Chapter 9 Marketing Channels

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Learning Objectives
Understand channel structure and how channels manage discrepancies Understand concept of channel flows Relationship of channel flows to service levels Understand channel formats and levels Understand what channel systems are expected to deliver Prominent marketing and channel systems
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Channel Functions
Information gathering Consumer motivation Bargaining with suppliers Placing orders Financing Inventory management Risk bearing After sales support
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Role of Intermediaries
Company 1 Company 2 Company 3

Intermediary

Large number of CONSUMERS

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Direct and Indirect.

Direct Distribution
Company to consumers or retailers without use of intermediaries. Also includes reaching Institutional buyers. Selling on the Internet If products are technically complex, this system is preferred Cost is a major consideration to adopt this mode
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Direct Distribution - Examples

Banking services Credit cards Petrol / diesel company own outlets Land line phone connections Health services Utilities electricity, water Subsidized ration Education
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Indirect Distribution
Goods may move through a set of intermediaries
Most FMCG companies follow this route

The intermediary has a far better reach than the company The cost of operations of an intermediary like a wholesaler / retailer is shared with many businesses.
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Indirect Distribution Examples

All FMCG, consumer durables and pharmaceutical Petrol / diesel / cooking gas franchisees Insurance Mobile phones All kinds of passenger transport
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Marketing Channel Systems

Vertical:
Corporate Administered Contractual

Horizontal Multi-channel
Vertical.
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Vertical Marketing System

Various parties like producers, wholesalers and retailers act as a unified system to avoid conflicts Improves operating efficiency and marketing effectiveness 3 types:
Corporate Administered Contractual
Corporate
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Corporate VMS
Combines successive stages of production and distribution under single ownership Examples:
Bata, Bombay Dyeing, Raymond Sears, Goodyear Suppliers of food items could be also their own supplying firms like Big bazaar and Shoppers Stop.
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Administered

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Administered VMS
Co-ordinates distribution activities Gains market power by dominating a channel Usually true of dominant brands like GE, Kodak, Pepsi, Gillette, Coke and HUL in certain locations
Command high level of co-operation in shelf space, displays, pricing policies and promotion strategies
Contractual
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Contractual VMS
Value added partnerships between channel members to obtain economies of scale. Could take the forms of:
Manufacturer sponsored retail or wholesale franchise like car dealer of Maruti and Hyundai. Franchise organizations like soft drink bottlers who buy the concentrate from Pepsi or Coca Cola Service firm sponsored retail franchise like Starbucks, CCD, Mc Donald's and Pizza Hut.

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Horizontal MS
Two or more unrelated companies join together to pool resources and exploit an emerging market opportunity. Win- Win situation
In-store ATM and banking in hotels, big stores Retail outlets in petrol pumps Coffee Day outlets in airports
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Multi-channel
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Multi-channel Distribution
Company uses different channels to reach / same or different market segments.
Most FMCG companies have separate networks for retail market and institutions(CSD Canteens) Pharma companies may use different channels to reach doctors, chemists and hospitals
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Multi-channel Distribution
Used in situations where:
Same product but different market segments Unrelated products in same market detergents and ice creams (HUL) Size of buyers varies-selling tea to retailers and big hotels. Geographic concentration of potential consumers varies Reach is difficult like selling in Ladakh or the North Eastern States.
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Distribution Channels
Take care of the following discrepancies
Spatial Temporal Breaking bulk Assortment and Financial support
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Spatial Discrepancy
The channel system helps reduce the distance between the producer and the consumer of his products.
Consumers are scattered Have to be reached cost effectively

Example: companies produce products in one location even for global needs
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Temporal Discrepancy
The channel system helps in speeding up in meeting the requirement of the consumers
Time when the product is made and when it is consumed is different Limited number of production points but hundreds of consumers

Maruti plant in Gurgaon cars and spares are available when the consumer wants

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Breaking Bulk
The channel system reduces large quantities into consumer acceptable lot sizes
Production has to be in large quantities to benefit from economies of scale Consumption is necessarily in small lot sizes

India is the ultimate example in breaking bulk you can buy one cigarette, one Anacin, one toffee etc
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Need for Assortment

The channel system helps aggregate a range of products for the benefit of the consumer it could be made by one company or several of them.
For the same product, it could be a variety of brands and pack sizes

MICO makes fuel injection equipment, spark plugs etc in different plants but its dealer will sell the entire range.
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Financial Support
The channel system provides critical working capital to its customers by extending credit. Some channel members like stockists and wholesalers finance the business of their customers.
Medical diagnostic equipment to hospitals
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Channel Flows
Forward flow company to its customers goods and services Backward flow customers to the company payment for the goods. Returned goods. Flows both ways - information

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Three Flows Recognized

Goods and Services FORWARD

BACKWARD
Payment for goods / returns

Information

BOTH WAYS

Company
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Customers
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The Five Channel Flows

Physical flow of goods Title flow of goods (negotiation, ownership and risk sharing also) Payment flows (financing and payment) Information flow (about goods, orders placed and orders executed) Promotion flows
Who is responsible?
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Channel Flows
Some channel member/s have to perform them There is a cost associated with each flow If a channel member is discontinued, the flow has to be performed by another All flows and transactions can be effective only with timely, accurate and correct information The channel flow is ideally to be handled by the most competent channel member who can deliver best service at the lowest cost.
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Degree of Involvement
Manufacturer C&FA or Distribution Center Physical Title Information Payment Order processing Distributor, dealers Physical Title / ownership Information Payment Order placement Negotiation Risk sharing Promotions Wholesaler or retailer Physical Title / ownership Information Payment Order placement Negotiation Risk sharing Promotions

