inventory management, having just the right amount of the right
merchandise on the shelves for just the right amount of time minimises
overstocking and markdowns, and so boosts profitability. This is
possible through IT.
• Detailed analysis of item performance, what-if scenario evaluation, and
exception reporting and handling is facilitated through IT.
IT and supply chain

The application of IT to the logistics function has had a major impact on
added value in the value chain. One particular application, Electronic Data
Interchange (EDI), has added to the value input with:
• More accurate and rapid information flows,
• Improved logistics system productivity,
• Closed trading relationships,
• Improved cash flows, and
• A reduction in forecasting errors.
Equally, it may be said that EDI would not function adequately, if at all,
without the benefits of electronic point of sale (EPOS) data capture. EPOS
enables real and live transactional data to be used (through the facility of
EDI) to manage production operations and inventory allocations and levels.
Hindustan Lever Ltd. (HLL) is an excellent example of a value delivery
system. By using an integrated combination of information systems and EDI

systems, it has managed to delay the finishing of the product until the very
last moment. With the advent of the internet, the supply chain is becoming
more and more customer centric.
The value chain concept is an ideal vehicle from which this notion can be
developed. The benefits of using this concept are:
• It identifies the roles and tasks to be undertaken in the total process of
customer satisfaction.
• Having identified roles and tasks, they may be evaluated in cost terms,
and decisions made concerning trade-off potential and the extent to
which intermediaries may be involved.
• The analysis may be used to determine more accurate costs for
providing the service requirements of customers using an activity-based
costing methodology.
The key to the development of the supply chain concept has been the rapid
progress made by information and the fact that the cost of making
information available to more decision makers has steadily decreased, while
concurrently, the physical costs of business such as facilities and inventory
have steadily risen.
Another major influence accompanied these phenomena—the

developments made in just-in-time (JIT). The change in manufacturing
philosophy brought about by the Japanese Kanban (just-in-time) concept,
which was specifically devised to eliminate waste (any activity or process
which does not directly add value to the product service), has clear
implications for logistics. For example, holding excess inventory was seen
as wasteful and, therefore, companies should minimize, even eliminate
inventories. JIT introduced the commitment to short (but consistent) lead
times, minimum levels of inventory but, at the same time, optimal levels of
customer service.

The rationale behind the concept is that stocks of components (or finished
items for resale) should be planned to arrive only at the time they are
actually needed. In effect, it saves money on downstream inventories by
placing greater reliance on improved responsiveness and flexibility. Hence,
quick response (QR) systems (the distribution equivalent) are attractive. The
implications for distribution management are not difficult to identify. Clearly,
there is an information requirement here, and the development of EPOS and
EDI has made the concept of minimal stocks/optimal service much more
feasible.
11.3 E-business Applications

E-business applications in SCM can be divided into three basic categories—
e-commerce, e-procurement and e-collaboration applications, all of which
support supply chain integration over the Internet. E-business applications
are centred in the information hub and also run on various other parts of the
supply chain.
E-Commerce
The many tasks of e-commerce begin when a customer places an order.
However, they go beyond the initial business-to-customer (B2C) transaction
to include internal processing as well as the multiple business-to-business
(B2B) transactions that occur in the back-end of the supply chain. Imagine
this scenario: a customer places an order, the order begins a series of
transactions throughout the chain – first the order must be quickly and
accurately processed (within the information hub), next comes the
interaction with the many other members of the supply chain.
Next, the software must process other transactions such as tracking the
status of orders and recording performance measures linked to the supply

chain, such as lead time, quality and inventory turnaround. Some of the
many tasks of e-commerce applications are:
1. Executing orders by customers – connects the information hub with the
customers.
2. Communication between the members of the chain – connects the hub
with back-end members of the chain.
3. Electronic and instantaneous order tracking.
4. Remote sensing, testing and diagnosis of problems in various parts of
the chain.
5. Recording useful performance data about the supply chain.
A classic case where all of the above has been significantly achieved is
Amazon.com, the most successful internet-based enterprise that sells
books, medicines, toys, electronic items, etc. online to a global customer
base. Not only does the site take care of personal likes and dislikes of each
unique visitor to the web-site, but it processes and delivers the product in
record time. The entire supply chain is well oiled and moves at breakneck
speed.
E-Procurement
The procurement process is that process by which a manufacturer procures
products from suppliers. The volume of products exchanged in the
procurement process is enormous and the Internet helps to manage the
complexity of this process. Many companies, such as Ariba, Free Markets,
etc. offer web-based procurement tools that link manufacturers and
suppliers, or buyers and sellers, into real-time product exchange
communities – virtual, dynamic markets. Internet procurement solutions
automate all steps of the procurement process – acquisition to order, as well
as the payment transactions.

