Summary. Chapter 7 MANAGING DISTRIBUTION CHANNELS AND PHYSICAL DISTRIBUTION

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1 Summary Chapter 7 MANAGING DISTRIBUTION CHANNELS AND PHYSICAL DISTRIBUTION Learning Objectives: Meaning and role of Channel of Distribution Flows in Channel of Distribution and channel choice Marketing Environment & Competitors Channel Decision, Market Coverage Channels of Distribution Middlemen in Distribution, Wholesalers Services to the retailers Channel Conflict and its causes Direct Marketing & Integrated Direct Marketing Physical Distribution Objective, Types, Components & Importance Inventory Management, Just-in-Time (JIT) Inventory Control 1. Channels of Distribution A. Meaning- Channels of distribution are mainly concerned with distribution of goods and services. We can define formally the distribution channel as the set of interdependent marketing institutions participating in the marketing activities involved in the movement or the flow of goods or services from the primary producer to the ultimate consumer. B. Role of Channels of Distribution: I. The searching out of buyers and sellers (contacting). II. Matching goods to the requirements of the market (merchandising). III. Offering products in the form of assortments or packages of items usable and acceptable by the consumers/users. IV. Persuading and influencing the prospective buyers to favour a certain product and its maker (personal selling/sales promotion). V. Implementing pricing strategies in such a manner that would be acceptable to the buyers and ensure effective distribution. VI. Looking after all physical distribution functions. VII. Participating actively in the creation and establishment of market for a new product. VIII. Offering pre-and after-sale services to customers.

2 IX. Transferring of new technology to the users along with the supply of products and playing the role of change agents, e.g., in the agricultural green revolution in our country. X. Providing feedback information, marketing intelligence and sales forecasting services for their regions to their suppliers. XI. Offering credit to retailers and consumers. XII. Risk-bearing with reference to stock holding/transport. C. Flows in Channels of Distribution- A flow is a set of functions performed in sequence by channel members. In the flow process, producers, wholesalers, retailers, and consumers are linked. The functions that need to be necessarily performed in a channel system include transfer of ownership through transportation, order processing, inventory carrying, storage, sorting negotiations, and promotions. D. Primary Channel Participants- Primary channel participants are defined as participants that acknowledge their dependence upon one another in a channel arrangement and assume the risk during the value addition distribution process. The primary participants are manufacturers, wholesalers, and retailers. E. Key Issues in Determining Channel Requirement: I. Product Proliferation and Dynamics- A major concern throughout industry is the rapid expansion that firms are experiencing in the number of stock-keeping units that they maintain in their product list. II. Total Quality Initiatives: The concept of total quality is do it right the first time. The general concept of total quality is to focus managerial attention on key concepts of manufacturing: People, Process, Design, and customer service through distribution channel. III. Manufacturing Strategies- There are two popular manufacturing strategies: Flexible, and Focused. The goal of flexible manufacturing is to increase responsiveness of production to consumer demands The goal of focused manufacture is the lowest possible per unit cost and fair quality. 2. Channel Choice- The problem of selecting the most suitable channel of distribution for a product is complex. The most fundamental factor for channel choice and channel management is economic criteria, viz., cost and profit criteria. Profit organizations are primarily interested in cost minimization in distribution and assurance of reasonable profit margin.the following are other critical factors: i. Product ii. Market iii. Middleman iv. Company

3 v. Marketing Environment vi. Competitors 3. Channel Decision- The decision is made after a careful analysis of product, consumers, dealers, company objectives and policies, and the conflict within the channels and any other relevant factors. The company must resolve channels and bring the product profitably to the market. 4. Market Coverage- Once, the company decides the general channels to be used, it should decide on the number of middlemen in each channel, i.e., intensity of distribution. There are three alternatives: A. Extensive Distribution- Extensive or broadcast distribution is essential when the price is low, buying is frequent and brand switching is a common phenomenon. B. Selective or Limited Distribution- When special services are needed, e.g., certain cosmetics to be sold only through chemists, we have selective distribution. The number of outlets at each level of distribution is limited in each geographic area. C. Exclusive Distribution: When final buyers do not need any product service, mass or extensive distribution is adopted. If the amount of product service expected by final buyers is considerable, exclusive distribution is preferable. E.g., expensive men s suits. 5. Channels of Distribution- The most common routes used for bringing the products in the market from producer to consumer are as follows: A. Manufacturer-Consumer (Direct Sale)- This is a shortest channel a product can follow to the market. Business goods may be sold directly to business buyers. Usually we have numerous and scattered consumers who buy in very small quantities. Hence, this channel is not popular for a wider market. B. Manufacturer-Retailer-Ultimate Consumer- This channel option is preferable when buyers are large retailers, e.g., a department store, discount house, chain stores, supermarket, co-operative stores. C. Manufacturer-Wholesaler-Retailer-Consumer- This is a normal, regular, and popular channel option used in groceries, drugs, goods, etc. D. Manufacturer-Agent-Wholesaler-Retailer-Consumer- In this channel, the producer uses the service of an agent middleman such as a sole selling agent, for the initial dispersion of goods. They are common in agricultural marketing. E. Manufacturer-Wholesalers-Consumer/User: Wholesaler may bypass retailer when there are large and institutional buyers, e.g., business buyers, Government, consumer co- operatives, hospitals, educational institutions, business houses.

