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Distribution and supply chain management- marketing mms notes
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Distribution Management &Marketing Mix
Sales and Distribution Management
The Marketing MixProductPricePromotionPlace
Distribution channels help in the ‘place’ aspect of themarketing mixDistribution provides place, time and possession utility tothe consumer
ExampleConsumer wants to buy a tube of toothpaste
Made available at a retail outlet close to her residence –placeMade available at 8 pm on a Tuesday evening when shewants it – timeShe can pay for the toothpaste and take it away –possession
The company distribution function has made allthis possible.The situation would be similar if a customer wantsto buy a refrigerator or medicines or even anelectric motor
Players InvolvedThe company and its distribution network
Direct company to consumerCompany to a C&FA / distribution center todistributors to retailersDistributor to wholesaler to retailer
All these intermediaries help the process of‘exchange’ of the product or service.
Distribution ManagementManagement of all activities which facilitatemovement and co-ordination of supply and demandin the creation of time and place utility in goods
The art and science of determining requirements,acquiring them, distributing them and finallymaintaining them in an operationally ready conditionfor their entire life.
Distribution Channels DefinedAre sets of interdependent organizations involved inthe process of making a product or service availablefor use or consumption
– Stern & Ansary
Whether selling products or services, marketingchannel decisions play a role of strategic importance inthe overall presence and success a company enjoys inthe marketplace.
Distribution ChannelsAre intermediaries or middlemen
Exist because producers cannot reach all theirconsumersMultiply reach and provide efficiency to themarketing processFacilitate smooth flow and create time, place andpossession utilitiesHave the core competence and reachProvide contact, experience, specialization andscales of operation
Types of ChannelsSales channel motivates buyers, shares informationbetween company and its consumers, negotiates fairbargains for consumers and finances the transactions
Delivery channel meant only for physical part of thedistribution
Service channel – performs after sales service
Listing of Channel MembersCompany own sales teamC&FAs and CSAsDistributors, dealers, stockists, value-added re-sellersAgents and brokersFranchiseesElectronic channelsWholesalersRetailers
C&FAs / C&SAsC&FA: carrying and forwarding agentC&SA: carrying and selling agentBoth are on contract with a companyBoth are transporters who work between the company and itsdistributorsCollect products from the company, store in a central location,break bulk and dispatch to distributors against indentsGoods belong to the companyC&SA also sells the goods on behalf of the company but remitsproceeds after sale
Distributors, Dealers, Stockists, AgentsName denotes the extent of re-distribution done bythemDistributors invest in the products – buy productsfrom the companyAre on commission, margins or mark-upMay or may not get credit – but extend creditDistributors cover the markets as per a beat plan. Allothers merely finance the business.Distributors could be exclusive for a companyAgents bring buyer and seller together
Wholesalers
Operate out of the main marketsDeal with a number of company products of theirchoiceAre not on contract with any companySell to other wholesalers, retailers and institutionsNegotiate about 15 days credit from companydistributors – also provide credit to their customersOperate on high volumes and low margins
RetailersThe final contact with consumersOperate out of their shops and sell a large assortmentand variety of goodsLocated closest to consumersBuy from company, distributors or wholesalersHighest margins in the networkProvide personalized services to their customers
Industrial Products
Customers may also directly purchase from company sales force
Producer Producer
Industrial Distributor
Industrial Customer
Industrial Distributor
Industrial Customer
Agent/middleman
Consumer Products
Retailers may also direct from company sales force
Producer
Customer /consumer
Retailer
Producer
Distributor
Customer/Consumer
Retailer
Producer
Distributor
Retailer
Customer/Consumer
Wholesaler
Patterns of DistributionDetermines the intensity of the distributionIntensity decides the service level providedTypes of distribution intensity:
IntensiveSelectiveExclusive
Intensive Distribution
Distribution through every reasonable outletavailable – FMCGStrategy is to make sure that the product isavailable in as many outlets as possiblePreferred for consumer, pharmaceuticalproducts and automobile spares
Selective DistributionMultiple, but not all outlets in the marketA few select outlets will be permitted to keep theproducts
Outlets selected in line with the image the companywants to project
Preferred for high value products
Tanishq jewelryKeeps distribution costs lower
Exclusive DistributionHighly selective choice of outlets – may be even oneoutlet in an entire market - car dealers
Could include outlets set up by companies – Titan, Bata
Producer wants a close watch and control on thedistribution of his products.
Distribution Channel StrategyDerived from the corporate strategy and themarketing strategySteps for designing the distribution strategy are:
Defining customer service levelsDistribution objectives and stepsStructure of the network requiredPolicy and procedure to be followedDefine Key performance indicatorsState Critical success factors
Customer Service LevelsDefined by the nature of the industry, the products,competition and market shares.Affordability also decides the service levelIt should at least match competition.Customer expectations have no limit
Distribution ObjectivesInfluenced by the customer expectationsDefines the extent of time, place and possessionutility which the customer can expect out of thechannel network
Set of ActivitiesManner in which the company and its marketing channelsgo about achieving the customer service levelsSome of these steps could be:
Periodic Sales forecastsDispatch plansMarket coverage beat plansJourney plans for service engineersCollection of sales proceedsCarrying out promotional activities
The company also decides as to who is to perform whichtask
Distribution OrganizationPrimary aim: determine who will do whatMajor Decision points:
Extent of company support and outsourcing to bedecidedBudget for the cost of the distribution effortSelect suitable channel partners – C&FAs, anddistributorsSetting clear objectives for the partnersAgree on level of financial commitments by the channelpartners.
Policy and ProcedureDefine policy and implementation guidelinesthrough Operating ManualsPolicy guidelines include
Code of conduct for channel membersSystem for redressal of complaintsAny additional subsidies etcHandling institutional businessService policy for engineering products
Key Performance IndicatorsConsistent achievement of targets by productgroups, periods and territoriesAchievement of market sharesAchievement of profitabilityZero complaints from customersNo stock returnsAbility to handle emergencies and sudden spurtsin demand
Key Performance IndicatorsBalanced sales achievement during a period –no period end skewsMarket coverage with ready stocksExcellent management of accounts receivablesMinimize losses on account of stock-outsMinimize damages to products
Critical Success FactorsThe distribution strategy also needs the support andencouragement of top management to succeedSome of the CSFs could be:
Clear, transparent and unambiguous policy and procedureSerious commitment of the channel partnersFairness in dealingsClearly defined customer service policyHigh level of integrityEquitable distribution at times of shortageTimely compensation of channel partners
Marketing Channels
Sales and Distribution Management
Channel FunctionsInformation gatheringConsumer motivationBargaining with suppliersPlacing ordersFinancingInventory managementRisk bearingAfter sales support
Distribution Channels
Take care of the following ‘discrepancies’SpatialTemporalBreaking bulkAssortment andFinancial support
Spatial DiscrepancyThe channel system helps reduce the ‘distance’ betweenthe producer and the consumer of his products.
Consumers are scatteredHave to be reached cost effectively
Example: companies produce products in one locationeven for global needs
Temporal DiscrepancyThe channel system helps in speeding up in meetingthe requirement of the consumers
Time when the product is made and when it is consumed isdifferentLimited number of production points but hundreds ofconsumers
Maruti plant in Gurgaon – cars and spares areavailable when the consumer wants
Breaking BulkThe channel system reduces large quantities intoconsumer acceptable lot sizes
Production has to be in large quantities to benefit fromeconomies of scaleConsumption is necessarily in small lot sizes
India is the ultimate example in breaking bulk – youcan buy one cigarette, one Anacin, one toffee etc
Need for AssortmentThe channel system helps aggregate a range ofproducts for the benefit of the consumer – it could bemade by one company or several of them.
For the same product, it could be a variety of brands andpack sizes
MICO makes fuel injection equipment, spark plugs etcin different plants but its dealer will sell the entirerange.