Currently, many industries, electronics, chemical, foodstuffs, etc. have

electronic marketplaces available for buying and selling. For example,
chemconnect.com is a global marketplace for chemical, plastic, feedstock
and related products that offers information, expertise, e-commerce tools
and global trading community that companies in diverse industries need to
streamline transactions and reduce costs.
Chemconnect has active network of trading partners—more than 9000

member companies from 150 countries (at the time of writing this book) can
access reliable market information, reduce process inefficiencies, and
improve profitability. Firms using such tools need e-procurement software,
linked to the marketplace. Such marketplaces allow the companies to
accurately assess the market, get quotes from the best of the best vendors
from different parts of the world, streamline negotiation process, provide
adequate support in getting the best market price, managing and hence
minimizing risks, if any, and finally automating order processing and
fulfillment.
The software includes sophisticated data storage, marketplace management

and monitoring tools – part lists, quote lists, decision-making, ordering and
order change tools, for example, and logistic/payment tools that drastically
cut down on time and effort spent on procurement. The popularity of such e-
marketplaces and corresponding procurement tools is on the rise and
according to an estimate of the research firm Gartner group by 2005, more
than 500,000 companies will be participating in business-to-business e-
marketplaces as buyers and/or sellers, developers and managers of B2B
marketplaces.
E-Collaboration
Businesses thrive on effective and flawless collaboration between its
employees and with its suppliers, franchisees, distributors, dealers,

stakeholders and customers. E-collaboration allows companies to share

information, collaborative planning and collaborative product development.
Collaborative planning provides a means for implementing group decision
making; decision making in a cost-effective way, because it considers every
part of the chain. Enterprises across the chain can effectively exchange the
necessary knowledge to make wise decisions for the whole chain.
Essentially, e-collaboration technology allows for real-time sharing of

product sales forecasts, replenishments plans and as a result, it can closely
match supply and demand across the whole chain. Ultimately, the
collaborators can jointly reduce inventory costs and raise customer service
levels.
Product life has become shorter and shorter as technology improves at

increasing rates – this is called quick product roll-over. E-collaboration
solutions enable real-time contribution from engineers, product developers
and front-end representatives to new products.
Furthermore, e-collaboration software allows for quick change-over to new

suppliers and manufacturers to facilitate the changes in products.
E-collaboration has brought the major benefits of the Internet to engineering
and product development. For instance, to invigorate strategic relationships
with key customers, Sun Microsystems has deployed web-based
collaborative planning tools that help to manage product life cycles,
exchanging information with customers about promotions, product status,
orders and shipments. Results: reduced lead times and improved inventory
turns have boosted customers’ satisfaction and made supply chain
operations more efficient.
There are many advantages of the Internet-enabled supply chain. The

Internet-based supply chain is a self-fulfilling prophecy. While it
revolutionizes SCM and makes the vital tasks associated with SCM simple,

the Internet is also the cause of the exponentially more complex supply
chain that exists today. The global nature of Internet has provided
businesses with a global market for suppliers, manufacturers, and
customers and the larger the spread and reach, the more complex the
nature of the business and hence SCM. However, benefits such as quick
returns, speedier optimization and all-round efficiency benefits which e-
business applications offer are necessary and unmatched by older
technology.
The next future trend in SCM, will transcend it to a completely different level
to "intelligent supply chain (SC) with intelligent information centre". These
intelligent SCs will have the capacity of doing automated translation of
quantitative data into better supply chain performance. The Internet
evolution has made massive quantities of useful data about the supply chain
available. However, it remains a challenge to systematically analyze this
data and quickly implement the resultant changes into the supply chain.
Some of the most influential business leaders have made some very bold
statements about the Internet and e-commerce. For example, General
Electric (GE) is a company that has launched very aggressive e-commerce
initiatives. So aggressive, in fact, that Jack Welch, well-known CEO of GE,
was quoted in Fortune magazine as saying "within 18 months, all of our
suppliers will supply us on the Internet or they won't do business with us."
General Motors (GM) is putting more emphasis on E-commerce with the
creation of e-GM, a group which will have oversight response sibilates for all
of GM's Internet-based activities. Initially, the group will have a staff of 200
with the objective of making GM a major force in e-commerce.
The scope of their activities will include everything from product

development, supply chain management, car sales, marketing and even the
on-board communication and information system in automobiles.

