Amity Business School

Amity Business School

Distribution Logistics & Management Module 1

Swati Bhatnagar

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Overview of distribution channels

A distribution channel is a group of people & firms involved in the transfer of title or ownership as the product moves from the producer to the end user. The AMA defines the same as A structure of intra company organisation units & extra company agents, dealers, wholesalers & retailers through which a commodity, product or service gets marketed. Marketing channels comprise complex & dynamic systems but much of what they do is not visible to the end customer. Distribution management study requires one to go behind the scenes! Distribution channels can be broadly classified into : Sales Channel- motivates buyers, shares information between the company and the customer, negotiates fair bargains & finances the transaction Delivery Channel- consists of CFAs, CSA s ( Consignment Selling agents) also known as facilitators. Service Channel- which performs pre sales & post sales service

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Need for distribution channels

In the past all distribution related operations were undertaken by the company itself . Soon they realized that the intermediaries could do the job better at a much lower cost ! The intermediaries became a link between the manufacturer & its customers.

But are intermediaries necessary?

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Discrepancies in marketplace
The distribution channel takes care of 4 discrepancies in the market place: Spatial discrepancy : Space difference b/w production point & consumption point Temporal discrepancy : Time difference b/w production time & consumption time Breaking of the bulk To provide assortment

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Companies like Dell & Amazon exist ! Eureka Forbes is also a case in point !
Normally, in case of a technical & complicated product the company may want to handle the distribution themselves as the intermediary may or may not be able to learn as much as their own salesperson

A combination works better !

A combination of direct & indirect distribution of goods & services generally works out better The intermediaries which includes all CFAs, distributors & retailers enable smooth flow of goods & services at a certain margin to themselves.

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Patterns of Distribution
Intensive distribution : make sure that the product is
made available in as many outlets as possible

Selective distribution:

only few select outlets will be permitted to sell companys products one outlet in the market may sell the companys product

Exclusive distribution: All the more selective, only

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Types of channel members

Distributors, dealers , stockists & agents - are required to invest in products i.e. buy from company, are on commission basis, may or may not get credit from the company. Wholesalers - deal in large volumes, as margin is quite low, operate out of the main markets in the city, deal with large no. of companiess products & packs Retailers - are shopkeepers who set up shops in the market place CFA s & CSA s - also known as facilitators. Basically transporters who act as a mid way point between the company & its distributors. CSA s act as CFAs but also sell goods in the market & remit the value of goods sold to the company

Contd.
Facilitators

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are business firms which assist in the performance of distribution tasks other than buying, selling & transferring title. Some common types of facilitating agencies are Transportation agencies Storage agencies Order processing agencies Advertising agencies Financial agencies Insurance companies Market Research firms

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Functions performed by the intermediaries

Facilitation of search Addresses the uncertainty part at both the consumers & manufacturers end. At times also enables sales of less known brands Sort, Accumulate, Allocate& Assort the right kind of goods Producers typically produces a large number of variety of goods, whereas consumers only require limited quantity of wide variety of goods! Routinisation of transactions Helps in reducing the cost of distribution & increase the efficiency. Enables flow of information to both the buyers & the sellers to help them manage their business better Reduction in the number of contact points Awareness of the environment in which they operate

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Channel Formats
Channel formats have been categorised into 4 types depending upon who drives the channel. They are: Producer driven Seller driven Service driven Others

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Producer driven

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Manufacturer tries to reach the product directly to his customer eg Company owned retail outlets, Licensed outlets, CSAs, franchisees.

Seller driven
Manufacturer uses the wholesalers & retailers to reach the end user eg departmental stores, discount stores, specialty stores, supermarkets etc

Service Driven
CFAs, CSAs, transporters who facilitate distribution

Other formats
Multi level marketing system Amway, Tupperware, Cooperative societies, catalogue shopping etc

Channel Levels

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The number of channel members decides the level of channel in operation.

Zero level channel denotes direct distribution set up. One level channel consists of one intermediary only. ( retailer)

Two level channel would have two intermediaries ( distributors then retailers)

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Prominent channel systems

Vertical Marketing system (VMS) : corporate, administered & contractual Horizontal marketing system ( HMS) Multi- channel marketing system

Examples of channel systems

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Category of product
Industrial/ technology
Consumer products Frozen desserts/ ice creams

Channel objectives
Direct marketing to a small no.of customers
Large no. of end users/intensive distribution Cold chain supported channel system

Fertilizers, pesticides/ seeds Rural based channel system Pharmaceutical products Multi level marketing House construction items Requires different set of partners to handle doctors, chemists, hospitals Distributors to recruit more distributors Distributors of hardware

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Distribution channel strategy

Corporate strategy

Marketing strategy

Distribution strategy

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Channel Mix decisions

Channel Mix deals with organizing & managing distribution functions. The same requires :a) Defining customer service levels b) Defining distribution objectives c) Outlining steps to achieve the above objectives a) Defining policy & procedure b) Stating KPIs c) Understanding CSFs