Financial Support
The channel system provides critical workingcapital to its customers by extending credit.Some channel members like stockists andwholesalers finance the business of theircustomers.
Medical diagnostic equipment to hospitals
Channel FlowsForward flow – company to its customers – goods andservices
Backward flow – customers to the company – paymentfor the goods. Returned goods.
Flows both ways - information
Three Flows Recognized
FORWARD
BOTH WAYS
BACKWARD
Goods and Services
Information
Payment for goods / returns
Com
pany
Customers
The Five Channel Flows1. Physical flow of goods
2. Title flow of goods (negotiation, ownership and risksharing also)
3. Payment flows (financing and payment)
4. Information flow (about goods, orders placed andorders executed)
5. Promotion flows
Channel FlowsSome channel member/s have to perform themThere is a cost associated with each flowIf a channel member is discontinued, the flow has tobe performed by anotherAll flows and transactions can be effective only withtimely, accurate and correct informationThe channel flow is ideally to be handled by the mostcompetent channel member who can deliver bestservice at the lowest cost.
Direct DistributionCompany to consumers or retailers without use ofintermediaries. Also includes reaching Institutionalbuyers.Selling on the InternetIf products are technically complex, this system ispreferredCost is a major consideration to adopt this mode
Direct Distribution - ExamplesBanking servicesCredit cardsPetrol / diesel – company own outletsLand line phone connectionsHealth servicesUtilities – electricity, waterSubsidized rationEducation
Indirect DistributionGoods may move through a set of intermediaries
Most FMCG companies follow this route
The intermediary has a far better reach than the companyThe cost of operations of an intermediary like awholesaler / retailer is shared with many businesses.
Role of Intermediaries
Company 1 Company 2 Company 3
Intermediary
Large number of CONSUMERS
Indirect Distribution - Examples
All FMCG, consumer durables and pharmaceutical
Petrol / diesel / cooking gas - franchisees
Insurance
Mobile phones
All kinds of passenger transport
Degree of InvolvementManufacturer C&FA or
Distribution CenterDistributor,
dealersWholesaler or
retailer
• Physical
• Title /ownership
• Information
• Risk sharing
• Promotions
• Physical
• Title
• Information
• Payment
• Order processing
• Physical
• Title / ownership
• Information
• Payment
• Order placement
• Negotiation
• Risk sharing
• Promotions
• Physical
• Title / ownership
• Information
• Payment
• Orderplacement
• Negotiation
• Risk sharing
• Promotions
Channel FormatsIs decided by who ‘drives’ the channel system:
Producer drivenSeller drivenService drivenOthers
Producer DrivenThis is the effort of the manufacturer to reach theproduct to his consumers. Examples:
Company owned retail outlets – petrol, Bata,Reliance mobilesLicensed outlets – KMFConsignment selling agentsFranchiseesBrokersVending machinesCompany contracted distributors
Seller DrivenUse of existing channels to reach the largest number ofend users
Existing wholesalers and retailersModern retail formatsSpecialty stores – Shoppers’ StopDiscount stores – SubhikshaPheriwalas
Service DrivenThese are the people who facilitate the distribution
Transporters and freight forwardersProviders of warehouse spaceC&F agents3P Logistics service providersCouriers
Other formatsMulti-level marketing systems – Amway, Modicare,Tupperware, HerbalifeCo-operative societiesTelephone kiosksTV home shoppingCatalogue marketingThe internetExhibitions, fairs and trade showsDatabase marketing
Channel LevelsZero level – if the product or service is provided tothe end user directly by the company.
Used mostly by companies delivering service likehealth, education, banking (also known as servicechannels)
One level – consists of one intermediaryTwo level – consists of two intermediaries and is themost common for FMCG products
Channel Levels
Zero level Two levelOne level
Producer
Customer /consumer
Producer
Customer/Consumer
Retailer
Producer
Retailer
Customer/Consumer
Wholesaler
Marketing Channel Systems
Vertical:CorporateAdministeredContractual
HorizontalMulti-channel
Vertical Marketing SystemVarious parties like producers, wholesalers andretailers act as a unified system to avoid conflictsImproves operating efficiency and marketingeffectiveness3 types:
CorporateAdministeredContractual
Corporate VMSCombines successive stages of production anddistribution under single ownershipExamples:
Bata, Bombay Dyeing, RaymondSears, GoodyearSuppliers of food items could be also their ownsupplying firms - like Nilgiris
Administered VMS
Co-ordinates distribution activitiesGains market power by dominating a channelUsually true of dominant brands like GE,Kodak, Pepsi, Gillette, Coke and HLL in certainlocations
Command high level of co-operation in shelf space,displays, pricing policies and promotion strategies
Contractual VMSIndependent producers, wholesalers and retailersoperate on a contractCould take the forms of:
Wholesaler sponsored voluntary chainsRetailer co-operativesManufacturer sponsored retail or wholesalefranchiseFranchise organizationsService firm sponsored retail franchise
Horizontal MSTwo or more unrelated companies join together topool resources and exploit an emerging marketopportunity
In-store banking in hotels, big storesRetail outlets in petrol bunksCoffee Day outlets in airports
Multi-channel Distribution
Company uses different channels to reach /same or different market segmentsMost FMCG companies have separatenetworks for retail market and institutionsPharmacy companies may use differentchannels to reach doctors, chemists andhospitals
Multi-channel DistributionUsed in situations where:
Same product but different market segmentsUnrelated products in same market – detergentsand ice creams (HLL)Size of buyers variesGeographic concentration of potential consumersvariesReach is difficult
Expectations from ChannelVariety and assortment at one location
Bulk Breaking
Close to customer location
Speed of Delivery
Additional services
SupportInstallationAfter-salesFinancial
Wholesaling
Sales and Distribution Management
Need for Wholesalers
Widespread economy – consumers can only reachedby thousands of retailers (except for consumerdurables and industrial products)Reaching these retailers by a company directly is notpossible (except for consumer durables and industrialproducts)Hence the need for wholesalers in two forms:
Well established free-lance wholesalersContracted distributors, stockists and agents
Characteristics of WholesalersOperate on large volumes but with chosen group ofproducts
Food, grocery, pharma or automobile spares etc
The company itself, contracted parties or free lancers,can operate as wholesalersMostly B2B business – trade and institutionsWholesaler could also be a retailer – in rural markets– W/s sells to other retailers and also to consumers
Characteristics of Wholesalers
Sell physical inputs or products – tangible goods ( Wsin some service industries)Optimise results, maximise service (effectiveness)and minimise operating costs (efficiency)Buy goods for resale, keep inventory, take risks ofprice changes, negotiate terms, procure orders,deliver and extend credit.
Definition
Wholesaling is concerned with the activities ofthose persons or establishments that sell to
retailers and other merchants and / orindustrial, institutional and commercial usersbut do not sell in large amounts to consumers
US Bureau of Census
Delivering Value
Keep goods accessible to customers instantlyAt times, get together to bargain for bettertermsPass on benefits or incentives to theircustomersHave a wide trading area
Difference with RetailersNot too worried about location, ambience orpromotions – prefer to be in the main marketDeal with other businessmen and not consumersDeal with a specific group of products onlyMuch larger trading areaMuch larger transactions with suppliers andcustomersBelieve in low margins but high volumes.