Even more intriguing is the rapid evolution of the digital marketplace.

Recently, i2 Technologies announced TradeMatrix.com which will eventually
allow buyers and sellers to transact in a single intelligent, multidimensional
marketplace that connects multiple trading exchanges. This will allow buyers
to consolidate orders from multiple vendors and subsequently provide for
the effective integration of the final logistical activities. The key is putting
intelligence into the super portal so that customers can get their information
their way.
Top Remarks on SCMS

This is a collection of some of the statements made by the doyens of
industry and academician on SCM. This gives a good insight into the minds
of people who have made new rules and evolved new processes.
Our supply chain process was very well-executed, but we had an

opportunity to increase our efficiency, make the process paperless and
provide a single system of record that we and our suppliers could share.
– Eric Michlowitz, Dell's Director of supply chain e-business solutions

As always the challenge for top management is setting the right priorities,
allocating appropriate resources, and of course, achieving the required
results.
– Michael Donovan, President of R. Michael Donovan Co. leading SCM

Consultant.
In the future, firms won't necessarily compete. Instead, entire supply chains
will compete against other supply chains. By developing relationships and
efficient flow patterns from suppliers to customers, the company can both
attain efficiencies and seek innovations.
– John Chambers, CEO at Cisco, said in the early 1990s.

It's the complete antithesis of how companies used to do business, which

was engineering and maybe marketing, sit down and figure out what
products to build. They would design it, engineer it and build it and then
figure out how to sell it. In the new e-commerce model, it is completely the
other way around. For example, Dell asks their customer what they want,
within a set of boundaries off course, and then figures out how to build it.
So, it's a complete pull model instead of a push model.
– Christopher S. Selland, Vice President of Customer Relationship

Management and Internet Computing Strategies at the Yankee Group.
Often, companies attempt to achieve supply chain excellence but only focus
on perhaps one or two supply chain building blocks – and not on all
dimensions needed for top performance. There are five key dimensions of
supply chain management that are needed to achieve superior
performance.
These include strategy, infrastructure, process, organization and

technology. Each dimension includes at least three questions that an
organization should answer as it strives to achieve supply chain excellence.
Supply chain principles primarily tell us three things. One, if a company can
compress its lead times and raise quality and accuracy at every stage,
service will improve and cost will fall out of the business.
Two, organizations should take a process view rather than a functional view
of the operation. Three, working across functional boundaries to integrate
business processes is the future. Change in die supply chain can be
focused on improving the characteristics of supply in the context of the goals
that have been set for service and or changing the service objectives.
Companies must look beyond conventional methods when seeking to justify

investments to improve their supply chain. Too frequently, organizations
take a one-dimensional approach that centers on IT's ability to process

transactions more effectively. The more compelling arguments underscore

the investment's hard benefits – the impacts of an IT-enhanced supply chain
on ROI, net income and cash flow.

1. The procurement process is that process by which a manufacturer

procures products from suppliers.
2. E-collaboration software allows for quick change-over to new suppliers

and manufacturers to facilitate the changes in products.
3. E-collaboration technology allows for real-time sharing of product sales

forecasts, replenishments plans and as a result, it can closely match
supply and demand across the whole chain.
4. EDI, stands for Entrepreneur’s Data Interchange.
11.4 Summary
The developments in IT have resulted in many possible alternative solutions
for managing the supply chain effectively.
EDI is defined as the inter-company computer to computer communication

of standard business transactions in a standard format that permits the
receiver to perform the intended transaction without human intervention. EDI
is the inter-organisational exchange of business documentation in a
structured machine processable form. The basic function is to provide
compatibility between different systems.

and retrieve data.

The global nature of Internet has provided businesses with a global market
for suppliers, manufacturers, and customers and the larger the spread and
reach, the more complex the nature of the business and hence SCM.

1. What is Electronic Data Interchange?
2. Explain, in detail, IT based supply chain operations.
3. Describe, in detail, the E-business applications.
4. Explain E-Procurement and E-Collaboration.