Channel flows

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The work of the channel includes the performance of several marketing flows. All the functions performed by the marketing channel recognizes three kinds of flows: Forward Flows from the company to the customers, basically goods & services Backward Flows -from the customers to the company, basically the value of goods & services Flows both ways -mainly Information On the basis of value added activities performed these can be further categorized into eight universal marketing flows. The same are Physical flow of goods Ownership Promotion flow Negotiation flow Financing flow Risking flow Ordering flow Payment flows A very important flow that permeates all such activities is the information flow. So important is this flow that logistics mangers often call this flow the ability to transform inventory to information.

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MARKETING FLOWS IN CHANNELS

Physical Possession Ownership Promotion Negotiation Producers Financing Wholesalers

Physical Possession Ownership Promotion Negotiation Retailers Financing

Physical Possession Ownership Promotion Negotiation Financing Consumers Industrial and Household

Risking
Ordering Payment

Risking
Ordering Payment

Risking
Ordering Payment

Commercial Channel Subsystem

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Implications of marketing/ channel flows

The progress in information technology provides great opportunity in capturing the vital information flow. Specialization in the performance of channel flows is the hallmark of an efficiently operating channel. Channel members should add value to the various channel flows. Too much specialization also breeds interdependency. The performance of certain flows is also co related with that of other flows. One can eliminate or substitute members in a channel but not the channel flows

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Every channel flow not only contributes to the production of valued service outputs but also carries an associated cost. Market Flow Cost represented Physical possession Storage & Delivery costs Ownership Inventory carrying costs Promotion Personal selling, advertising, sales promotion, publicity, public relations cost Negotiation Time & Legal costs Financing Credit terms/ conditions of sale Risking Price guarantees, warranties, insurance, repair & after sales service costs Ordering Order processing costs Payment Collections / bad debt costs

Service Output Demands/End user preferences

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SODs : defined by the desired customer service levels expected out of channel system. The same consists of Lot size, waiting time, choice to the customer , place utility & service support. Lot size : convenient size Waiting time: time elapsed b/w the desire in the customer to buy the product & the time when he actually buys it. Choice to the customer :Variety of products to choose from, assortment Place utility : depends on the intensity of the distribution Service support: after sales service ; matters quite a lot in case of industrial products e.g. Maruti service centres

Service Outputs

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Are basically the benefits which the channel system passes to the end users. Other things being equal , the end user would prefer to deal with a channel system which gives him greater service output. Louis Bucklin came out with the framework on the service outputs & specified four generic service outputs :- a) Bulk breaking( more bulk breaking ; higher price to the end user) b) Spatial convenience c) Waiting/ delivery time d) Product variety

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Zero based channel a) meets the target markets service outputs & b) at a minimum cost of performing these channel flows that produce those service outputs

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Channel Design & Implementation

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Channel Design Process
SEGMENTATION: Recognize and respond to target customers service output demands

Channel Implementation Process

CHANNEL POWER: Identify sources for all channel members CHANNEL CONFLICT: Identify actual and potential sources

Decisions About Efficient Channel Response:

CHANNEL STRUCTURE: What kinds of intermediaries are in my channel? Who are they? How many of them? SPLITTING THE WORKLOAD: With what responsibilities? DEGREE OF COMMITMENT: Distribution alliance? Vertical integration/ownership? GAP ANALYSIS: What do I have to change?

MANAGE/DEFUSE CONFLICT: Use power sources strategically, subject to legal constraints

GOAL: Channel Coordination

INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS:

Retailing, Wholesaling and Logistics, Franchising

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Channel Design & Implementation

Refers to decisions involving development of new marketing channels or modification of existing channels. Has a strategic connotation as helps a firm achieve sustainable competitive advantage.

The main elements involved in the design of channel are :i) Who shall be the members of the channel & ii) How many of each type of channel member will be in the channel. ( channel intensity) iii) Who will do what task?

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The process of channel design answers some of these questions

What activities are the channel members required to perform? Which of these activities is to be performed by which channel partner? How is the performance of these activities going to help company achieve its customer satisfaction objective? The no. of channel members required in the network & of each category? How do we define the relationship between various channel entities? Are the roles & responsibilities of the channel partners clearly defined ? Are all channel members clear about how they would get compensated for their services? Is the compensation plan fair to all channel members with regards to the task they perform? Are the channel members clear about how their performance going to be judged & by whom , at what frequency? What is the risk of their performance being not upto the target ?

