Chapter 20

Managing the Distribution Function

Chapter 19

Managing the Distribution Function

….Marketers realize that if they were to make

the brands available in the right size, at the

right time and at the right price, the Indian

consumer can be motivated to buy it and

consume it…..

20.3

Role of Middlemen or Intermediaries

a) Provide information about the market to the manufacturer

b) Maintain price stability in the market

c) Promotion of the products in his territory

d) Financing by providing the necessary working capital in the form of advance payments for goods and services

e) Middlemen also take the title of the goods and services and trade in their own name

20.4

Suppliers ofInputs

Transporter and Warehouses

ManufacturerTransporters and C & F Agents of

Company Warehouses

WholesalersTransportersRetailersCustomers

Physical Flow:

20.5

Title Flow:

Input Suppliers

ManufacturerWholesalers/

DealersRetailers Customers

20.6

Suppliers Bank ManufacturerWholesaler/

DealersRetailers Customers

Payment Flow:

20.7

Information Flow:

Suppliers of

Inputs

Transporter and

Warehouseand Banks

Manu-facturer

Transporter and

Warehouseand Banks

Wholesalers/Dealers

Transporter and

Warehouseand Banks

Customers Retailers

20.8

Promotion Flow:

Supplier of Input

AdvertisingAgency

Manu-facturer

AdvertisingAgency

Trade Customer

20.9

Type and Nature of Middlemen

Merchant Middlemenintermediaries who take title to the goods and services and resell them

Agentshelp in identifying potential customers and help in negotiations

Facilitatorsindependent business units that facilitate the flow of goods and services

20.10

Channel Level

Decisions that a firm must take regarding the number of

channel levels appropriate to serve a given market

From zero-directly from the manufacturer to the

customer- to as high as 4 to 5 levels involved in

distribution.

Zero level in industrial product marketing, project

marketing

20.11

Channel level:

Firm adopts a one channel level when:

a) Number of customers is high

b) Customers in specific geographical area

c) Order lot size not uniform

d) Firm sells goods to wholesaler or a large dealer

2, 3 or even 4 levels in case of:

a) Consumer products

b) Customers spread across the country

c) Market is large

20.12

Factors determining the length of the Channel

a) Size of the market-larger it is more economical it isto serve it directly

b) Order lot size-if it is small, better to have longerchannel

c) Service requirements-if higher level of service is required,then it is better to have a shorter level

d) Product variety-if customers shop for product assortment,a wider channel of distribution is required

20.13

Manufacturer

Customer

Customer

Wholesaler/Dealer

Manufacturer

Zero Level One Level

(a) (b)

Length of channel distribution

20.14

Wholesaler/Dealer

Retailer

Distributor

Customer

Manufacturer Manufacturer

Wholesaler

Retailer

Customer

Two Level Three Level

(c) (d)

Length of channel distribution

20.15

Manufacturer

Market 1

Dealer Dealer DealerDealerDealerDealer Dealer

A B C D E F G

Retailers

Customers Customers Customers

Width of channel of distribution

20.16

Market

Market

Market

Market

Market

Market

Market

Market

Market

Market

Market

MarketMarket

Market

Market

Market

Market

Market

Market

Market

Market

MarketMarket

Market

Market

Market

Market Market

Market

Market

Market

Market

Market

MarketMarket

Market

Retail spokes-restaurants, soft drink kiosks, panwalsa, sweetmarts

Dealer/wholesalerDealer Hub

FranchiseMajor Hub ofParent Company

Hub and spoke pattern of distribution of a soft drink firm

20.17

Factors Influencing Distribution Decisions

Market Characteristics

Company Characteristics

Product Characteristics

Middlemen Characteristics

Intensity of Competition

Environmental Characteristics

20.18

Identifying Major Distribution Alternatives

Intensive Distributioninvolves all possible outlets that can be used to distribute the product

Selective Distributionfirm selects some outlets to distribute its products

Exclusive Distributionfirm distributes its brand through just one or two major outlets in the market

20.19

Terms and Responsibilities of Intermediaries

a) Price policy-the middlemen have to ensure that everyone involved gets a fair and equitable deal

b) Payment terms-the manufacturing firm stipulates the mode and terms of payment

c) Returns policy-this indicates the warranty that the manufacturer extends to the intermediary

d) Territorial rights-the territorial jurisdiction should be spelt spelt out to avoid territory jumping

e) Mutual services and responsibilities-should be spelt out,particularly in case of franchised and exclusive agency channels

20.20

Criteria for Evaluating Channel Alternatives

Evolution of Channels

GrowthDedicated stores:Computer pointShopper’s stop

Mature Department Stores like

Akbarallys

DeclineDiscount Store

Low cost alternatives like‘Discount Sales’

IntroductorySpecialist Channels like

boutiques in fashion/designer wear

Value Added by Channel Members

High

Low

MarketGrowth Rate

Marketing channels across product life cycle

20.21

Vertical Marketing System

VMS are of three typesi) Corporate Vertical Marketing Systems-successive

stages from production to distribution are under single ownership

ii) Administered VMS-seeks to control successive stages from production to distribution not through ownership but through the size and power of one of the channel members

iii) Contractual VMS-independent firms at different levels of production and distribution integrating their programs on a contractual basis to obtain larger economies of scale and, or sales impact than they could achieve alone