4 F. Manufacturer-Distributor-Wholesaler-Retailer-User- Alengthy marketing channel used by FMCG Companies to penetrate rural and semi-urban markets. 6. Middlemen in Distribution- In all commodity markets, whether primary or central, we have a host of middlemen acting as essential functionaries. They are Brokers, Commission Agents & Sole Selling Agency. 7. Consignment Sale- Under a consignment sale, the goods are consigned to the selling agent called the consignee on a sale or return basis. When the goods are sold, the agent prepares Account Sale and forwards it to the seller. The selling expenses and commission are deducted from the total sale proceeds and the net amount due is remitted by cheque along with the Account Sale. 8. Wholesalers- Wholesalers are individuals or business firms who will sell products to be used primarily for resale or for industrial use. The wholesaler is a bulk purchaser with the object of resale to retailers or other traders after breaking down his Bulk in smaller quantities and, if necessary, repacking the smaller lots into lots suitable for his customers, viz. retailers. 9. Services to the Manufacturer or Producer: A. Order Collector: The wholesaler acts as order collecting and marketing agency for the manufacturer. The manufacturer can, therefore, concentrate on production and need not worry about distribution. B. Risk Transfer: A wholesaler usually places huge advance orders on the manufacturer. Thus, the manufacturer is insured for sale or disposal. C. Financial Relief: The wholesaler s organisation can be used by the manufacturer for disposal of his goods. The manufacturer enjoys financial relief and employs his capital for more productive purposes, viz., expansion of his manufacturing activities. D. Expert Advice: The wholesaler s order on the manufacturer can act as an indicator of trend of demand or of public taste. The manufacturer can regulate his production activity in the light of this trend and can bring about necessary modifications in his product so that it will give the desired satisfaction to the consumer. 10. Services to the Retailers- A. No Need to Hold Large Stocks of Varied Goods- A retailer has to maintain adequate stocks of varied commodities especially if his turnover is not quick and he has relatively large number of customers. B. Prompt Delivery of Goods- When the wholesaler is present, supplies to the retailer will be available more quickly as the goods are in his warehouse almost ready for delivery. Thus, the retailer gets prompt delivery of goods. C. Benefits of Specialization- The wholesaler performs marketing functions for the retailer also. A retailer will buy from the best

5 wholesaler who in turn will secure supplies from the best manufacturer. Some of the advantages of specialization can be passed on to the retailers. D. Announcement of New Products- The wholesaler informs the retailer about the arrival of new goods. The manufacturer may advertise the new products. E. Grant of Credit- Wholesalers grant credit to their permanent customers. The wholesaler usually grants monthly or quarterly credit and sends periodical statements of account to the retailers who are granted credit facilities. Such financial help increases in effect the working capital of the retailer. 11. Retailers- Retailing is a trading activity directly related to the sale of goods or services to the ultimate consumer for personal, non-business use. A retailer is the last middleman in the machinery of distribution and he is responsible to satisfy recurrent wants of consumers. 12. Channel Conflict: A. Types of Conflict- Even when a company has an effective distribution set up in the market, some conflict between channel members and between the company and channel members may take place. This is normally due to conflicting business interests.there are three types of channel conflict: i. Vertical channelconflict relates to conflict between different levels within the same channel. Example: Conflict between distributor and the retailer. ii. Horizontal channelconflict means conflict between members at the same level of the distribution channel. Example: Pricecutting between retailers in the same market. iii. Multi-channel conflict- Here the company selects two or more channels to sell its products in the same market. Example: Company makes direct supplies to wholesales as well as key retailers in the same market. 13. Causes of Channel Conflict- A. Conflicting objectives- The objectives of the company and the channel members differ. Example: The company wants the distributor to offer sales incentives for bulk purchases. The distributor wishes to work with high margins and is concerned with his profitability. B. Demand for extra discount- The channel members may ask for additional discount for pushing the products and the company may not be in favour such proposal, leading to conflict. C. Unethical practices- Channel members i.e., distributors and dealers may resort to unethical practices like charging more than MRP (particularly during shortages), not passing on free goods to consumers, selling spurious products, etc. leading to conflict between company and channel members. D. Some companies may supply directly to key industrial customers bypassing the area distributor. The distributor loses the business and

