Module 5 Module 5

Industrial Distribution Channel and Marketing Logistics• A marketing channel is defined as a set of

independent organizations that make a product or service available to the customers.

• A marketing channel is also called as distribution channel/trade channel.

• Also defined as a link between manufacturers and customers.

• The decisions on marketing channels are taken strategically as they are long term.

The marketing logistics is also called as physical distribution.

It consists of delivering the completed products to customers and channel intermediaries.

Its purpose is to assist to perform the task of storing and moving of goods and services.

Distinctive Nature of Industrial Distribution ChannelsFactors Affecting the Nature of Industrial

Channels:Geographical Distribution: Industrial

distributors are highly concentrated and found where industrial market exists.

Channel Size: Industrial channels are short and involve intermediary for selling and handling the products because buyers expect product availability, technical expertise and service capabilities. Sometimes the channels are direct from the manufacturer to customers.

Characteristics of intermediaries: Industrial intermediaries are often technically qualified and have close relationship with the industrial organizations. Marketers use industrial distributors or manufacturers’ representative.

Mixed System: Some marketers use a mixture of direct and indirect channel in order to meet the requirements of different market segments.Some firms have agents to serve the markets

segments consisting to geographical territories

Structures of Industrial Channel

Direct Channel-The manufacturer performs all the functions or tasks necessary to delivery the product to its customers.

Tasks include contacting potential customers, negotiating, communicating, selling, financing, product storage, transportation and servicing

Ex: Direct channel is through company's sales force and Direct marketing is through direct mail, telemarketing, and electronic business through online marketing.

The direct distribution is feasible whenThe value of the transaction is largeThe selling includes extensive technical and

commercial negotiations at various level, including top management.

The buying process is lengthyIndustrial buyers insist on buying directly from

the manufacturers.

Indirect Channel: the manufacturer and the intermediaries share the tasks between them.

Ex: independent dealers or distributors, manufacturers' representatives, commission merchants, VAR, and brokers

Indirect channel are appropriate when:– The value of the transaction are low– The manufacturer has limited sources– The industrial buyers are widely dispersed– The industrial buyers purchase many

product items in one transaction

Ex: industrial chemicals, construction materials, electrical wiring, iron and steel, general machinery etc.

Services performed by Intermediaries• Buying: The distributor purchases products

from the manufacturers to resell in market.• Promoting and Selling: the intermediaries

contact potential or existing customers to promote the products, negotiate and sometimes secure the orders.

• Assorting: Intermediaries combine several related items through various sources to serve potential customers

• Financing: they purchase products and can keep as inventory.

• Warehousing: they ensure product availability in good condition by proper warehousing.

• Grading: Sometimes the manufacturers ask to inspect, test the product and assign distinct quality grades.

• Transportation: sometimes they manage the transportation of products from manufacturer to customers’ place.

• Information: The intermediaries have information about product features, prices, deliveries both to their customers and suppliers.

• Risk: The product purchased may deteriorate, or may become obsolete, or sometimes may not be required by the customers.

• Technical Services: Some intermediaries provide pre sales and after sales services to the users.

Why Industrial Customers buy from Distributors Dependable Delivery: the distributors are fast

and are economical in delivery. They inturn reduce the inventory levels at the customers' place.

Information:Information about the price, product availability, quality and service can be obtained.

Variety:variety of products are available at the distributor's place.

Liberal Credit:they understand the financial needs of the local customers.

Types of Industrial Intermediaries

Manufacturers' Representatives: Manufacturers' Representatives: they are also called as sales agents/manufacturers' agents.

Their main function is to promote sales and secure orders.

They do not buy, store or finance the transactions.

They are paid a commission on sales. They are needed by small and medium sized

industrial firms with low market potential. The sales agents have excellent contacts

with buyers.

Industrial Distributors or Dealers:They are an important intermediary in distribution channel. They are independent business firms serving narrow geographical market. They are also called full function middlemen.

Responsibilities-information, buying, selling, storing, financing, promoting, offering credit and transportation.

