DISTRIBUTION CHANNELS

Prof. Sudas Roy Indian Institute of Management Calcutta

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MARKETING CHANNELS CAN BE VIEWED AS SETS OF INTERDEPENDENT ORGANIZATIONS INVOLVED IN THE PROCESS OF MAKING A PRODUCT OR SERVICE AVAILABLE FOR CONSUMPTION OR USE.

2.

BENNETON GROUP,ITALY`S INTEGRATED FASHION RETAILER AND MANUFACTURER SHIPS 80 MILLION ITEMS EACH YEAR DIRECTLY TO 7000 STORES IN 100 COUNTRIES WITH AN ORDER CYCLE TIME OF 7 DAYS.
CONTD...

COMPANY`S LOGISTICS, PRODUCTION AND INFORMATION SYSTEMS TIE TOGETHER 7000 STORES,80 COMPANY AGENTS,200 SUPPLIERS, 850 SUB-CONTRACTORS, A $50 MILLION FULLY AUTOMATED WAREHOUSE, MAJOR CARRIERS AND IN-HOUSE FORWARDER. THE SYSTEM HAS HELPED THE COMPANY TO ACHIEVE NEAR-PERFECT CUSTOMER SERVICE LEVELS AND NO EXCESS STOCKS.

3.

IN THE ENVIRONMENT OF COMPETITION, DISTRIBUTION IS INCREASINGLY BECOMING A STRATEGIC VARIABLE LEVERAGED BY COMPANIES TO OBTAIN COMPETITIVE ADVANTAGE.

4. DISTRIBUTION CHANNELS: INDIAN

SCENARIO:
A. URBAN MARKETS: RKSWAMY/BBDO GUIDE TO URBAN MARKETS COVERS 784 TOWNS WITH POPULATION >50,000 OR 77%OF TOTAL URBAN POPULATION. IT PROVIDES AN INDEXING METHOD TO ASSESS THE MARKET POTENTIAL OF A TOWN. Contd...

MARKET POTENTIAL VALUE (MPV) OF A TOWN IS =f (NO. OF CONSUMERS A TOWN HAS, THE MEANS THESE CONSUMERS HAVE, THE CONSUMPTION BEHAVIOUR THERE, THEIR AWARENESS LEVELS-EXPOSURE TO MEDIA AND EXTENT OF FEMALE LITERACY, THE EXTENT OF MARKET SUPPORTING INFRASTRUCTURE THAT EXISTS).

B. THE LAST 4 INDICATORS ARE COMPUTED PER CAPITA AT THE TOWN LEVEL AND THEN COMBINED USING CERTAIN WEIGHTS, INTO THE MARKET INTENSITY INDEX (MII). THIS IS AN INDICATOR OF A MARKET`S POTENTIAL FOR RETURN PER UNIT OF INVESTMENT OR EFFORT.
Contd...

IF MII IS ABOUT THE BANG PER BUCK THAT A MARKET IS CAPABLE OF YIELDING, THEN MPV-THAT COMBINES MII WITH THE NUMBER OF CONSUMERS IS ABOUT THE TOTAL BUCKS THE MARKET CAN YIELD. THERE ARE SWEAT MARKETS LIKE UP AND THERE ARE SWEET MATKETS THAT GIVE FEWER BUCKS BUT THE RETURN-EFFORT RATIO IS FAR SUPERIOR. SUCH MARKETS WOULD BE LIKE PANAJI OR CHANDIGARH. DELHI AND MUMBAI ARE BEST OF ALL MARKETS WITH BOTH HIGH MII AND MPV.

C. 80:20 RULE HOLDS VERY SHARPLY.

NEARLY 25% OF THE TOTAL POTENTIAL OF THIS UNIVERSE OF 784 TOWNS LIE IN JUST THREE CITIES-MUMBAI, DELHI AND CHENNAI. HALF THE POPULATION AND HALF THE POTENTIAL RESIDE IN JUST 24 TOWNS. THE NEXT 95 TOWNS FORM THE SWEET BAND WITH ABOUT QUARTER OF THE POPULATION AND POTENTIAL.
CONTD...

IT THEN TAKES ANOTHER LEAP OF 470 TOWNS TO COVER THE NEXT 20% OF THE MARKET POTENTIAL. FINALLY LAST 195 TOWNS ACCOUNT FOR ONLY 5% OF THE TOTAL POTENTIAL. THIS STRATIFIED ANALYSIS HELP IN PLANNING OR REENGINEERING THE DISTRIBUTION AND SERVICE STRUCTURE OF THE GOODS. LAST 195 TOWNS MAY BE USED AS FEEDER POINTS FOR ACCESSING RURAL MARKETS OR SMALLER TOWNS.