6 the commission, and this leads to conflict between the company and the distributor. E. The distributor may sell competitors products and this will affect company s business. F. Reduction in the area of operation- In order to improve dealer coverage and sales, company may reduce the area of operation of the current distributor and add one or more distributors in the same area. G. Managing Channel Conflict- Channel members play a major role in growth and development of business. They perform specialized marketing functions such as buying, selling, warehousing, grading, financing, risk taking and provide valuable marketing intelligence to the company. 14. Direct Marketing- Direct marketing is selling product and services to customers without the use of channel members. A direct marketer is an organisation that uses personal selling, advertising, sales promotion, electronic media, vending machines, Telemarketing etc. to promote and sell products directly to consumers/ users. 15. Major Direct Marketing (Non-store Retailing) Methods: A. In-home Selling- Marketer can use door-to-door selling through trained sales force. This method is costly but effective. B. Telebuying/Teleselling- The dial-n-order, i.e., Telephone-buying and direct phone contact with the prospects to persuade and secure orders on phone is now a popular device spreading in big cities in India. Telephone-shopping and getting free home delivery is very convenient and cheaper method for double-income families. The growing satellite networks can create brand awareness and facilitate phone buying and selling. C. E-marketing- IT and Internet are extensively used for buying rail, bus and air tickets and booking hotel accommodation. D. Mail-Order Sale- The seller approaches the prospects by mail publicity, i.e., sending circulars, price-list, catalogue, booklets, pamphlets, samples, etc., through the post office. Up-to-date mailing list is maintained. All selling is done invariably through regular advertisements and direct mail publicity. Examples: Books, Toys, Cutlery, Watches, Fountain pens, Clothes, Footwear, Small appliances, Common drugs and cosmetics, Ready-made Foods, Household furnishing, etc. E. Direct Response Marketing (using TV, radio and press media)- Magazines, newspapers, radio, and television are used to present direct response offers to customers. The advertisement includes the company s toll-free telephone number. The customer is requested to secure further information and place an order directly using that tollfree number. F. Permission marketing is a form of direct marketing wherein promotional information is sent only to those consumers who give permission to do so. It can be offered on Internet, mobile or direct mail.

7 Those who agree are given incentive for volunteering. The information pertains to company s products or services. G. Automatic Vending Machines: Well-known pre-sold brands with good turnover are sold by vending machines. Cold drinks, coffee, candy, snacks, magazines are suitable products sold by vending machines. They are usually kept at work places, schools, and public places. 16. Disadvantages of Direct Marketing: A. Conventional retailers are not looked with suspicion by prospects. But they do have suspicion towards direct marketers and their claims. B. Direct marketing, e.g., in-home selling, telemarketing, affects consumer privacy. C. Except for direct-to-home marketing, goods cannot be inspected prior to purchase. D. In absence of personal inspection, marketer should offer liberal return facilities. E. In-home selling through sales force is costly. 17. Physical Distribution- Physical distribution means the process of delivering the product to the user or consumer promptly, safely and in time. Physical distribution involves management (planning, action and control) of the physical flows of raw materials and finished products from the points of origin to the points of use/consumption to meet the customer needs at a profit. It covers all activities in the flow of goods between producer and consumer.the physical distribution function, is responsible for completing the marketing transaction once the buyer and seller come to terms and enter a contract of sale. A. Types of Distribution Functions- Marketing represents two different but closely inter-related distribution functions. i. Demand-Oriented Functions- These are concerned with the search for and stimulation of consumer demand. The channels of distribution, viz., wholesalers, retailers, and all types of mercantile agents, perform these demand-oriented functions. ii. Supply-Oriented Functions- These are concerned with physical product flow. These activities revolve physical distribution as a planned movement (physical flow) of products from the supplier to the firm and from the firm to the dealers or resellers economically, quickly, and efficiently. A. Components of Physical Distribution- The following are the components of Physical Distribution System: a. Distribution planning and accounting b. In-bound transport c. Receiving d. Inventory management e. In-plant warehousing f. Order processing