Categories-General line distributors -Specialized distributors

-Combination house Brokers: these middlemen provide information on

what is available and required. Their function is to find potential buyers, negotiate and complete the sale. They deal with standard products.

Commission Merchants: they deal with bulk commodities such as raw-materials. They do not buy materials, but they perform the function of arranging inspection, physical handling, negotiating process and completing sales.

Value Added Resellers(VAR): they are not new, but have gained importance in computer industry. They customize the computer hardware and software to solve specific problem for specific industry.

Choosing the Right Distributor Assigning the market function:they have to

carry local inventory sufficient to serve the market. The manufacturer will divide the potential market into two broad categories and decide wich segment will the distributor will serve.

Along with inventory and sales, the distributor is expected to assume credit liability.

Other responsibility include repairs, in-warranty service, local advertising, new product sampling, trade show participation.

Product Line Coverage: Fragmented channels-portions of a

product line are aimed at different market segments and hence require different distributor groups

Specialized products-the average distributor lacks technical competancy to negotiate complex specifications with users. Thus it is advisable to sell the specialized product direct.

Distributor Size: The firms can afford to carry a larger and more

complete inventory for better customer service. With lower selling costs, they can generate

higher profits to support complementary service or pursue increased sales with more aggressive pricing.

Manufacturers select one or more of many small distributors so that they get solid effort, commitment, and produce outstanding results.

Manufacturer retain strategic control over the distributors.

Distributor Type: The relative importance and efforts to

each distributor will vary considerably. There is notable variation in customer

types, price, number of product line carried and relative amount of time spent on selling.

Manufacturers therefore choose the type of business being conducted in the particular location.

Market/Customer Coverage- Marketers who are concentrating on the direct

sales effort on potential customers, would like to see distributors active business in the remeinder of the geographic market.

Market Development- They provide the types of post development

services that customers normally demand from manufacturers.

Product Concentration: Manufacturers who have not established

reputation within the target market, use general line distributors to reach the customers.

Exclusive or Multiple Distribution: Manufacturers usually let the size and

dispersion of the geographical market determine the number of distributors that they will franchise.

Distributors often start out as market specialists.

Problems to Avoid : Franchising too many distributors in the

market makes the product line undesirable to all.

The mixture of distributors in multiple distribution market.

Distribution Policies: Spell out the respective duties of both the parties

to each other and to their common market. Recognize the rights of both the parties and show

how it could be protected. Attempt to foresee major potential conflicts and

resolve them beforehand. Duties and Goals:

The manufacturer and the distributor quite clearly share the duties and responsibilities.

The marketer must explain the major elements of the marketing strategy pertain to the distributor.

Emphasis is given to price, degree of product innovation and the level of service.

Rights and Protection: The marketer has to take prudent steps to

prevent false impressions by exhibiting an understanding of both sides of the proposed relationship.

Marketing Logistics: Physical DistributionThe Relationship of Logistics and Physical Distribution:• Logistics refers to activities involved in making

products and raw materials available for manufacturing and in providing finished products to customers, when and where and how they are desired.

• It involves 2 primary product flows:• Physical supply- Materials Management

• Physical distribution- Tasks necessary to deliver the completed products to the customer/intermediaries.

Physical Distribution and Marketing Strategy:

• Industrial marketer use logistics to create a competitive advantage in the market place.

• Inventory control system analyzes demand trends, re calculate minimum maximum quantity levels and automatically issue necessary purchase orders.

• The manufacturer seeks better utilization of their facilities, and becoming more efficient in material handling.

• Supplier of component parts frequently face challenging logistical performance from their customers.

• The costs and the adequate availability of the product directly influence physical distribution system.

The Total Cost Approach:• Objective of the effective physical distribution

system is to minimize the costs involved in storing products and moving them from point of production to point of purchase.

• Management of logistical activities, focus on two variables: • Total distribution costs• Level of service provided to customers

• Logistical costs in industrial markets vary considerably, depending on the nature of the product and the level of service.