2. RURAL SCENARIO: A. 53% OF ALL FMCGs AND 59% OF ALL CONSUMER DURABLES ARE SOLD IN RURAL INDIA. THERE ARE ABOUT 42000 RURAL HAATS IN INDIA.THERE ARE 6800 MANDIS (WHOLESALE MARKETS) IN INDIA. INNOVATIVE APPROACHES: RUFF&TUFFJEANS, LG SAMPOORNA TV. CONTD.

IN 2003, 35% OF LG`S RS.4,500 CRORE TURNOVER CAME FROM RURAL INDIA WHICH IT PLANS TO DOUBLE TO 70% IN THE PROJECTED RS.7,000 CRORE TURNOVER FOR 2004. FROM WHERE THE RURAL CONSUMERS BUY? IN CASE OF DURABLES, 90% OF DURABLES ARE PURCHASED FROM THE 2300 ODD 20,000+ POPULATION TOWNS.

THOUGH INDIA HAS 6,00,000 VILLAGES, DIRECT SUPPLY UP TO THE 20,000 FEEDER TOWNS SHOULD BE QUITE ADEQUATE AS EACH DISTRIBUTOR IN TURN WOULD HAVE A SUPPLY NETWORK OF 100+ OUTLETS IN 50+ ODD LOCATIONS WHICH CAN COVER ALL VILLAGES UPTO 2000+ POPULATION CATEGORY. THIS UNIVERSE OF 85,000 LARGER VILLAGES ARE HOME TO 40% OF RURAL POPULATION BUT THEY ACCOUNT FOR OVER 60% OF RURAL CONSUMPTION.

B. WITH THE COST OF TECHNOLOGY COMING DOWN, SEVERAL COMPANIES ARE TRYING TO CREATE VIRTUAL BAZAARS OR AGRI-PORTALS AKIN TO THE WEEKLY MANDIS. ITC HAS ALREADY SET UP 4000 e-CHAUPALS COVERING 20,000 VILLAGES IN FOUR STATES WHERE FARMERS CAN SELL PRODUCTS RANGING FROM SOYABEAN, COFFEE, AQUACULTURAL PRODUCTS AND WHEAT. CONTD..

THE SAME KIOSK IS ALSO USED FOR REVERSE TRADING-WITH COMPANIES SELLING DIRECTLY PRODUCTS AND SERVICES NEEDED BY FARMERS. THE OTHER INITIATIVES IN THIS REGARD ARE THE INDIAAGRILINE (PERRY`S), THE DAIRY INFORMATION SYSTEM KIOSK (DISK) FROM AMUL.

C. LARGE FORMAT AGRI RETAIL STORES HAVE ALSO COME TO THE SCENE WITH MAHINDRA & MAHINDRA`S SHUBH LABH (36 FRANCHISED STORES IN 10 STATES), RALLI`S KISAN KENDRAS AND TATA CHEMICAL`S KISSAN KENDRAS.

D. DIRECT COMMUNICATION AND PRODUCT DEMONSTRATION ARE VITAL FOR RURAL CUSTOMER EDUCATION AND CONVICTION. BELOW-THE-LINE TOUCH-FEEL-TALK NODES AT HAATS, MELAS AND MANDIS ARE CRITICAL TOUCHPOINTS FOR RURAL SALES AND COMMUNICATION.

E. AN INCOME DISPERSAL PROJECTION BY NCAER FOR 2006-07 SHOWS THAT THE NUMBER OF POOR HOUSEHOLDS WILL SHRINK BY HALF TO 28 MILLION FROM 61 MILLION IN 1997-98, WHERE AS MIDDLE-INCOME HOUSEHOLDS WILL DOUBLE AND THE RICH HOUSEHOLDS WILL TREBLE OVER THE DECADE IN RURAL INDIA.

3.STRATEGIC IMPORTANCE OF DISTRIBUTION IN INDIA ARISES FROM MANY SOURCES. SOME OF THESE ARE:
THE VAST GEOGRAPHICAL SPREAD OF THE MARKET REQUIRES EXTENSIVE PENETRATION TO ENSURE THAT SUPPLY CREATES ITS OWN DEMAND. CONTD..