8 g. Packaging/repackaging where applicable h. Dispatch of goods i. Out-bound transport j. Field warehousing k. Customer service. 18. Importance of Physical Distribution Management- Planned and integrated management of physical distribution has assumed unique importance in marketing management. A. Ever-Increasing Cost: Cost reductions could be successfully made not only in production activities but also in many areas of marketing with the help of scientific management, rationalization, and marketing research. Marketers now feel that physical distribution should be the new major (perhaps the last) frontier for cost minimization without of course, adversely affecting customer satisfaction. B. Broader Scope of Marketing:Physical distribution revolving around customer needs can add the utility or want-satisfying power, viz., the availability of products at the right place and time, and at the lowest possible cost. Physical distribution is not only a cost; it should be regarded as one of the tools in competitive marketing. C. The Sales Generating Power:Customer service (the main objective of physical distribution system) can act as a unique selling point to attract business from potential customers. Due to the growth of consumerism, customer is now insisting on better service and quality. Integrated physical distribution package can satisfy this pressing demand. D. Rising Competitive Demand:When some firms through physical distribution management, got the benefits of lower costs and higher levels of customer service and thereby could reduce their operating expenses by 10 to 15 per cent, many other competing firms were also compelled to adopt scientific management of physical distribution services. E. Management Science: The development of management science or operations research has made possible the integration of physical distribution functions. Physical distribution problems have large number of variables which are readily measurable. 19. Decision areas in Physical Distribution: A. Order Processing- order processing is considered the key to customer service and satisfaction. Order processing includes receiving, recording, filling, and assembling of products for despatch. The amount of time required from the date of receipt of an order up to the date of despatch of goods must be reasonable and as short as possible. Order cycle time must not exceed eight days. Order-processing procedure affects customer service level in two ways: (1) It affects re-order time (interval between two orders), and (2) It affects the consistency or uniformity of delivery time.

9 Your customer is interested much more in the consistency of delivery time, i.e., assured delivery within a fixed period always. Buyers tend to shift their orders to suppliers who can provide superior order processing service. In fact, order-serving time can act as a competitive advantage in the marketing-mix. Customer is primarily interested in prompt, punctual, safe, and reliable delivery services. B. Inventory Management- Inventory management is a powerful tool in the process of creation and satisfaction of customer demand. Inventories are kept to meet market demands promptly. Inventory is the link interconnecting the customers orders and the company s production activity. In fact, the entire physical distribution management rotates around the inventory management. Managerial decisions regarding size, location, handling, and transporting of inventories assume unique significance in physical distribution system. i. Inventory control aims at the following objectives: (1) never run out of anything (out of stock), (2) never build up a very large inventory, i.e., having too much of anything on hand (unwanted stock), and (3) never send out too many small orders for more, i.e., never pay high prices and incur high freight and lose quantity discount because of buying in small quantities. ii. iii. Standards in Inventory Control: A. The Maximum: It indicates the upper limit of inventory or stocks. It is the largest quantity to be kept in the interest of the economy. B. The Minimum: It is the lower limit of inventory. It is also called safety or reserve stock. It must be always on hand. It acts as a safety valve. C. The Ordering Point: It indicates when to order or reorder. It is the level of inventory necessary to protect against exhaustion of the stock during the time-gap between the order date and the date of receipt of stock. D. The Standard Order: It is the quantity of inventory to be requisitioned for purchase at any one time. A re-order or repeat order for a commodity is always the same quantity until conditions change, necessitating a revision of the standard order. The standard order is the quantity for replenishment of stocks. Just-in-Time (JIT) Inventory Control- A buyer buys in small quantities Just-in-time for use in production and then produces right quantities Just-in-time for marketing. By buying in small quantities and keeping low levels of stocks of parts and finished goods, a marketer can secure remarkable cost savings. Even quality levels are better with JIT buying. Essential environment of good co-operation, co-ordination and understanding between

10 buyers and sellers is important to effective implementation of the JIT concept. C. Warehousing System- Warehouses perform many of the usual functions of wholesalers, e.g., breaking bulk, dispatch of smaller consignments to retailers, holding the stocks for retailers, regulating the goods flow to retailers, providing market intelligence and many other merchandising services of manufacturers. A full-service warehouse is called distribution centre. i. The Distribution Centre- It is a full-service warehouse, primarily related to market. It emphasizes movement of goods rather than their storage. A distribution centre provides services with the help of a computer and modern material- handling equipment. It serves a regional market. It consolidates large consignments from production points, processes, and re-groups products according to customer s orders and maintains a full product-line. A distribution centre facilitates movement of goods to customers. It can reduce cost of inventory, storage, handling, and transports. Products are shifted from the factory to the distribution centre directly and not to a storage warehouse. D. Packaging and Material-Handling System- The effect of packaging in physical distribution is measured in terms of its effects on three costs: warehousing, transport, and damage. E. Transport System- We have five means of transport at our disposal: (1) railway, (2) road, (3) water, (4) airplanes, and (5) pipelines. A few criteria govern the choice of transport, such as speed, frequency of service, dependability, availability, safety, operational flexibility and, above all, the element of cost. Please note that decisions on means of transport are closely related to the size of inventory and on the location of warehouses.