Functions of WholesalersVaries in degree between free-lance, companydistributors and stockists / agentsSales and promotion of chosen company productsBuying the assortment of goodsBreaking bulk to suit customer requirementsStorage and protection of goods till sold
Functions of WholesalersGrading and packing of commoditiesTransportation of goods to customersFinancing the buying of customersBearing the risks associated with the businessCollecting and disseminating market information to bothsuppliers and customers
Types of WholesalersFull service: stocking, selling, offering credit, deliveryand business assistance (company distributors,wholesale merchants)Limited service: range of service is limited (examplesinclude Metro C&C, mail order)Merchant w/s: independent businessesBrokers and agents: bring buyer and seller together –do not take possession of goodsOthers: agri business, auction companies etc
Limitations of WholesalersSome of them do not give complete information tosuppliers for selfish reasonsCannot be relied on to do equitable distributionAt times, do not want company and customers tomeetTend to hoard goods and influence pricingConsumers have no say in pricing or quality in a w/sdominated system
Major Wholesaling DecisionsWhich markets to operate inManpower to employWhat products to sellPricing decisions / Promotional supportCredit and collectionsImage and customer perceptionWarehouse location and designInventory Control
Favourable Factors
Companies have limitations in market / outletcoverage. Wholesalers are required to fill the gapsHundreds of small companies who cannot afford toset up distribution networks – need to depend onwholesalersIn food grains, fruits and vegetables – hardly anyorganised distribution network. Wholesalers helpmove goods from farm gate to consumers
Favorable Factors
Big companies also need wholesalers to get big volumes
W/s extend credit to customers. Companies cannotmatch this
Retailers have to visit w/s markets to buy food grains,cereals and pulses – buy a lot more.
Unfavorable Factors
Companies coverage focus on retailers and institutionsthrough their distributorsUsing modern retail formats as wholesalersMore outlets like Metro C&C being encouragedEnforcing strict price control so that w/s do not sell belowcompany prices.
Distributor
Is a wholesaler nominated by a company toexclusively re-distribute the company products to itscustomers in a designated territory. He does not dealin competitor’s products. Does not sell from hispremises. Extends credit selectively.
A redistribution stockist for HLLA distributor for Philips lighting divisionA distributor for L&T engineering division
Dealer
Role similar to a distributor butMay not have a clearly defined territory and may sell both inthe market and from his shopMay deal with competitive products alsoExtends credit selectively.Dealers in industrial products may have better defined roles.
Examples:Dealer for an edible oil companyA dealer for garment brands
StockistMay be working for a company with a designatedterritory but does not re-distribute the stocks. Sells fromhis premises. Extends credit selectively.
A stockist for paper productsA stockist for automobile spares
Re-distribution is visiting customer premises to sellproducts
Managing Distributors
The principles are similar across industry verticals. FMCGis the most complex.
Has the capacity to maximize sales and market shares.
Has to ensure buying goods from the company and re-distribution to the trade
Managing Distributors
Distributor responsibilities include:Buying adequate quantities by Stock Keeping Unit (SKU) forredistributionEnsuring full market coverage of all customers in the territoryassigned to himHelp finance the operations – pays for the goods upfront butextends credit to his customersMaintaining inventory of company products adequate at alltimes to service the marketAssist company in its promotional efforts
Need for Distributors
Under three circumstances:For entering a new townFor additional coverage in the same townFor replacing an existing distributor
For entering a new town, assess the potential forbusiness to decide:
If the town can sustain a full fledged distributorThe number of distributors required
Starts with a town profile of potential, number ofcustomers to be serviced and the competition.
Cost of Servicing
Cost benefit of using distributors to be assessedLogistics cost of serving the marketThe number of customers to be covered by category –wholesalers, retailers, institutionsFrequency of visits to markets and outletsSales revenue estimate from each visitMarkets to be covered with ready stocks or order bookingfor later deliveryLikely collections during each visit – gives an idea of thecredit requirements
Expectations from a DistributorTo be stated at the start of the relationshipHelps get the right kind of distributor also
Achieving sales targets – volume, value and packsFinancial commitment on inventory and creditInvestment in infrastructure – space, vehiclesManpower – front line and back officeDistribution effort – market and outlet coverage as per abeat plan with productive callsDeveloping new markets and new accountsManaging key accounts and institutional business
Expectations from a DistributorMerchandising and displays in the marketSecondary sales efforts and tracking – critical for fmcgand pharma (secondary sales is sales from thedistributor to the outlets in the market)Effectively handling promotions and schemesinitiated by the companyManaging damaged stocks
Expectations from a DistributorOrganising and participation in promotional eventsAssist company in making a success of launching newproducts and packsHandling consumer quality complaintsHandling statutory requirements on behalf of thecompanyPayments and remittances promptly to the company
RetailingSales and Distribution Management
What is Retailing?Any business entity selling to consumers directly isretailing – in a shop, in person, by mail, on theinternet, telephone or a vending machineRetail also has a life cycle – newer forms of retailcome to replace the older ones – the corner grocermay change to a supermarketIncludes all activities involved in selling or rentingproducts or services to consumers for their home orpersonal consumption
RetailingTerm retail derived from French word ‘retaillier’ meaning‘to break bulk’Characteristics:
Order sizes tend to be small but manyCaters to a wide variety of customers. Keeps a large assortmentof goodsLot of buying in the outlet is ‘impulse’- inventory management iscriticalSelling personnel and displays are important elements of theselling processStrengths in ‘availability’ and ‘visibility’Targeted customer mix decides the marketing mix of the retailer
RetailingRetail stores are independent of the producers – notattached to any of them
A survey shows that only 35% of purchases are pre-planned.
The rest are ‘impulse’- greatly influenced by quality ofthe merchandising efforts
Functions of RetailersMarketing functions to provide consumers a wide varietyHelps create time, place and possession utilitiesMay add form utility (alteration of a trouser bought by acustomer)Helps create an ‘image’ for the products he sells
Functions of Retailers
Add value through:Additional services – extended store timings, credit, homedeliveryPersonnel to identify and solve customer problemsLocation in a bazaar to facilitate comparison shopping
How do Customers Decide on a Retailer?
Price
Location
Product selection
Fairness in dealings
Friendly sales people
Specialized services provided
Kinds of RetailersType ofretailer
Characteristics
Specialty store Narrow product line with deep assortment – apparel,furniture, books
Departmentstore
Several product line in different departments – ShoppersStop, Big Bazaar
Supermarket Large, low-cost, low-margin, high volume, self-serviceoperation with a wide offering
Conveniencestore
Small stores in residential areas, open long hours all days ofthe week – limited variety of fast moving products likegroceries, food
Discount store Standard merchandise sold at lower prices for low margins -Subhiksha
Kinds of RetailersType ofretailer
Characteristics
Corporatechains
More outlets owned and controlled by one firm – Globus
Voluntary chain Wholesaler sponsored group of independent retailers
Retailer co-ops Independent retailers with centralized buying operationsand common promotions
Consumer co-ops
Co-op societies of groups of consumers operating their ownstores – farmers, industrial workers etc
Franchiseorganisation
Contractual arrangement between the producer andretailers – selling products exclusively – Kemp Toys
Retailers’ Strengths
Choice of merchandise is their prerogative – putpressure on producer suppliersMany new products on offer. Can charge penalty ifproducts do not do wellNew developments in IT help them run operationsoptimally and keep track of loyal customers. Alsohelps them identify profitable store locations.
Trade / Retail FormatRange of goods and customer service dimensionsdetermine the ‘format’. Elements distinguishbetween stores and include:
Store ambience. (Kemp Fort)Saving in time for shopping – interiors of practical design –reduce time for search and pick-up of goodsLocationPhysical characteristics – external appearance,arrangement of goods
All these are parts of the positioning strategy andinfluence the ‘footfalls’ to the store.