Physical Title / ownership Information Risk sharing Promotions

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Channel formats

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Channel Formats
Is decided by who drives the channel system:
Producer driven Seller driven Service driven Others

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Producer Driven
This is the effort of the manufacturer to reach the product to his consumers. Examples:
Company owned retail outlets petrol, Bata, Reliance mobiles Licensed outlets KMF Consignment selling agents Franchisees Brokers Vending machines Company contracted distributors
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Seller Driven
Use of existing channels to reach the largest number of end users
Existing wholesalers and retailers Modern retail formats Specialty stores Shoppers Stop Discount stores Subhiksha Pheriwalas
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Service Driven
These are the people who facilitate the distribution
Transporters and freight forwarders Providers of warehouse space C&F agents 3P Logistics service providers Couriers
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Other formats
Multi-level marketing systems Amway, Modicare, Tupperware, Herbalife Co-operative societies Telephone kiosks TV home shopping Catalogue marketing The internet Exhibitions, fairs and trade shows Data base marketing
Channel levels
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Channel Levels
Zero level if the product or service is provided to the end user directly by the company.
Used mostly by companies delivering service like health, education, banking (also known as service channels)

One level consists of one intermediary Two level consists of two intermediaries and is the most common for FMCG products
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Service Channel
Companies establish their own unique channels to deliver services like health, education, banking, insurance etc
Hundreds of bank branches to be close to prospects Banks may also recruit independent agents to get customers to walk in Consulting or IT firm uses one team for Biz Development and another for execution Musician or magician may use mass media, events or web sites to reach customers
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Summarize Expectations

Channel Levels
Manufacturer Manufacturer Manufacturer

Distributor/ wholesaler

Retailer

Retailer

End User

End User

End User

Zero level
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One level
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Two level
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Key Learnings
Marketing channels are responsible for flows physical possession, title, payments, information and promotion covered by forward, backward and flows both ways Each channel partner has a different role in supporting customer service through suitable channel flows Number of categories operating in a channel system define the channel levels as one, two etc
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Key Learnings
Channel system deliverables are: bulk breaking, place utility, reduced waiting time, providing assortment, financial help, installation and after sales support. Customer service has to be done at optimum cost Marketing channel systems are categorised as vertical, horizontal and multi-channel depending on the structure and the functionality
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Why Carry Inventory?

Support production requirements Support operational requirements Maximize customer service ensure availability when needed protect against uncertainty Hedge against marketplace uncertainty Take advantage of order quantity discounts
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Functions of Inventory
Inventory serves as a buffer between:
Supply and demand Customer demand and finished goods Requirements for an operation and the output from the previous operation Parts and materials to begin an operation and the suppliers of the materials
The shock absorber of business !
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Factors Which Drive Inventory

Target service level parameters Lot sizing practices Safety stock and safety time conventions Volume discounts and purchase arrangements Seasonal build up needs
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Categories of Inventory
Anticipation built in anticipation of future demand peak season, strike, promotion Fluctuation (safety) to cover random, unpredictable fluctuations in supply and demand and lead time to prevent disruption in operations, deliveries etc Lot-size to take advantage of quantity discounts, reduce shipping, set up and clerical costs also called cycle stock
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Categories of Inventory
Transportation pipeline or movement inventories to cover the time needed to move from one point to another factory to distribution point for example Hedge for materials where prices are volatile Maintenance, repair and operating supplies (MRO) to support M and O spare parts, lubricants, consumables etc
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Types of Inventory
Obvious.
Raw materials Work-in-process Finished goods of primary concern to marketing Maintenance, repair and operating (MRO) supplies In-transit, pipeline
Performance measures
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Performance Measures
Inventory turns = Annual cost of goods sold /average inventory in value Days of sales = inventory on hand / average daily sales

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Types of Inventory Systems

Pure Inventory when and how much to order. RM procurement. Simple manufacturing operations Production Inventory finite production rates. Demand fluctuation. Products compete for manufacturing capacity Production distribution Inventory compete for production capacity. Geographic placement of inventory for best service of demand
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Types of Classification
ABC category most common for all HML - high, medium, low - similar FSND fast moving, slow moving, non-moving, dead spare parts / FG SDE scarce, difficult, easy to obtain procurement / Spares GOLF govt, ordinary, local, foreign source procurement / Spares VED vital, essential, desirable spare parts / FG SOS seasonal, off-seasonal - commodity

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ABC Inventory Analysis

Based on Paretos law:
A 20% items worth 80% of value B 30% items worth 15% of value C about 50% items account for 5% of the usage

Classify items based on the above criteria Apply degree of control in proportion to the importance of the group

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Inventory Related Costs

Unit costs basic value of the item carried Ordering costs generating and sending a material release, transport, any other acquisition costs Carrying costs capital, storage, obsolescence Stock-out costs Quality costs non-conforming goods Other costs duties, tooling, exchange rate differences etc
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Approaches for Controlling Inventory

Continuous review:
Safety stocks and forecasting methods Excess and obsolete inventory

Part simplification and re-design On-site supplier managed inventory Use of supply chain inventory management systems, Materials Requirement Planning, Distribution Requirement Planning etc Automated inventory tracking systems Supplier buyer cycle-time reduction
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Warehouse management
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