Interactive Costs: the cost of logical activities interact often in inverse manner. Ex: the policy of maintaining low inventory levels to reduce holding costs can result in stock out and backorders, resulting in lost customers.

The total cost approach seeks to achieve efficiency of the entire system, not just one specific activity. All cost items are considered simultaneously.

Evaluating Cost Trade-offs: they occur among all logistical activities.

Ex: If the firm found that only 20% of the inventory is utilized, then the firm decided to stock only those items locally and consolidate the remaining inventory in selected warehouses. The firm decided to use air freight to maintain the customer service. The firm reported to have saved in spite of increased transportation costs.

Identifying Cost Centers• Logistical management includes integration of cost

centers and is provided at the lowest possible cost.

• Cost center include: transportation, warehousing, inventory, material handling, and order processing.

• The objectives of the cost centers include:• Identify the cost by activity center.

• Evaluate these costs in terms of desired level of customer service.

• Seek trade-offs between and among the various activity center.

Cost Trade-offs:It is possible within a single activity center. Ex :In

different modes of transportation, a particular mode is selected(rail, road, air, water, pipeline) and trade-offs are possible within that mode and the firm may use leased vs company owned trucks.

Transportation: The most important activity function in physical distribution is the shipment of goods.

• Depending factors: speed, availability, cost, dependability, product movement.

• Modes : air, water, rail, road, pipeline

Air Freight: It is one of the fastest and the most expensive mode of transportation.

Highly perishable goods are shipped by air like sea foods and cut flowers. Air freight is also used to transport products of high value density.

Truck: the trucking industry is the common mode of transportation for food grains, agricultural products, a wide variety of manufactured goods and consumer goods.

Rail: They are specialized for supplying raw materials like metallic ores, coal, gravel, unprocessed agricultural goods, scrap and automobiles.

Pipeline: It is a limited adaptability mode of transportation . Products normally include crude oil, refined petroleum, natural gas. 90% of the petroleum are transported by this mode.

Other products adaptable to this mode is chemicals and waste commodities.

Criteria for Selecting the Mode of Transportation:• Speed and availability of service:• Dependability of service• Carrier capability• Frequency of service• Overall Efficiency

Warehousing:

Significant opportunities for cost savings, without lessening customer service, exist in the area of warehousing.

Decisions on warehousing have a tremendous impact on the firms’ sales volume and distribution cost.

The most important factor is to determine the number and locations of warehouses.

The objective of choosing specific locations is to improve customer service and reduce costs.

Private or Public Facilities: the warehouse space may be owned(private), rented or leased(public). The private facilities have total control over the operations and personnel. Public facilities do not require the firm to commit a large sum of money.

Warehouse Site Location: It has to located so as to provide the desired level of customer service at the least cost of distribution. Warehouse location decision are approached from macro and micro perspective.

Inventory: the quality of inventory management has significant impact on the customer service and effective costs.

Inventory act as a buffer against demand and supply uncertainties and other conflicting costs.

Finished goods inventory are essential part of the customer service.

Inventory Carrying Costs: It usually represent one of the highest cost in the logistical system and includes percentage of total inventory value.

Optimizing inventories methods include ABC analysis and EOQ models.

Order Processing:An essential aspect of logistical coordination is

an effective order processing system.Physical distribution starts with the receipt of

the customer order and ends when the customer receives the shipment.

Order processing function include• Credit check by the credit dept.• Crediting the sales persons with sale• Recording the transaction in the accounting

dept.• Contacting the warehouse nearest to the

customer to arrange for shipment.• Updating the firms master inventory controls• Translating the shipment documents into an

invoice and a permanent sales record.

Materials Handling:The cost effectiveness with which inventory will

be physically handled in warehouses.Depends on variety of factors like:

• Absolute volume and the degree to which it fluctuates.

• Relative space and labor cost• The ability to minimize idle time, overtime,

breakdown, breakage and errors.

The efficient use of mechanized handling equipment like forklifts, hoists, hand trucks, conveyors etc. can help to minimize cost.