Amity Business School

Amity Business School

MBA Class of 2011, Semester III
Distribution Management & Logistics
Module 1
Swati Bhatnagar
 Amity Business School

Introduction of Distribution Management

• Deals with the “place” part of the

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

“Distribution Management is the

management of all activities which
facilitates movement & co-
ordination of demand & supply in Place utility
creation of time & place utility of
goods & services”
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Need for distribution channels

• In the past all distribution related operations were undertaken
by the company itself .
• Soon they realized that the intermediaries could do the job
better at a much lower cost !
• The intermediaries are a link between the manufacturer & its
customers.
• The intermediaries which includes all CFAs, distributors &
retailers enable smooth flow of goods & services at a certain
margin to themselves.
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Functions performed by the intermediaries

• Facilitation of search
Addresses the uncertainty part at both the consumers & manufacturers end.
At times also enables sales of less known brands
• Sort, Accumulate, Allocate& Assort the right kind of goods
Producers typically produces a large number of variety of goods, whereas
consumers only require limited quantity of wide variety of goods!
• Routinisation of transactions
Helps in reducing the cost of distribution & increase the efficiency.
• Enables flow of information to both the buyers & the sellers to help them
manage their business better
• Reduction in the number of contact points
• Awareness of the environment in which they operate
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Are intermediaries necessary?

• Companies like Dell & Amazon exist !
• Eureka Forbes is also a case in point !

Normally, in case of a technical & complicated product the

company may want to handle the distribution themselves as
the intermediary may or may not be able to learn as much as
their own salesperson
A combination works better !
A combination of direct & indirect distribution of goods &
services generally works out better…
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Discrepancies in distribution channel

The distribution channel takes care of 4 discrepancies in the
market place:
 Spatial discrepancy : Space difference b/w production point
& consumption point
 Temporal discrepancy : Time difference b/w production
point & consumption point
 Breaking of the bulk
 To provide assortment
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Distribution channel strategy

Corporate strategy

Marketing strategy

Distribution strategy
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Channel Mix decisions

Channel Mix deals with organizing & managing distribution

functions. The same requires :-
a) Defining customer service levels
b) Defining distribution objectives
c) Outlining steps to achieve the above objectives
a) Defining policy & procedure
b) Stating KPIs
c) Understanding CSFs
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Overview of distribution channels

A distribution channel is a group of people & firms involved in the transfer
of title or ownership as the product moves from the producer to the end
user.

The AMA defines the same as “ A structure of intra company organisation

units & extra company agents, dealers, wholesalers & retailers through
which a commodity, product or service gets marketed.

Distribution channels can be broadly classified into :-

 Sales Channel- motivates buyers, shares information between the
company and the customer, negotiates fair bargains & finances the
transaction
 Delivery Channel- consists of CFAs, CSA s ( Consignment Selling
agents) also known as facilitators.
 Service Channel- which performs after sales service
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Types of channel members

CFA s & CSA s : are known as facilitators. Basically

transporters who act as a mid way point between the company
& its distributors. CSA s act as CFAs but also sell goods in
the market & remit the value of goods sold to the company
Distributors, dealers , stockists & agents : they are required to
invest in products i.e. buy from company, are on commission
basis,, may or may not get credit from the company.
Wholesalers : deal in large volumes, as margin is quite low,
operate out of the main markets in the city, deal with large no.
of companies’s products & packs
Retailers : are shopkeepers who set up shops in the market
place
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Patterns of Distribution

 Intensive distribution : make sure that the product is

made available in as many outlets as possible
 Selective distribution: only few select outlets will be
permitted to sell company’s products
 Exclusive distribution: All the more selective, only
one outlet in the market may sell the company’s product
 Channel flows
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The work of the channel includes the performance of several marketing flows. All the functions
performed by the marketing channel recognizes three kinds of flows:-
 Forward Flows – from the company to the customers, basically goods & services
 Backward Flows -from the customers to the company, basically the value of goods & services
 Flows both ways -mainly Information

On the basis of value added activities performed these can be further categorized into eight
universal marketing flows. The same are
 Physical flow of goods
 Ownership
 Promotion flow
 Negotiation flow
 Financing flow
 Risking flow
 Ordering flow
 Payment flows
A very important flow that permeates all such activities is the information flow. So important is
this flow that logistics mangers often call this flow “ the ability to transform inventory to
information.”
 Amity Business School

Marketing flows in channels

Physical
Physical Physical Possession
Possession Possession
Ownership Ownership
Ownership
Promotion
Promotion Promotion
Producers
Negotiation Wholesalers Negotiation Retailers Negotiation

Financing Financing Consumers

Financing
Industrial
Risking risking &
Risking
Household
Ordering
Ordering Ordering
Payment Payment
Payment
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Implications of marketing/ channel flows

• The progress in information technology provides great opportunity in capturing the
vital information flow.
• The flows performed may be managed in different ways for different parts of the
company’s business. Eg. –Ingersoll-Rand International Bobcat, Clark Material
handling & the Spicer Division of Dana Corporation use a 3PL German firm-
Feige to handle all non U.S Distribution of spare parts
• Not every channel need participate in every flow. Specialization in the performance
of channel flows is the hallmark of an efficiently operating channel.
• Flows should be shared only among those channel members who can add value or
reduce cost by bearing them. But one also needs to bear in mind that too much
specialization also breeds interdependency.
• The performance of certain flows is also co related with that of other flows. The
opportunity cost tied up in the form of inventory should also be considered.
• One can eliminate or substitute members in a channel but not the channel flows
 End user preferences/ SODs
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Define customer needs : defined by the desired customer service levels

expected out of channel system.