 HIGH PRICE SENSITIVITY OF BUYERS IN MOST PRODUCT CATEGORIES DEMAND LOW COST EFFICIENT CHANNELS.
POOR LOGISTICAL INFRASTRUCTURE AND HIGH COST OF WORKING CAPITAL LEAD TO HIGH LAVEL OF INVENTORY AND HIGH COST OF OWNERSHIP AN EFFICIENT CHANNEL ENSURING TIMELY DELIVERY CAN OFFER HIGH COST SAVINGS TO THE CUSTOMER. CONTD..

 MARKETS IN INDIA ARE SHIFTING FROM MASS MARKETS TO SEGMENTED MARKETS REQUIRING CUSTOMIZED CHANNELS TO CATER TO DIFFERENT MARKET SEGMENTS. IN INDIA THE TRADE CHANNELS ARE MANNED BY WHOLESALING AND RETAILING INSTITUTIONS WHICH ARE OFTEN SMALL ENTITIES WITH TRADITIONAL BUSINESS PRACTICES. CONTD..

 TO INTEGRATE SUCH FIRMS INTO A VIABLE CHANNEL FOR DELIVERING CUSTOMER SERVICES IS NOT AN EASY TASK AND OFTEN TURNS OUT TO BE THE CRITICAL FACTOR FOR SUCCESS OF THE MARKETING EFFORT OF THE MANUFACTURING COMPANY. ABSENCE OF SPECIALIZED AGENCIES OFTEN LEADS TO MANUFACTURER ASSUMING SPECIALIZED TASKS LEADING TO HIGH COST AND INEFFICIENCY.

 PRESENCE OF TRADITIONAL W/SALE MARKETS FOR ALMOST ALL PRODUCT CATEGORIES IMPLIES PARRALEL AVAILABILTY LEADING TO DIFFICULTY IN CONTROLLING THE CHANNEL OPERATIONS .

4. CHANNEL DECISION VARIABLES:- CHANNEL STRUCTURE DESIGN CHANNEL MANAGEMENT CHANNEL LOGISTICS

5. CHANNEL STRUCTURE IS DETERMINED BY PERFORMANCE OF CHANNEL FUNCTIONS AND BY THE TYPE OF SERVICE OUTPUT TO BE DELIVERED.

6. CHANNEL FUNCTIONS ARE:

-PHYSICAL POSSESSION. -OWNERSHIP. -PROMOTION. -NEGOTIATION. -FINANCING. -RISKING. -ORDERING. -PAYMENT

7. STRUCTURE IS DETERMINED BY FUNCTIONAL SPIN-OFF AND ABSORPTION.

8. CUSTOMER SERVICE DIMENSIONS: LOT SIZE SPATIAL CONVENIENCE WAITING TIME PRODUCT VARIETY

9.CHANNEL STRUCTURE CONCEPTS: POSTPONEMENT VS. SPECULATION CHARACTERISTICS OF GOODS TRANSACTION COST ANALYSIS 10.CHANNEL MANAGEMENT ISSUES:-

COORDINATION AND LEADERSHIP. POWER RELATIONSHIP CONFLICT MANAGEMENT

11.INTER-ORGANIZATIONAL SYSTEMS
CONVENTIONAL CHANNELS ADMINISTERED VERTICAL CHANNELS CONTRACTUAL CHANNELS CORPORATE CHANNELS

12.LOGISTICS: -CUSTOMER SERVICE -DEMAND FORECASTING -COMMUNICATION -INVENTORY CONTROL -MATERIAL HANDLING -ORDER PROCESSING -PARTS AND SERVICE SUPPORT -PACKAGING -RETURN GOODS HANDLING -SALVAGE AND SCRAP -TRAFFIC AND TRANSPORTATION -WAREHOUSING AND STORAGE

13. LOGISTICS HAVE BECOME CENTRAL TO PRODUCT STRATEGY BECAUSE PRODUCTS ARE NOT JUST THINGS-WITH-FEATURES. THEY ARE THINGS-WITH-FEATURES BUNDLED WITH SERVICES.COMPANIES CREATE VALUE FOR THE CUSTOMERS AND SUSTAINABLE ADVANTAGES FOR THEMSELVES BY OFFERING GOODS IN DISTINCT WAYS CREATING CONVENIENCE, RELIABILITY AND SUPPORT FOR THE CUSTOMER.THEY ARE IN A COMPLEX RELATIONSHIP WITH CUSTOMERS.THE CHALLENGE IS TO MANAGE THE WHOLE OF IT

14. PDS CONCEPT:-TOTAL COST PERSPECTIVE

-COST TRADE-OFFS -ZERO SUB OPTIMIZATION -TOTAL SYSTEM PERSPECTIVE

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