Unit V SDM

7/27/2019 Unit V SDM

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Distribution activities are specialized and have a learningcurve.Activities like transportation, warehousing and even a

neighborhood kirana store are specialized activities.


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It is a strategic choice between cost of distribution andcontrol over distribution. Technically complex products or short life cycle products need

higher control.

The choice between control and costs depends on: Nature, scope and economics of distribution activities Objectives of the firm

Market penetration, market share, financial strength etc Capabilities of the firm Industry norms and competition practices Future trends


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Production function gives FORM utility distributionfunction gives TIME, PLACE and POSSESSION utility. Time utility -customer buys the product at the time of need Possession utility customer takes possession of product through

payment Place utility customer buys the product at a convenient placeHaving the best designed or manufactured product is notenough.

Sometimes distribution channel creates more value thanthese three utilities e.g. Maruti suzukis channels provideafter sale service utility which is a key reason for Maruti to

be the market leader in India


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Design the ideal channel structure that can meet all theobjectives at the least costLook at available channels and identify those closest to the

ideal channel.Assess the various channel options w.r.t specific criterionDevelop the channel plan and implement it


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It is the process where goods that are manufactured in largevolumes are broken into smaller units at different locations,which are consumed by end customers.

Necessary functions performed buy the channel: Providing storage space Transaction management of ordering and payment

Smaller the lot size means higher convenience for the

customer but also means higher cost for the channelIndian rural markets need smaller lot size and higher geographic spread - thereby greatly increasing the cost of distribution.


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Waiting time is the time the customer has to spend beforeavailing the services of the channel. Waiting time is low for low value & low involvement products and

vice versa. Waiting time is low for impulse buys

Waiting time also depends on tolerance levels of consumers,competitive practices and brand loyalty.


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Assortment is the service which involves making availableat one place products that are normally bought together.It is difficult to predict the adequate level of assortment.

High end brands normally go for exclusivity and low valueitems are sold at multi brand stores.Having said that, high value brands normally locatethemselves in clusters to offer spatial convenience.Data from super markets are great store houses for figuringout the assortment behavior of the consumers


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Physical possession this involves transportation andstorage of the product as it moves from manufacturinglocation to end use location. Several channel memberscontribute to this flow.Ownership flow taking title of the product as it flowsthrough the channel.Promotion flow promoting the product to the customersas the product moves through the channel.

Negotiation flow finalizing the terms of trade at everylevel of channel flow.Financing flow managing the working capitalrequirements of the channel


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Risk taking flow underwriting the risks associated with possession /ownership including warranties and after sales service

Ordering flow receiving and consolidating of ordersand passing it upstreamPayment flow receiving, recording and passing the

payment upstream


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CHANNEL FLOWS & COSTS

Channel Flow Cost Represented

Physical possession Storage and delivery costs

Ownership Inventory carrying costs

Promotion Personal selling, advertising, sales promotion,

publicity, public relations costs

Negotiation Time and legal costs

Financing Credit terms, terms and conditions of sale

Risking Price guarantees, warranties, insurance, repair, andafter-sale service costs

Ordering Order-processing costs

Payment Collections, bad debt costs


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Effectiveness -whether the key objectives can beachievedEfficiency - the cost incurred for meeting the objectivesEquity whether every channel member getsremunerated to the extent of the criticality their of activities.Scalability the extent to which the channel can take thesurge in demandFlexibility how well the channel will adjust to changesin products, consumer behavior, technology changes etc.


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You will not design a channel ( 95% probability)You will deal with channels (100% probability)


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ManufacturerCarrying andforwarding

agent

Distributor

Wholesaler

Retailer


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Logistics is the process of planning, implementing andcontrolling the efficient, cost effective flow and storage of raw materials, in process inventory, finished goods andrelated information from point of origin to point of consumption for the purpose of conforming to customer requirements.It involves two major operations:

Material Management Physical distribution managementIt is divided into

Inbound logistics Outbound logisticsIn FMCG almost 40% of the final cost paid by customer is towards logistical activitiesIn India, around 13% of GDP is estimated to be spent onlogistics.


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Cost reductionCapital reductionService improvements


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Cost reduction is aimed at reducing the variable costrelated to storage and movement of goods withoutaltering the service levels. It is done by Altering the location and number of warehouses Altering the mode of transport Route optimization Optimizing the quantum of inventory


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Capital reduction is aimed at reducing the level of investment in logistics. Assets that are created in thisfunction are Warehouses Trucks Material handling equipments IT investments for managing supply chain


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Service improvements are aimed at giving better service without increase in the costs of logistics. Better service could mean Scalability at least cost when demand goes up Increase in accuracy /speed of transaction processing through

business process re - engineering.


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Logistical planning addresses the issue of costreduction, capital reduction and better service levelthrough: FIT Facility planning Inventory management Transportation management


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Warehouses are secure, protected buildings with specialfacilities where inventories are accumulated, stored, allocatedand according to demandMain functions of warehousing are material movement andinformation processing: Receiving ( unloading, quantity verification, order matching, quality

inspection) Transferring ( specific location in warehouse, adjusting inventory

records) Order picking and Selection ( order receiving, picking of inventory,

packing, deciding on mode of transport, adjusting inventory records) Shipping ( transportation and billing)


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Main decisions in warehousing area are Number of warehouses the considerations here are cost of lost

sales, inventory carrying costs, warehouse costs andtransportation costs

Location of warehouses Location decisions are basedminimization of transportation costs and warehousing costsleading to lower lead times and better service levels.


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Logistical planning addresses the issue of costreduction capital reduction and better service levelthrough: Facility planning Inventory management Transportation management


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Costs associated with Inventories: Inventory procurement costs ordering costs Inventory carrying costs capital investment on inventory,

inventory service costs ( insurance), storage space costs ( rent,

maintenance, manpower), other costs ( obsolescence, pilferage,shrinkage etc)

Out of stock costs Order cancellation ( amount of profit lost)and back order costs (cost of management time and effort to

push old orders)


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Total cost of inventory = Cost of ordering +Inventory carrying cost

TC - total cost

D - Annual demandQ - Order quantityS Ordering costI Inv. Carrying cost

C Unit cost of inventory in Rs.


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RK agency is a distributor of cycles in Karnataka. Thecycles are ordered from Punjab and order fulfillmenttakes 4 weeks. The annual demand of cycle in around20,000 cycles with an average price of Rs.700.the Invcarrying cost is 5%and the cost of each order

processing is Rs 4000. Find out the optimum order qtyand the reorder level.


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RK agency is a distributor of cycles in Karnataka. The cycles are ordered fromPunjab and order fulfillment takes 4 weeks. The annual demand of cycle in around20,000 cycles with an average price of Rs.700.the Inv carrying cost is 5%and thecost of each order processing is Rs 4000. Find out the optimum order qty and thereorder level.Total demand 20000 cycles /year Ordering cost Rs 4000 per order Inventory carrying cost Rs 700 * 5% = Rs 35 per cycleEconomic order quantity = sq root of (2*20000*4000/35)= 2138Estimated demand per week 20000/52 = 384Lead time - 4 weeksReorder point 384*4 = 1538 cycles


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Logistical planning addresses the issue of costreduction capital reduction and better service levelthrough: Facility planning Inventory management Transportation management


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Documents

Unit V SDM