The same consists of Lot size, waiting time, choice to the customer , place
utility & service support.

Lot size : convenient size

Waiting time: time elapsed b/w the desire in the customer to buy the product
& the time when he actually buys it.
Choice to the customer :Variety of products to choose from, assortment
Place utility : depends on the intensity of the distribution
Service support: after sales service ; matters quite a lot in case of industrial
products e.g. Maruti service centres
 Contd Amity Business School

Service Outputs :
 Are basically the benefits which the channel system passes to the end
users.
 Other things being equal , the end user would prefer to deal with a channel
system which gives him greater service output.
 Louis Bucklin came out with the framework on the service outputs &
specified four generic service outputs :- a) Bulk breaking( more bulk
breaking ; higher price to the end
user)
b) Spatial convenience
c) Waiting/ delivery time
d) Product variety
 Contd. Amity Business School

• Zero based channel is one that a) meets the target market’s service outputs
& b) at a minimum cost of performing these channel flows that produce
those service outputs
• Every channel flow not only contributes to the production of valued
service outputs but also carries an associated cost.
Market Flow Cost represented

Physical possession Storage & Delivery costs

Ownership Inventory carrying costs
Promotion Personal selling, advertising, sales promotion, publicity,
public relations cost
Negotiation Time & Legal costs
Financing Credit terms/ conditions of sale
Risking Price guarantees, warranties, insurance, repair & after sales service costs
Ordering Order processing costs
Payment Collections / bad debt costs
 Amity Business School

Channel Formats possible

Channel formats have been categorised into 4 types
depending upon who drives the channel. They are:-
 Producer driven
 Seller driven
 Service driven
 Others
 Contd. Amity Business School

Producer driven : Manufacturer tries to reach the

product directly to his customer eg –Company owned
retail outlets, Licensed outlets, CSAs, franchisees.
Seller driven : Manufacturer uses the wholesalers &
retailers to reach the end user eg departmental stores,
discount stores, specialty stores, supermarkets etc
Service Driven : CFAs, CSAs, transporters who “
facilitate” distribution
Other formats: Multi level marketing system – Amway,
Tupperware, Co-operative societies,, catalogue
shopping etc
 Channel Levels Amity Business School

The number of channel members decides the

level of channel in operation.

Zero level channel denotes direct distribution set up.

One level channel consists of one intermediary only.

( retailer)

Two level channel would have two intermediaries

( distributors then retailers)
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What is the channel expected to deliver?

 Variety of products to suit customers needs

 Close to customer location
 Breaking bulk
 Speed to delivery
 Additional services
 Support for installation
 After sales service support
 Financing support
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Prominent channel systems

• Vertical Marketing system (VMS) : corporate,

administered & contractual
• Horizontal marketing system ( HMS)
• Multi- channel marketing system
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Channel Design & Implementation

The design of the channel involves two main elements:-
i) Who shall be the members of the channel &
ii) How many of each type of channel member will be in the channel.
( channel intensity)
A number of factors are to be kept in mind while designing the channel. Some
of these factors are :-
a) Nature of the product or service being marketed
b) The expectations/ “deliverables” from the system
c) Location & nature of customers
d) Nature of competition
e) Intensity of distribution required
f) Nature of the markets being targeted
A marketing channel is required to add value to the product passing through it
!
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Channel Design & Planning Process

Designing a suitable channel system requires defining customer needs,
clarifying the channel objectives, looking at alternate systems which can
meet these objectives , cost of channel & finally evaluating various
alternatives to hone in on the ideal channel system.

The process of channel design answers some of these questions :-

 What activities are the channel members required to perform? Which of
these activities is to be performed by which channel partner?
 How is the performance of these activities going to help company achieve
its customer satisfaction objective?
 The no. of channel members required in the network & of each category?
 How do we define the relationship between various channel entities?
 Contd. Amity Business School

 Are the roles & responsibilities of the channel partners clearly defined ?
 Are all channel members clear about how they would get compensated for
their services?
 Is the compensation plan fair to all channel members with regards to the
task they perform?
 Are the channel members clear about how their performance going to be
judged & by whom , at what frequency?
 What is the risk of their performance being not upto the target ?
 Stages in channel Amity Business School
planning

egmentation Positioning Focus Development

 Segmentation stage Amity Business School

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

End –user channel preferences

 There is a need to identify not only what the consumer wants to buy but
also how he wants to buy.
 Clusters of customers on the basis of what each segment expects out of the
channel is grouped together.
 Different set of end users have different set of demands & that
understanding & responding to those demands create new business
opportunities.
For eg : a pharma company
 Segmenting the market by SODs
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• Service outputs clearly differentiate marketing channels.