Categories of Shoppers (1)Identified by Cook & WaltersTask focused shopper – visits the store to buyspecific things he has planned for
Convenience, minimum time, easily accessible goods,pleasing store formatGrocery shopping is an example
Leisure shopper – more interested in the ambienceand environment
Has plenty of time, wants to have a good time whileshoppingLifestyle stores are examples
Category of Shoppers (2)
Convenience goods (low value): probable gain fromshopping and making comparisons is small comparedto the time, effort and mental discomfort required inthe search -toothpasteShopping goods (high value): gain is large -refrigeratorSpecialty goods: clearly distinguished by brandpreferences – Maruti Zen car or Tag-Heuer watch
Trading Area
Catchment area from where most of the customers ofa retail store come
Corner grocery store caters to the locality in which it issituatedDiscount stores have a wider area. Subhiksha locations forconsumers in 2 km radiusSpecialty stores have a much wider trading area – MTR,Shoppers’ Stop etc
Trading area increases with the size of the store andthe variety it offers
Retail Strategy
Positioning of the retailer
Merchandising
Customer service
Customer communication
Positioning StrategyWide range with a high value add – Lifestyle brand ofstoresLimited range but a high value add – Tanishque jewelrystoreLimited range with a limited value add – Bata storesWide range of goods but a limited value add – a FoodWorld outlet
Merchandising
A set of activities involved in acquiring goods andservices and making them available at the places,times and prices and the quantity that enable aretailer to reach his goalsThe most critical function in retailDirectly effects the revenue and profitability of thestoreAlso takes into account the assortment of goods andtheir quality
Customer Service Strategy
Developed to create ‘stickiness’ in customersPersonal data collected using IT – includingpurchasing practices and preferencesCustomer loyalty programs plannedCreate ‘customer’ delightLocation strategy to give competitive advantageUnderstanding the buying profile of the customers
Customer Communication
The manner in which the retailer makes himselfknown to his customers. Has two parts to it:
The messages which the retailer sends to his customers andprospectsThe word of mouth support which satisfied customers giveto the retailer by talking to others
Retailer communicates about:Announcing the opening of a storePromotions running in the storeAdditional facilities introduced by the stores
Pricing Strategy
Premium and indicating high value
Reasonable pricing with good value
Low pricing but high value for money
All strategies are focused on giving value to the customer
Product Differentiation
Feature exclusive national brands not available incompeting retailers – unlikelyExclusivity of products – specialty storesMostly private labels – WestsideFeature, big, specially planned merchandising events– Kemp Fashion sowsIntroduce new products before competition - -againunlikely
Retail Performance Measures
Gross margin return on inventory investment – GMROIGross margin multiplied by ratio of sales to inventory (50%*4=200%)
Gross margin per full time equivalent employee
Gross margin per square foot
FranchisingFranchisor is the firm which wants to sell its goods orservicesFranchisee is the firm or group that are willing to sell theproducts or services on behalf of the franchisor
The first party gives advice and help to the second to find goodlocations, blue prints for a store, financial, marketing andmanagement assistance
Benefits to Franchisor
Faster expansion
Local franchisee pays lower advertising rates than anational firm
Owners motivated to work more hours than mereemployees
Local taxes and licenses are responsibility of franchisees
Benefits to Franchisee
Quick recognition among potential customersManagement training provided by principalPrincipal may buy ingredients and supplies and sell tofranchisee at lower pricesFinancial assistancePromotional aids, in-store displays etc
Retailing on the Internet
Unlimited assortmentItems may not be on hold – someone has to deliverthe product – delaysNo product touch or feelMore info makes the customer a better shopperComparison shopping possibleConsumer has to plan purchases aheadNo need to handle cash – payment can be on-lineShopping is 24X7
E-tailing Issues
Logistics support to selling
Payment gateway
Customer product returns
Conflicts with Brick &Mortar – overcome by sellingseparate products
Designing Distribution Channels
Sales and Distribution Management
Channel Design Factors
Product mix and nature of the productWidth and depth of market / outlet coverage plannedLong term commitments to channel partnersLevel of customer service plannedCost affordable on the channel systemChannel control requirements of the company
Channel Design StepsDefine customer needsClarify channel objectivesLook at alternative systems which can meet theseobjectivesEstimate cost of operating the channel systemEvaluate available alternativesFinalise the ‘ideal’ system
Customer Needs
Lot size – most convenient pack size which theconsumer can buy at a timeWaiting time – time elapsed between the desire tobuy the product and the time when he can actuallybuy it – should be almost zeroVariety – choice of products, brands, packsPlace utility – choice of buying where he wants. For aconsumer product it has to be at a location closest tohis residence
Channel Design ComponentsRevenue generation or the commercial partPhysical delivery of the goods or services – the logisticspartThe ‘service’ part to take care of after-sales supportEach part of the system is likely to be handled by adifferent entity.
Channel Design IssuesActivities required and who will perform
Activities relationship to service levels
Number of channel members required and therelationship between categories
Roles, responsibilities, remuneration and appraisal ofperformance of channel members
Channel Design Process
Segmentation
Development
Focus
Positioning
SegmentationPutting customers in similar clusters based on theirneeds
Doctors who prescribe medicinesChemists who dispense medicinesHospitals and nursing homes who use them
Each segment has a different need to be serviced bythe channelGives an idea to the sales manager as to the kind ofchannel members he should be planning for.
PositioningDefines the channel element required to service eachof the segments
The sales manager decides the channel partner who is‘ideal’ to meet the expectations of the segments.The number of each category of intermediary is also decidedbased on the number of customers to be serviced in eachsegment.The service objectives and flows for each channel partnerare also frozen
FocusIt may not be possible to meet the needs of all segments– cost and practicality considerations (the managerialtalent available for instance)The sales manager has to firmly decide which of thesegments he will serviceThe competitive scenario also helps in this decision
DevelopmentAt this stage the channel system is being put in placeto achieve the objectivesSelect the best of the alternatives
Comparison with the most successful competitor could be agood benchmark
Channel partners of competitors may be willing toshare best practices of their principalsFor modifying an existing channel, the gap betweenthe ideal and the existing is to be identified forremedial action.
Channel ObjectivesDefines what the channel system is supposed to do tosupport customer service.Customer needs could include:
Lot size convenienceMinimum waiting timeVariety and assortmentPlace utility
The product characteristics and the market profilealso impact the objectives.Competition could also affect the objectives
Channel AlternativesAre planned after deciding the customer segments tobe serviced and the levels of service
Business intermediaries currently available like C&FAs,distributors, dealers, agents wholesalers and retailers.The number and type of intermediaries requiredDeveloping new channel typesRoles of each channel member
Evaluation of Major Alternatives
Cost of operations
and controlAbility to manage
and control
Adaptability
to be handledRange and volume
to be handled
Evaluation CritieriaCost:
If existing sales force can be expanded cost effectively, this isthe best alternativeCost of alternatives at different volumes can only beestimated for comparisonSystem with the lowest cost is preferred
Adaptability – the channel should be flexible tohandle different types of markets and changes in themarket conditionsVolume and range to be handled – Capable evenwhen business grows or expands
Evaluation CriteriaAbility to manage and control:
Distribution network being an extended arm of the company,the channel partners have some obligationsOperating guidelines specify these rulesThe channel system should help the company enforce theserules fairly to all channel partnersSome of the operating rules are……
Company trains channel personnel and provides properproduct literature
Selecting Channel PartnersGetting good channel partners is a difficult part ofdoing businessSome of the methods employed to select channelpartners are:
Sales people identify prospects and talk to themPress advertising (industrial goods)Existing channel partners can give good referencesCompetitors’ channel members for reference, not poaching
Selection CriteriaQualitative: willingness, confidence in company products,willingness to abide by company rules, building companyimage, innovativeness etc
Quantitative: financial status, infrastructure, location,present businesses, customer relationships, marketstanding etc
Training Channel MembersStarts from the time of recruitmentChannel member owner and his staffMarket views channel member as part of thecompany – he has to behave in a like manner – hencetraining assumes significanceTraining could be on the job field training orclassroom trainingTraining is an ongoing process.
