Amity Business School

Amity Business School

MBA Class of 2012, Semester II

Distribution Logistics & Management 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 utility to the customer. Distribution Management is the management of all activities which facilitates movement & coordination of demand & supply in creation of time & place utility of goods & services

Time Utility

Possession utility

Place utility

Amity Business School

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.

Amity Business School

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

Amity Business School

Are intermediaries necessary?

Companies like Dell & Amazon exist ! Eureka Forbes is also a case in point !
Normally, in case of a technical & complicated product the company may want to handle the distribution themselves as the intermediary may or may not be able to learn as much as their own salesperson

A combination works better !

A combination of direct & indirect distribution of godds & services generally works out better

Amity Business School

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

Amity Business School

Distribution channel strategy

Corporate strategy

Marketing strategy

Distribution strategy

Amity Business School

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

Amity Business School

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

Amity Business School

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 companiess products & packs Retailers : are shopkeepers who set up shops in the market place

Amity Business School

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 companys products one outlet in the market may sell the companys product

 Exclusive distribution: All the more selective, only

Channel flows
Amity Business School 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 Possession Ownership Promotion Negotiation Financing Risking Ordering Payment Wholesalers

Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment Retailers

Physical Possession Ownership Promotion Negotiation Financing risking Ordering Payment Consumers Industrial & Household

Producers

Amity Business School

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 companys business. Eg. Ingersoll-Rand International Bobcat, Clark Material handling & the Spicer Division of Dana Corporation use a 3PL German firmFeige 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

Amity Business School

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
Service Outputs :

Amity Business School

 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 markets service outputs & b) at a minimum cost of performing these channel flows that produce those service outputs Every channel flow not only contributes to the production of valued service outputs but also carries an associated cost.
Market Flow Physical possession Ownership Promotion Negotiation Financing Risking Ordering Payment Cost represented Storage & Delivery costs Inventory carrying costs Personal selling, advertising, sales promotion, publicity, public relations cost Time & Legal costs Credit terms/ conditions of sale Price guarantees, warranties, insurance, repair & after sales service costs Order processing costs 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)

Amity Business School

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

Amity Business School

Prominent channel systems

Vertical Marketing system (VMS) : corporate, administered & contractual Horizontal marketing system ( HMS) Multi- channel marketing system

Amity Business School

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 !

Amity Business School

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 planning Amity Business School

Segmentation

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

Amity Business School

Segmenting the market by SODs

Service outputs clearly differentiate marketing channels. Different group of end users value service outputs differently.

The channel segmentation process should be such that it produces group of buyers who are a) Maximally similar within a 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

Amity Business School

Importance of positioning stage

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.

Amity Business School

Developing the right channel alternative

 The sales manager has to work out best possible alternatives in case a new channel needs to be established  In case an existing channel exists which needs to be modified , the sales manager needs to identify the gaps which exist b/w the ideal channel & existing channel .  Needs to take steps to minimize these gaps

Amity Business School

Establish new channel

The channel manager opts for a new channel if no channel exists currently in the market for a particular segment. He needs to establish a channel design which comes closest to meeting the target markets demands. The same will be subject to the environmental & managerial bounds constraining the design

Amity Business School

Refine existing channel

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

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 Business School Amity

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

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

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 ProcessAmity Business School

Segmentation Segmentation * Define SODs
by segment * Identify environment -al characteristic -s & constraints

Positioning Positioning *Define optimal

channel flow performance for each Channel *Define optimal channel structure for each segment

Targeting Targeting
Choose segments to target to *Environment Bounds *Managerial Bounds *Competitive benchmarks

Establish Establish new Channels new channels *Channel flow

Performance *Channel structure

Refine existing Refine Channels existin *Gapchannels analysis

*Channel flow Performance *Channel structure

Channel Design Process

Examples of channel systems

Amity Business School

Category of product
Industrial/ technology Consumer products Frozen desserts/ ice creams

Channel objectives
Direct marketing to a small no.of customers Large no. of end users/intensive distribution Cold chain supported channel system

Fertilizers, pesticides/ seeds Rural based channel system Pharmaceutical products Multi level marketing House construction items Requires different set of partners to handle doctors, chemists, hospitals Distributors to recruit more distributors Distributors of hardware

Amity Business School

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

managers 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 members 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