• Different group of end users value service outputs
differently.

The channel segmentation process should be such that it produces

group of buyers who are
a) Maximally similar within a group
b) Maximally different b/w groups
c) differ on dimensions that matter on building the distribution
system
 Positioning stage Amity Business School

 The activities or functions that produce the service outputs demanded by

the end users are called channel flows.
 Define the channel element which is required to service each segment.
 Need to decide which channel partner is “ ideal” to meet the expectation of
different segments & how many of them are required, basically the no. &
type of intermediaries is decided.
 The sales manager also defines the service objectives & flows of each
channel element
 There are eight generic channel flows : physical possession, Ownership,
promotion, negotiation, financing, risking, ordering, payment
 Importance of positioning Amity
stage Business School

Identifying what channel flows are performed by whom and at

what level is helpful in several aspects :-
1) Helps the channel manager diagnose & remedy shortcomings
in the provision of service outputs.
2) Helps establish a new channel or revise an existing channel to
minimize the cost of providing desired service outputs
3) Helps in allocating profits equitably because…..
Compensation in the channel system should be given on the
basis of the degree of participation in the marketing flows &
the value created by the participation !
 Focus Stage Amity Business School

 The sales manager decides which segment to be addressed as

it may be impractical & expensive to target all segments.
 There can be constraints such as those of the environment,
managerial talent pool available & competition.
 Developing the right channel alternative
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 The sales manager has to work out best possible alternatives in

case a new channel needs to be established
 In case an existing channel exists which needs to be modified ,
the sales manager needs to identify the gaps which exist b/w
the ideal channel & existing channel .
 Needs to take steps to minimize these gaps
 Establish new channelAmity Business School

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

exists currently in the market for a particular segment.
• He needs to establish a channel design which comes closest to
meeting the target market’s demands.
• The same will be subject to the environmental & managerial
bounds constraining the design
 Refine existing channelAmity Business School

• When a pre existing channel exists in the market but is not that
effective & productive, the channel manager needs to perform
a gap analysis.
• The difference b/w a zero based and the the actual channel on
the demand &supply side constitute gaps in the channel
design.
• On the demand side, gaps mean that at least one of the service
output demand is not being appropriately met by the channel
• The SOD can be oversupplied or undersupplied.
• Supplying too much leads to higher prices to the end users
• Supplying too little will result in end users asking for more.
 Contd. Amity Business School

• In a supply side gap at least one flow in a channel is carried

out at too high a cost..
• This not only wastes channel profit margins but can also
translate as higher prices for end users which they are
unwilling to pay. This is followed by a drop in sales and thus a
fall in market share.
• Generally occurs due to lack of up to date expertise in channel
flow management or simply from wastage in a channel
 Gap Analysis Amity Business School

The Gap Analysis framework considers :-

a) Sources of gaps
b) Types of gaps
c) Closing gaps
 The gap analysis framework
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Sources of gaps
Environmental Managerial
• Local legal constraints Lack of knowledge
• Local physical retailing infrastructure Optimization at a higher
level

Types of gaps
Demand side gaps Supply side gaps
• SOS <SOD Flow cost too high
• SOS>SOD Which flow(s)?
• Which service outputs?

Closing gaps
Demand side gaps Supply side gaps
• Offer tiered service levels Change flow responsibilities of current channel members
• Expand- contract provision of SO Invest in low cost distribution technology
• Change segment(s) targeted Bring in new channel members
 Channel Design Process
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Segmentation Positioning
Segmentation PositioningTargeting
Targeting Establish
Establish
new
*Define optimal • Choose
Channels
new channels
* Define SODschannel flow segments to
*Channel flow
by performance target to
Performance
segment for each *Channel structure
* Identify Channel *Environment
environment *Define optimal Bounds
-al
*Managerial Refine existing
characteristic channel structure Refine existin
for each segment Bounds Channels
-s &
constraints *Competitive
channels
*Gap analysis
benchmarks *Channel flow
Performance
*Channel structure

Channel Design Process

 Examples of channel systems
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Category of Channel objectives

product
Industrial/ technology Direct marketing to a small no.of customers

Consumer products Large no. of end users/intensive distribution

Frozen desserts/ ice creams Cold chain supported channel system

Fertilizers, pesticides/ seeds Rural based channel system

Pharmaceutical products Requires different set of partners to handle

doctors, chemists, hospitals
Multi level marketing Distributors to recruit more distributors

House construction items Distributors of hardware

 Channel Implementation Process
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 After attaining a good channel design for the market, the channel manager’s
job is not over. He now has to implement the channel design.
 Specific channel members are likely to specialise in particular flows &
activities.
 If the channel members do not perform properly , the entire channel effort
suffers.
For e.g a poor transportation system can ruin a most excellent channel design
also at times
 For a channel manager to implement the optimal channel design, in the face
of interdependence of the channel partners , of whom not all incentivised
uniformly & not all cooperate to deliver their designated channel flows, the
channel manager needs to possess & use channel power.
 A channel member’s power is its ability to control the decision variables in
the marketing strategy of another member in the given channel at a different
level of distribution