Subjects for TrainingField training on how the markets are to be worked toachieve sales, collect payments and ensure the rightkind of merchandisingClass room training on company products,competition and how to tackle it to gain marketsharesSpecial meetings for new product launchesSubmitting reports and maintaining recordsStatutory compliance
Subjects for TrainingCare of company productsTechnical specifications and answering FAQs ofcustomersFor technical and industrial products – recognition ofspecs, installation procedure, repair and maintenanceand effective demonstrationsServicing of automobiles and other engineeringproducts
Motivating Channel MembersAmbitious volume and growth targets – continuousmotivation required to achieveMotivation includes:
Capacity building programsTrainingPromotions supportMarketing research supportWorking with company personnelIncentives
“Power” of MotivationReward – positive supportCoercion- threat of punitive actionReferent – positive effects of associationLegitimate – enforcing a contractExpert – support of special knowledgeSupport – additional benefits for performersCompetition – pitting against peers
French & Raven
Channel Members EvaluationEffectiveness of the distribution channel determinesthe success of the companyCompany would like its channel partners to performat the highest standards possibleNeed to constantly evaluate performance on salestargets, coverage, productivity, inventory holdings,attending to servicing requests etc
ROI as a MeasureLeading FMCG companies feel that an ROI of 30% fora distributor is healthy and is a fair indication that heis performing well.
If the ROI is more, additional tasks are givenIf the ROI is less, the company may provide additionalsupport
Post evaluation tasks include counseling, retrainingand motivating. In extreme cases it may result intermination.
Performance EvaluationOn pre-agreed tasks only. No surprises.Specific targets on periodical basis are set.
Targets on volume and outlet productivity could be for aweek or a monthTargets relating to increasing market shares or total outletcoverage could be for 6 monthsDifferent weightages could be given for each of theparameters for evaluation
The performance appraisal is open and transparent
Steps for Modifying NetworksService level desired and willing to deliverActivities required to deliver service level, who will doit and at what costDerive ideal channel structure and compare withexisting to know gaps by evaluating based onstandard parameters relating to effectiveness andefficiencyAction to bridge the gaps and put modified channelsystem into placeDefine key performance indicators
Channel Comparison Factors
Efficiency
Effectiveness
Scalability
Flexibility
Consistency
Reliability
Integrity
Non-store RetailingSelling door-to-door
Vending machines
Tele-shopping networks
Selling through catalogs
Other forms of direct selling
Electronic channels
Retailing on the Internet
Unlimited assortmentItems may not be on holdNo product touch or feelMore information makes the customer a bettershopperComparison shopping possibleConsumer has to plan purchases aheadNo need to handle cash – payment can be on-lineShopping is 24X7
Vertical Integration
This means owning the channel. The company does thework of production, branding and distribution.
Downstream integration means the producer of thegoods also does the distribution – Eureka Forbes, Bata
Vertical IntegrationUpstream integration means the seller also produces thegoods – private labels of modern retailers.If the organization does the work of production, brandingand distribution, it is said to be vertically integrated.Vertical Integration provides better control over thedistribution function
Outsourcing Distribution
Is the most prevalent situation as:The ‘reach’ is betterThe cost may be lowerThe company can exploit the ‘core competence’ of itschannel partners, which is distribution
Vertical integration is a choice which will becomelong term and cannot be easily changed once theresources have been committed.However, direct distribution (owning the channel) isstill the best solution for ‘intensive’ distribution.
Channel (Conflict) Management
Sales and Distribution Management
Channel ManagementChannel system has a set of players:
Not equally motivated to implement the ideal channeldesignWhose expectations from the system differ
Is in three broad phases:Use of power basesIdentifying and resolving channel conflictsChannel co-ordination
Use of Channel Power
Channel members are dependent on each other.The power equations between them keep themworking together.There are basically 5 types of power bases – reward,coercion, expert, reference and legitimacy.2 more can be considered in Indian context assupport and competition.Extent of dependence defines the power base whichis appropriate.
“Power” (Bases) of Motivation
Reward – incentives for good performanceCoercion – threat of punishment for non-performance
Referent – benefit of sheer association with a strongcompany
Legitimate – arising out of a contract
Expert – specialized knowledge
Support – additional benefits for better performers only
Competition – created between channel partners
Countervailing PowerBalances the power exerted by one channel member.It is not a one-sided equation.Both the channel member and the principal can haveinfluence on each other.Results from interdependence within the channelsystem.
Company exerts power on the distributor to get itscoverage and revenuesDistributor has enough influence on his customers and thisis critical for the company alsoWeaker partners do get exploited – ancillary units
Channel Coordination
Channel system is well coordinated if each memberunderstands his role correctly and performs it to helpthe system achieve its customer service objectives.In a coordinated channel:
Interests of all channel members are protectedActions of all are in line with overall objectivesFlows are streamlined to desired customer serviceobjectives
Channel co-ordination is an on-going effort
Channel Conflict
Situation of discord or disagreement betweenpartners in the same channel system – has negativeconnotations and is driven more by feelings thanfactsConflict is part of any social system – gettingdisparate entities to work together as in a channelsystem is also one such social unitIf any member feels that another is working in amanner as to affect him, conflict results
Channel Conflict
CHANNEL CONFLICT
DOMAIN PERCEPTIONGOAL
Goal conflict – rising out of mismatch in understanding ofobjectives by various channel membersDomain conflict – resulting due to mismatch of understandingof responsibilities and authorityPerception conflict – due to mismatch in reading of themarket place and thus proposed actions
Conflicts Result From…
Each channel member wanting to pursue his owngoalsEach wants to retain his independenceThere are limited resources which all of them want toutilize in achieving their goalsFeatures of conflicts:
Initially latent and does not affect the workingIs not normally possible to detect till it becomes disruptive
Four Stages of Conflict
Each stage is progressivelym
ore severe than the earlierone
LATENT
MANIFEST
FELT
PERCEIVED
Types of ConflictsLatent Conflict:
Some amount of discord exists but does not affect theworking or delivery of customer service objectives.Disagreement could be on roles, expectations, perceptions,communication.
Perceived Conflict:Discords become noticeable – channel partners are aware ofthe opposition.Channel members take the situation in their stride and goabout their normal businessNo cause for worry but the opposition has to be recognized
Types of ConflictsFelt Conflict:
Reaching the stage of worry, concern and alarm. Also known as‘affective’ conflict.Parties are trying to outsmart each other.Causes could be economical or personalNeeds to be managed effectively and not allowed to escalate.
Manifest Conflict:Reflects open antagonistic behavior of channel partners.Confrontation results.Initiatives taken are openly opposed affecting the performance ofthe channel system.May require outside intervention to resolve
Root Causes for Channel ConflictRoles not defined properlyAllocation of scarce resources between members seem unfairto someDifferences in perception of the business environmentFuture expectations not likely to materializeDecision domain disagreements – who has to decide on what(key account pricing)Channel members do not agree on objectivesMisunderstanding or misinterpretation of routine businesscommunication
Resolving Conflicts
Understanding nature and intensity
Strategy and plan of action for resolution
Understand the impact of the conflict
Tracing the source of the conflict
Conflict Resolution Styles
Avoidance
Aggression
Accommodation
Compromise
Collaboration
Least effort and results Maximum effort and Best results
Kenneth W Thomas
Styles are a combinationof assertiveness and co-operation.
Avoidance
Used by weak channel members.
Problem is postponed or discussion avoided.
Relationships are not of much importance.
As there is no serious effort on getting anything done,conflict is avoided.
Aggression
Also known as a competitive or selfish style.It means being concerned about one’s own goalswithout any thought for the others.The dominating channel partner (may be theprincipal) dictates terms to the others. Long termcould be detrimental to the system.
Accommodation
A situation of complete surrender.One party helps the other achieve its goals withoutbeing worried about its own goals.Emphasis is on full co-operation and flexibility inapproach. May generate matching feelings in thereceiver.If not handled properly, can result in exploitation
Compromise
Obviously both sides have to give up something to meetmid way.
Can only work with small and not so serious conflicts.
Used often in the earlier two stages.