SAQs I
1. True 2. True 3. True 4. False
Answers to TQs:
1. Refer to 11.2
2. Refer to 11.2
3. Refer to 11.3
4. Refer to 11.3

Reference:
1. Albaum, G., J.Strandskov, E. Duerr, and L.Dowd 1994, International

Marketing and Export Management, 2nd Edn Addison Wesley
Publishing Company, Massauchusetts.
2. Arnold, David 2000, Seven Rules of International Distribution, Harvard
Business Review, 78 (6), November- December,
3. Cateora, P.R 1990, International Marketing, Seventh edition,
Homewood, IL: Irvin
4. Louis W. stern and Adel I. EL-Ansary 1982, Marketing Channels, 2nd

edn, Prentice Hall, Englewood cliffs, NJ.
5. Rosenbloom, Bert 1990, ‘Motivating Your International Channel
Partners;, Business Horizons, March-April.
6. Jim Miller, Strategic Supply Chain Management: The Five Disciplines
for Top Performance, Cisco Publishers. NewYork.
7. Michael 2006, ‘Supply Chain Management: Strategies and Realities’ –
Sterling Publishers. New Delhi.
8. Andrew Royalton, 1999, “Privatization, Globalization and Supply
Chain Management: Cox town Publishers, Aurangabad.
9. James B. Ayers, 2006 Handbook of Supply Chain Management –
10. Jack W. Plunkett, 2006, “Plunkett's Transportation, Supply Chain &
Logistics Industry Almanac:

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MK 0001

Sales, Distribution and Supply Chain Management

Content preparation Team

Edition: Fall 2007

Selling products to the customers has become a challenging task amidst

Businesses must be willing to change their attitudes, routines and their

This courseware has been carefully designed to incorporate all essential

This book comprises 11 units:

Unit 1: Personal Selling and Sales Management Overview

Unit 3: Sales Force Management

Unit 4: Directing and Controlling Sales Efforts

Unit 5: Logistics of Distribution

Unit 6: Channel Management

Unit 7: Recent Trends in Channel Management

Unit 8: Introduction to Supply Chain Management

Unit 9: Planning and Designing Supply Chain

Unit 10: Co-ordination in Supply Chain

Unit 11: Issues Regarding Information Technology and Supply Chain

Unit 1 Personal Selling and

Sikkim Manipal University Page No. 1

Due to the varied market requirements and market opportunities, the

Sales management and the business enterprise:

Missionary salespersons represent the manufacturing companies and their

Sikkim Manipal University Page No. 2

form of training or preparing personnel to take on actual sales work later on

Persons holding sales management positions are required to show a very

The opportunities such as direct interaction with a variety of customers

There are various employment opportunities and many sales management

Sikkim Manipal University Page No. 3

 Explain personal selling.

 Explain how the objectives of personal selling are set.

 Explain direct marketing.

1.2 Sales Management, Personal Selling and Salesmanship

Sikkim Manipal University Page No. 4

in the communication mix. In certain services, selling is the preeminent

Selling of services include prospect identification, sales call planning,

Traditionally, sales promotion was used mainly in consumer’s goods market.

Sikkim Manipal University Page No. 5

2. Intermediaries: Free goods, discounts, advertising allowances, co-

Sikkim Manipal University Page No. 6

the service company. So the employees also can be included. As publics

Public relations is concerned with many marketing tasks like –

A service organization’s image is made up of the collective experiences,

A wide range of tools can be used in the design of a public relation

Sikkim Manipal University Page No. 7

The multiplier effect from word-of-mouth is not uniform to all products. It

Self Assessment Questions I

1.3 Setting the Objectives of Personal Selling

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also important in consumer markets. As we will discuss, the advent of

1.4 Determining Sales-related Marketing Policies

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then STOP! We found it again. Do you ask why…? Because marketing

In fact, many marketing programs struggle to break even, and actually

1.4.1 Sales and Marketing Company Policy: Case Study

The metrics we developed reduced their marketing expenses by 60%

1.4.2 Methods to Design the New Sales and Marketing Process

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 Sales Cycle Efficiency: Time kills deals. The speed at which a

 Life-time Value: How profitable a given customer is over time defines

 Demand Forecasting: Every customer buys on a cycle. So this means

 Improve Lead Quality: Do you have methods in place to measure the

 Increase Awareness: To keep the sales pipeline full of good quality

Sikkim Manipal University Page No. 11