20.22

Horizontal Marketing Systems-This reflects the readiness or willingness of two or more non-related companies to put together resources to exploit an emerging market opportunity

Multichannel Marketing Systems-The firm uses two or more channels to reach one or more market segments

Managing the Channel-To effectively manage the channel members, the marketer has to:a) manage channel conflictb) motivate channel members

20.23

Channel ConflictType of conflict:i) Vertical level conflict-when the channel member at one level is

in conflict with another member at the next higher or lower level.1) Corporate Vertical Marketing Systems2) Administered VMS3) Contractual VMS

ii) Horizontal level conflict-conflict at the same level between channel members

iii) Multi channel level conflict-middlemen come in conflict with the manufacturer, using both direct and indirect means of distribution

20.24

Nature or Causes of Conflict

i) Goal incompatibility-between manufacturers and wholesalers

ii) Role ambiguity-common cause of conflict in multichannel conflict

iii) Differences in Perceptions of the Market-may create a conflict between manufacturer and middlemen

Magnitude of ConflictWhen a conflict assumes significant magnitude, the manufacturer must take the initiative to resolve it

20.25

Managing The Conflict

a) Communication-have regular communication between the manufacturers and the channel members

b) Dealer Councils-helpful in resolving conflicts at horizontal level and vertical level

c) Super ordinate goals-through evolving a superordinate goal of maximizing customer satisfaction

d) Arbitration and mediation-in intra-middlemen conflict -horizontal or vertical- the manufacturer may arbitrate or mediate

Motivating Channel Members

Achieved through financial and non-financial rewards

20.26

Eight Steps in Designing the Market Driven Distribution are:

1. Know what the customers want2. Decide on the outlet3. Determine the costs4. Bound the ‘ideal’5. Compare the alternatives6. Review assumptions in the list of research7. Confront the gap between the ideal and the actual

distribution system8. Implement changes in the system, if required

20.27

Element Traditional Approach Supply Chain Approach

Inventory management approach

Total cost approach

Time horizon

Amount of information sharing and monitoring

Amount of coordination of multiple levels in the channel

Joint Planning

Compatibility of corporate philosophies

Breadth of supplier base

Channel leadership

Amount of sharing of risks and rewards

Speed of operations, information and inventory flows

Independent efforts

Minimize firm costs

Short-term

Limited to needs of current

transaction

Single contact for the

transaction between

channel pans

Transaction-based

Not relevant

Large to increase com-

petition and spread risk

Not needed

Each on its own

"Warehouse'‘ orientation

(storage, safety stock) interrupted by barriers to flows;

Localized to channel pairs

Joint reduction in channel inventories

Channel-wide cost efficiencies

Long-term

As required for planning and

Monitoring processes

Multiple contacts between levels in firms and levels of channel

Ongoing

Compatible at least for key relationships

Small to increase coordination

Needed for coordination focus

Risks and rewards shared over the long-term

"Distribution Center" orientation

(inventory velocity) interconnecting flows; JIT, Quick Response across the channel

20.28

Logistics ManagementInvolvesa) Materials Managementb) Physical Distribution Management

Represents the value chain of the firm where at the start is the procurement function and at the end of the chain is the customer

This requires materials planning, inventory management, management of transportation and warehouses, and information management

20.29

Logistics Decisions

Transportation decisions involve:a) Costsb) Dependability of the modec) Transit loss and damage d) Reach of the modee) Speed at which firm is able to reach the market

Companies are using intermodal transportation to reach the markets. It combines two or more modes of transportation

20.30

Warehousing

Whether a firm uses its own or a third party warehouse, it has to take the following decisions:

a) Number of warehouses and their locationb) Level of customer service required to be provided to

gain competitive advantagec) Cost of distributiond) Technology to be deployed-automated warehousing

is now the order of the day

Inventory Management: Marketer has to maintain a fine balance between stockouts and stockpiles. Many companies are trying to manage this through JIT processes.

20.31

Third Party Logistics--An Emerging Alternative

These can be segmented in three broad categories:

1. Diversified, or those who handle all product types2. Product specific3. Customized to a client

Third party logistics providers add value to the distribution

channel by offering speed and consistency for just-in-time

operations, without having to move existing manufacturing,

and warehousing facilities closer to the customer.

20.32

Reasons why third party logistics is gaining importance

a) firms are able to concentrate on their core competencies and hence there is a better focus in their operations

b) it eliminates staffing and internal system development costs

c) reduce initial startup distribution costs

d) customize the offer to the market needs better than the manufacturer

20.33

In selecting a third party logistics supplier firm

needs to focus on:

a) compatibility in approach, attitude and culture

b) quality of services to be provided by the supplier

c) experience in a particular industry

d) performance track record

e) Flexibility

f) financial muscle

g) brand image