Collaboration
Also known as a problem solving approachTries to maximize the benefit to both parties whilesolving the dispute.Most ideal style of conflict resolution – a win-winapproachRequires a lot of time and effort to succeed.Sensitive information may have to be shared
Channel Policies
Defines how the channel is required to operate.Normally framed by the channel principal to guidethe operations of the channel systemIf not framed properly could prove the starting pointof channel conflicts.Some subjects of channel policies could be as seen inthe next slide:
Channel Policies
Markets to be covered
Customer coverage
Pricing
Product portfolio to be handled
Selection, termination of channel members
Ownership of the channel
The Services Sector
Twice the size of the manufacturing sectorServices offered are to be in line with customerdemandServices have to be presented in an appealingmanner to sustain customers.Needs specialized channels which understand thecharacteristics of service delivery
5 Characteristics of ServicesThey are intangible – can only be felt. No visualfeatures like size, style.They are inseparable from their service providers – a3P cannot deliverThey cannot be standardized – custom made anddeliveredCustomers are involved to a great degree – define theservicesThey are perishable – cannot be stored for deliverylater. Salvage value of an unsold service is zero.
Channels UsedShorter channels than for productsSome channels used are:
Direct from service provider to userAgents or brokers to bring buyer and seller togetherFranchisees or contractorsElectronic channels
High degree of customization is provided
Channel Information Systems
Sales and Distribution Management
CIS Purpose
CIS is Channel Information Systems
CIS is the orderly flow of pertinent operational data
both internally and between channel members, for
use as a basis of decision making in specified
responsibility areas of channel management
CIS is of primary use of sales managers.
Information - Advantages
Useful in marketing planning – helps improve quality of
marketing decisions
Can help tap market opportunities
Provides an alert against competition
Helps spot trends – favourable or otherwise
Helps develop action plans for growth
Gives feedback on consumer needs
Classification of InformationBased on the use made of it by marketing – planning,operations, decision making or controlBased on subjects – consumers, products,competition, channels, promotions, pricing, salesvolume, value etcOperations data – facts and figuresAlso based on assumptions, anticipated occurrences– forecasts relating to the channel system
Information Process
COLLECTION
USE
PROCESSING
STORAGE
Information ProcessCollection: acquiring and placing raw data – monthlysales by each territoryProcessing: analyzing data to get meaning out of it –arranging, modifying and interpreting the data by theuser – comparison of sales between periodsStorage: keeping the information intact till it isneededUse: application of information for managementdecision making – sales data of the last 6 months toforecast the sales of the next month.
Developing a Channel MIS
Decide what information is required
Decide who will use the informationwhen and for what purpose
Organize information in a manner suitablefor interpretation and action
Use of InformationPlanning: sales forecasts or distributor indentsControl: expenses against budgetThere is always a cost of collecting information.If data collected is not used properly, the dataprovider will hesitate to give the information.The channel MIS works at the sales operational level.It has very little strategic intent.
Sources of DataReports (oral and written) and records of channelmembers, sales peopleLetters, statements and market researchAny other info collected by the sales people and thechannel members from the marketExternal sources like business publications, magazines,newspapers, trade journals.In a dedicated channel system the collection of info iswell streamlined – in the JC meetingWith use of IT enabled systems collection and processinghas become simpler.
A Good Channel MIS…
Integrated system to handle all regular dataUseful decision support systemReflects the style of the marketing organizationUser friendly and user orientedConvincing to the providers of the info as to itspurposeBe cost effectiveNot need for verification from other sourcesBe fast and totally reliable
Element ImportanceIn a good channel MIS, it is necessary to define upfrontfor each element of the MIS, the following:
Purpose of the infoSource of the infoAction possibleImpact on customer service
Competition Tracking
Purpose Plan day to day corrective action to protectmarket shares and shelf space
Source Trade, channel partners and sales people
Actionpossible
Spot action while in the market and taken bychannel partners or sales people
Impact onservice
Timely action to provide better support to thetrade and retain their goodwill
Market Logistics and SCM
Sales and Distribution Management
Materials ManagementMaterials forms the largest single cost item in mostmanufacturing companies – needs to be carefullymanagedMaterials management function includes planningand control, purchasing and stores and inventorycontrolMaterials management is the precursor to logisticsand supply chain management
Logistics Defined
Logistics means having the right thing, at the rightplace, at the right timeThe procurement, maintenance, distribution andreplacement of personnel and materials – Webster’sDictionaryThe science of planning, organizing and managingactivities that provide goods or services – LogisticsWorld, 1997
LogisticsFunctions: planning, procurement, transportation,supply and maintenanceProcesses: requirements determination, acquisition,distribution and conservationBusiness: science of planning, design and support ofbusiness operations of procurement, purchasing,inventory, warehousing, distribution, transportation,customer support, financial and human resources
Scope of LogisticsChoice of marketsProcurementPlant location and layoutInventory managementLocation and management of warehousesChoices of carriers, mode of transportPackaging decisionsRelevant to all enterprises: manufacturing,Government, Institutions, service organizations
Components of Logistics Management
•NaturalResources
•HR•Finance•Information
• MarketingOrientation(competitiveAdvantage)
• Time and Placeutility
• Efficient moveto customer
Customer serviceDemand forecasting
DistributionCommunicationsInventory control
Materials handlingOrder processing
Parts and service supportPlants and warehouse selection
ProcurementPackaging
Return goods handlingSalvage and scrap disposalTraffic and transportationWarehouse and storage
Input
Output
Logistics Activities
Links and Flows
Customer’scustomer
Supplier’ssupplier
SupplierLead FirmCustomer
General cash flow
Information flow
Information flow
General material flow/ service flow
Inbound / Upstream logisticsOutbound / Downstream logistics
Logistics and MarketingInterface on:
Product design and pricingCustomer service policiesSales forecasts and order processingInventory policies and location of warehousesChannels of distribution and dispatch planningTransportation to reach products to customers
Production wants larger production runs to minimizetime spent on set up changes on the machines.Marketing wants smaller runs of a variety ofproducts.
Value Chain (Michael Porter)
Firm’s Infrastructure
Human Resources (Organization, people, methods)
Systems and Technology
Procurement
Service
Marketing&
Sales
Outbound
Logistics
Operations
InboundLogistics
Supp
ort
Act
ivit
ies
Primary Activities
Logistics Plan OutlineInternal analysis (current position)
OrganizationHuman resourcesTransportationRelations with internal customersQuality of productQuality of Service
External / situation analysisCompetitor logistics performanceTrendsExternal environment / economyPublic, private and contract warehousePublic, private and contract carriage
Principles of Logistics Excellence
Alling & Tyndall
Strategic Operational
Link logistics to corporatestrategy
Organize comprehensively
Use the power ofinformation
Emphasize human resources
Form strategic alliances
Focus on financialperformance
Target optimum service levels
Manage the details
Leveraging logistics volumes
Measure and react toperformance
Logistics Focus AreasCustomer service related Operations related
Packaging
Order processing
Spare parts and service support
After sales Customer servicesupport
Demand forecasting
Distribution communications
Return goods handling
Plant and warehouse sitelocation
Procurement
Inventory control
Materials handling
Salvage and scrap disposal
Traffic and transportation
Warehousing and storage
Logistics may be confined to the company whereas SCM extends beyond
Supply Chain ManagementBusiness context:
Globalization of the market placeAdvances in technologyIncreasingly demanding, informed customer basePurchase decisions on dimensions of quality, price and time
Innovative supply chain:To meet customer driven challengesTo reduce costsImprove service levelsEnhance speed to market
Supply Chain IntegrationOptimizing the supply chain requires
supplier and customer involvementto integrate
processes,policies,systems,database andstrategies
between diverse trading partners
Integrated
Supply Chain
Management
Manufacturing/Re-manufacturing/
Assembly
Demand & Lead TimeManagement
Storage &
Transportation
MaterialsManagement
Inventory Managementand control
Customer Analysis
Purchasing/SupplierPartnering
Order Fulfillment
Supply Chain Integration
Why Carry Inventory?Support production requirementsSupport operational requirementsMaximize customer service – ensure availability whenneeded – protect against uncertaintyHedge against marketplace uncertaintyTake advantage of order quantity discounts
Functions of Inventory
Inventory serves as a buffer between:Supply and demandCustomer demand and finished goodsRequirements for an operation and the output from theprevious operationParts and materials to begin an operation and the suppliers ofthe materials
Factors Which Drive InventoryTarget service level parameters
Lot sizing practices
Safety stock and safety time conventions
Volume discounts and purchase arrangements
Seasonal build up needs
Categories of InventoryAnticipation – built in anticipation of future demand– peak season, strike, promotionFluctuation (safety) – to cover random, unpredictablefluctuations in supply and demand and lead time – toprevent disruption in operations, deliveries etcLot-size – to take advantage of quantity discounts,reduce shipping, set up and clerical costs – also calledcycle stock
Categories of InventoryTransportation – pipeline or movement inventories –to cover the time needed to move from one point toanother – factory to distribution point for exampleHedge – for materials where prices are volatileMaintenance, repair and operating supplies (MRO) –to support M and O – spare parts, lubricants,consumables etc
Types of InventoryObvious….
Raw materialsWork-in-processFinished goods – of primary concern to marketingMaintenance, repair and operating (MRO) suppliesIn-transit, pipeline
Performance MeasuresInventory turns = Annual cost of goods sold /averageinventory in value
Days of sales = inventory on hand / average daily sales
Types of Inventory SystemsPure Inventory – when and how much to order. RMprocurement. Simple manufacturing operationsProduction Inventory – finite production rates.Demand fluctuation. Products compete formanufacturing capacityProduction – distribution Inventory – compete forproduction capacity. Geographic placement ofinventory for best service of demand
Types of ClassificationABC category – most common for allHML - high, medium, low - similarFSND – fast moving, slow moving, non-moving, dead –spare parts / FGSDE – scarce, difficult, easy to obtain – procurement /SparesGOLF – govt, ordinary, local, foreign source –procurement / SparesVED – vital, essential, desirable – spare parts / FGSOS – seasonal, off-seasonal - commodity
ABC Inventory AnalysisBased on Pareto’s law:
A – 20% items worth 80% of valueB – 30% items worth 15% of valueC – about 50% items account for 5% of the usage
Classify items based on the above criteriaApply degree of control in proportion to theimportance of the group
Inventory Related CostsUnit costs – basic value of the item carriedOrdering costs – generating and sending a materialrelease, transport, any other acquisition costsCarrying costs – capital, storage, obsolescenceStock-out costsQuality costs – non-conforming goodsOther costs – duties, tooling, exchange ratedifferences etc
Approaches for Controlling InventoryContinuous review:
Safety stocks and forecasting methodsExcess and obsolete inventory
Part simplification and re-designOn-site supplier managed inventoryUse of supply chain inventory management systems,Materials Requirement Planning, DistributionRequirement Planning etcAutomated inventory tracking systemsSupplier – buyer cycle-time reduction
Stores Management ObjectivesProviding efficient service to usersReduce cost of carrying goodsProviding correct, updated stock figuresControlling inventoryPreventing damage to or obsolescence of materialsAchieve all of the above with good housekeeping
FunctionsWarehouses
Material handling Storage FunctionCustomer Service Information Transfer
Temporary Permanent
Receive goodsIdentify goods
Sort goodsDispatch to storage
Hold inventoryRecall, select goods
Marshal the shipmentDispatch the shipment
Prepare records and advices
Purpose of Warehousing
To provide desired level of customer service at thelowest possible total costIt is that part of the firm’s logistics system that storesproducts (RM, Packing Materials, WIP, FG) at andbetween point of origin and point of consumptionand provides info to management on the status,condition and disposition of items being storedDistribution warehousing relates mainly to FG
Reasons for Warehousing
Service related Cost relatedMaintain source of supply
Support customer service policies
Meet changing market conditions
Overcome time and spacedifferentials
Support JIT programs of suppliersand customers
Provide customers with the rightmix of products at all times
Temporary storage of materials tobe disposed or re-cycled
Achieve production economies
Achieve transportation economies
Take advantage of QuantityPurchase discounts and forwardbuys
Least Logistics cost for a desiredlevel of customer service
Warehouses
Support manufacturing
Mix products from multiple facilities for shipment to asingle customer
Break-bulk
Aggregate
Used more as a ‘flow-thru’ point than as a ‘hoarding’point
Distribution WarehousingThe objective is to set up a network of warehousesclosest to the customer locations to service marketsbetter and minimise costCould be C&FA s, depots or distribution centersMacro location strategies:
Market positionedProduction positionedIntermediately positioned
Distribution CenterWarehouse designed to speed the flow of goods andavoid unnecessary costsSpeeds bulk-breaking to avoid inventory carrying costsHelps to centralise control and co-ordination of logisticsactivitiesProducts can also be cross-docked (one vehicle toanother)
Market PositionedWarehouses located nearest to the final customerFactors influencing are:
Order cycle timeTransportation costsSensitivity of the productOrder sizeLevels of customer service offered
Production PositionedWarehouses located close to the production facilitiesor supply sourcesNot the same level of customer service as the earlieroneServe as points of aggregation / collection forproducts made in a number of plantsFactors influencing are:
Perishability of raw materialsNumber of products in the product mixAssortments ordered by customersTransport consolidation rates ex; FTL
Intermediate Positioned
Mid point locations between the final customer andthe producerHigh customer service levels possible even if productsmade in number of unitsOther macro approaches look at cost minimisation orcost and demand elements to maximise profitability
TransportationVery important in the Logistics function:
Movement across space or distance adds value to productsTransportation provides time and place utility
Role of transportation includes:Provides opportunity for growth under competitiveconditionsDeeper penetration into marketsWider distribution means greater demandCan influence product prices favourably
Transportation PrinciplesContinuous flowOptimise unit of cargo - stackabilityMaximum vehicle unit – capacity utilizationAdaptation of vehicle unit to volume and nature oftrafficStandardisationCompatibility of unit load equipmentMinimum of dead weight to total weightMaximum utilization of capital, equipment andpersonnel
The Selection CriteriaEnvironmental analysis: shipper, carrier, governmentregulations, public influenceDeciding objectivesSelecting modeSelect transport type within the modeDefine functions of transportEvaluation and control – customer perception /satisfaction, best practice benchmarking
Cost FactorsCan be product related or market related.Product related: density, stowability, ease or difficultyof handling and liabilityMarket related: competition, location of markets,Government regulations, traffic in and out of themarket, seasonality of movements and impact oncustomer serviceFive prominent modes:
Road, rail, air, water and pipeline.Sixth one is use of Ropeways
Customer Service FactorsConsistency, dependability
Transit time
Coverage – door-to-door for example
Flexibility in handling a range of products
Loss and damage performance
Additional services provided
Reverse LogisticsMovement of goods from the market or customerback to the companyThe need:
Increased awareness of the environmentStringent legislationFor some it is part of the businessProfitability of dealing with scrap, surplus
Surplus, obsolescence can result due to:Over optimistic sales forecasts, change in product specs,errors in estimating material usage, losses in processing oroverbuying based on incentives
Advantages of RailEconomy – more so for goods over long distances
Efficiency of energy
Reliability – not affected by weather conditions
DisadvantagesUneconomical for small shipments and short distances
Not suitable for remote stations
Costly terminal handling facilities
Inflexible time schedules
Road Freight AdvantagesThrough movement – direct from consignor toconsignee, no transshipmentFlexibility – routes and loading routines can be easilyaltered, operate day and nightLess capital costs – for own fleet + immunity fromindustrial actionFast turn-around – if articulated units like tractorsand trailers are usedMinimum delays
DisadvantagesSusceptibility to weather and road conditions – inspite of the best protectionUnsuitability for heavy loads – rail transport moreeconomical for bulk loadsUnsuitability for long distances – again the railtelescopic rates are more favourable
Air Transport AdvantagesFaster modeReduction in cost particularly inventoryBroad service rangeIncreasing capabilitiesDisadvantages:
High costWeather affects flight conditionsLimitations on heavy consignments
Water TransportAdvantages:
Mass movement of bulkLowest freight costPreferred for long haul of low value commodities
Disadvantages:Not for quick transitSuitable for certain types on commodities only
Pipeline MovementAdvantages:
Reliable, continuous, all weather transportLow energy consumption – hence low costLow maintenance and operating costsUnderground, no space problemCan traverse difficult terrainMinimal transit lossesOperation round the clock, safeEconomies of scale – double the throughput for only 30%additional cost
Disadvantage is in the investment cost
RopewaysAdvantages:
In hilly or inaccessible areasLong and circuitous routes with streams / deep valleysFor commodities capable of movement in ropeway bucketsShort haulages of less than 50 kmsAreas where other carriers are uneconomical
Disadvantages:Heavy investmentsLimitations on size and quantity of haul
Carrier SelectionTraffic Related Shipper related Service related
Length of haul
Consignment weight
Dimensions
Value
Urgency
Regularity of shipment
Fragility
Toxicity
Perishability
Type of packing
Special handling required
Size of firm
Investment priorities
Marketing strategy
Network of productionand distribution
Availability of railsidings
Stockholding policy
Management structure
System of carrierevaluation
Speed (transit time)
Reliability
Cost
Customer relationship
Geographical coverage
Accessibility
Availability of specialvehicles / equipment
Monitoring of goods
Unitisation
Ancillary services – bulkbreaking, storage
Chart of Relative MeritsParameter Weightage Rail Road Air Water Pipe
lineRopeway
Speed 30 5 6 8 4 3 3
Versatility 10 6 8 5 6 3 2
Reliability 20 6 8 5 5 7 4
Availability 10 7 8 5 6 3 2
Continuity ofservice
10 6 7 5 5 8 3
Distribution cost 20 4 5 6 6 7 8
Total score 10 5.4 6.7 5.1 5.1 5.1 4.0
Overall ranking 10 2 1 4 5 5 6
International Sales & Distribution
Sales and Distribution Management
Why International?The WTO agreement has resulted in opening up of new areasfor freer trade (Textiles, Services & Agricultural products)China, Russia, India & the East European countries haveembraced free market policies resulting in huge opening up ofunderserved populations.Domestic competition has increased especially from imports.Outsourcing in manufacturing and services has increased dueto cost pressures & improvement in infrastructure.
Choosing the MarketFactors to be borne in mind while choosing markets:
Size of the market
Language & Culture of the market
Competition in the market
Proximity of the market
Political and Financial stability of the country
Ease of doing business
Culture and International BusinessCulture influences everything from taste &preferences to consumption patterns and attitude toforeigners.Culture influences communication modesCulture influences dress and behaviorCulture influences usage of a productLanguage is very important in international businessto communicate effectively.
Legal Aspects of International BusinessLaws vary from country to country – there is no “internationallaw”
Important to know the local laws to do business – oninvestment, management, employment, marketing, pricing,royalties, profit repatriation, taxation etc
Developed countries have stringent laws on safety, pollution,intellectual property rights etc.
In times of disputes, which law will prevail – this needs to bespelt out in contracts
Risks in International BusinessTwo main risks in international business:Political risks – involve disruption of contracts orpayments due to sudden political changes,expropriation of businesses etcCommercial & Financial risks – failure of the buyer topay due to bankruptcy or sudden changes in theexchange availability or rate.
Risks in International BusinessRisks can be insured with agencies like the exportcredit guarantee corporation(ECGC) for a premiumbased on the country’s risk.Letters of credit may be guaranteed by internationalbanks located in major financial centers like London,New York, Singapore etc.
Trade Between CountriesReasons for trade between countries include:Non availability of a product or resourceCost advantages in buying rather than making aproduct locallyDifferentiated products-Luxury products or betterdesigned products in the same category may beavailable from different countries (cars, electronics,textiles and garments etc)
International Trade-Company PerspectiveCompanies may choose to sell internationally for thereasons given below:Limited growth in home marketOverseas markets offer large profitable opportunitiesExcess capacity which cannot be absorbed locallyCost advantage over international competitorsMitigating risk of increased domestic competition
Entry StrategyExporting through local agentExporting through foreign agentExporting to foreign importer / distributorSetting up local office / representativeLicensing / FranchisingSetting up Joint ventures for distribution /manufactureSetting up wholly owned manufacturing facilities
Organizing for International SalesStructure depends on volume of sales and nature ofthe product.In situations of low volumes, exporting through localor foreign agents is cost effectiveAs volume grows and in complex products or largevalue deals, using own sales personnel is preferable.To be effective, it is preferable to have local personnelin the sales force
DistributionDistribution is a vital aspect of marketing – ensuringavailability of the product in the right quantity, at the righttime and right place.
More important in international markets due to distance andtransportation time.
Importers, manufacturers and retailers are increasingly askingfor Just in Time deliveries.
Distribution strategy varies from market to market dependingon size and local conditions.
Multiple channels may be used in countries.
Distribution OptionsDepends on the volume of the businessPositioning of the productInfrastructure of distribution in the countryLocal laws – some countries insist on local companiesin the distribution businessInternet as a channel of sales and distribution
Role of LogisticsVery important aspect of international selling
Logistics can make up over 15% of the cost of the product
Involves multiple modes of transport – land, sea and air
Considerable paperwork and formalities to be completedin international trade
Logistics providers now offer complete one stop solutionincluding distribution, invoicing and collection of payment
Profile of International Salespersons
Pleasant and amiable personality
Ability to adapt to foreign culture – especially food, drink etc
Conversant in one or more foreign languages
Ability to act independently and decisively
Ability to understand complexities of financing, foreignexchange etc
Some local sales persons in the force will be useful toovercome some barriers and leverage local networks forbusiness development
Pricing and Payment TermsCommon pricing terms are:
Ex Works – at the mfrs factory gateFOT, FOR – free on truck / rail –loaded on truck/railFAS – free along side – at port next to shipFOB – free on board – loaded on shipC&F – cost and freight – inclusive of to destinationCIF – cost, insurance and freight – inclusive todestination
Pricing and Payment TermsPayment terms can include:
Cash in advanceCash on delivery – cash against documentsConsignment basis – payable after saleUsance – payment … days after acceptance of documentsLetter of creditLong term credit financing – for machinery / projectsEach method has risks for the buyer or seller. The LC offerssafety and comfort for both
Currency of PricingThe US Dollar is the most widely used currency for pricinginternational sales
Importers in some countries may prefer invoicing in localcurrencies like Japanese Yen or Euro or Pound Sterling,Singapore Dollars or UAE Dirhams Saudi riyals etc.
This reduces the risk of exchange rate fluctuations for thebuyer
Exchange fluctuation is a major risk for sellers and can bemanaged by hedging the currency.
Packing and ShippingPacking is of two types:
Industrial packing – bulk for protection during shipping &transportConsumer packing – to enhance sales appeal
Packing could makeup up to 5% of product costs
Countries have laws or practices in packing which must beunderstood and adhered to.
Packing depends on the product and must be suitable forcontainerized shipping and mechanical handling.
Market IntelligenceSecondary data is very easy to gather from variouspublications, agencies like chambers of commerce, tradebodies, embassies, trade shows, internet, banks etc
Usually secondary data is sufficient to establish the feasibilityof the market.
Care must be taken to understand the data and the measuresused before drawing conclusions.