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Channel Design & Planning Process

Decision for a suitable channel design involves seven phases or steps: Recognizing the need Setting & clarifying the distribution objectives Specifying distribution tasks Developing possible alternate structures Evaluating variables affecting channel structures Choose the best/ideal channel system. Select channel members

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I. Recognizing the need for channel design

a)Developing a new product/product line b)Aiming an existing product on a new target market c)Making a major change in some component of marketing mix d)Establishing a new firm either from scratch or as a result of merger & acquisition e)Response to changing intermediary policies f)Opening up of new marketing territories g)Occurrence of some major environment changes h)Due to conflict or some behavioral problem of channel members

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II.Setting & coordinating distribution

objectives
Become familiar with objectives & strategies in other marketing mix areas & that of the firm. E.g Frito Lay s emphasis on freshness of its products compels them to use almost 13000 salesforce to supply directly to the grocery store Set explicit distribution objectives Check for congruency

III.Specify distribution tasks

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This job is much more specific and situationally dependent. E.g a manufacture of high quality tennis racquets aimed at serious amateur tennis players would specify distribution tasks such as :Gather information on target markets shopping patterns Promote product availability in the target market Maintain inventory storage Compile information on product features Provide for hand on try out of the product Sell against competition Process & fill specific customer orders Transport the product Arrange for credit provisions Provide product warranty service Provide repair and restringing service Establish product return procedure.

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IV. Developing alternate structures

Possible channel structures should be in terms of the following three dimensions Number of levels in the channel Intensity at various levels Types of intermediaries at each level So a 3 level channel with 3 degrees of intensity & 5 different types of members can theoretically have 45 possible structures!!!!

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Factors and variables affecting the channel design

Number of factors are to be kept in mind while designing the channel are :a) Nature of the product or service being marketed b) The expectations/ deliverables from the system c) Location & nature of customers d) Nature of competition e) Intensity of distribution required f) Nature of the markets being targeted A marketing channel is required to add value to the product passing through it !

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V.Evaluating variables affecting channel structure

Some basic categories of variables are:i. Market variables ii. Product variables iii.Company variables iv.Intermediary variables v. Environmental variables vi.Behavioral variables

Market variables

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Greater the distance b/w manufacturer & the market greater the need for intermediaries
Geography

Larger the size better is the use of intermediaries, else serving large numbet of individual customers will increase transaction costs
Size

Market variables
Density

Greater the density of market better it is to eliminate intermediaries

Behaviour

Four types of customer behaviour how , when , where , who?

Product variables
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Bulk& weight

Perishability

Unit Value Product variables

Degree of standardisation Newness of product

Technical vs Non technical

Company variables
Size
Financial capacity

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Company variables

Managerial expertise

Objectives & strategies

Intermediary variables

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Availability

Intermediary

Cost

Services

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Environmental variables
Political, sociocultural, technological,economical, competitive legal forces

Behavioral variables
Avoid members with behavioral problems which can distort communications.

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VI. Choosing the best channel structure Calculate exact payoffs associated with each possible channel structure

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Stages in channel planning

Segmentation Positioning Focus Development

Segmentation stage Amity Business School

For channel design its not just important to know what end users want to consume rather how they want to consume the product/service being purchased !

End user channel preferences

End users routinely make trade offs among service outputs, product attributes, price & analyze which product/ service bundle offers maximum satisfaction/ overall utility Clusters of customers on the basis of what each segment expects out of the channel is grouped together. This helps the marketer to identify whom not to pursue just as much as whom to pursue Different segments represent different business opportunities. For eg : Albert Karoll, a custom tailor in Chicago

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Segmenting the market by SODs

a) b) c)

Service outputs clearly differentiate marketing channels. Different group of end users value service outputs differently. The channel segmentation process should be such that it produces group of buyers who are Maximally similar within a group Maximally different b/w groups Differ on dimensions that matter on building the distribution system

Positioning stage

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Identify the channel elements. Identify the ideal channel partner. Analyse how many of them are required? Basically the no. & type of intermediaries is decided. Define the service objectives & flows of each channel element

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Importance of positioning stage

The tasks performed in the positioning stage :1) Helps the channel manager diagnose & remedy shortcomings in the provision of service outputs. 2) Helps establish a new channel or revise an existing channel to minimize the cost of providing desired service outputs 3) Helps in allocating profits equitably because..

Compensation in the channel system should be given on the basis of the degree of participation in the marketing flows & the value created by the participation !

Focus Stage

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Decide which segment to be targeted as it may be impractical & expensive to target all segments. Identify constraints such as those of the environment, managerial talent pool available & competition which makes targeting all segments insensible.

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Developing the right channel alternative

Involves eithera) Establishment of new channel b) Refine existing channel Work out best possible alternatives in case a new channel needs to be established keeping in mind the environment & managerial constraints. Where an existing channel exists which needs to be modified , identify the gaps which exist b/w the ideal channel & existing channel . Take steps to minimize these gaps

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Producer should periodically review & modify the channel design & arrangements Distribution channel may not work as planned due to:-Change in consumer buying patterns -Expansion of market -New competition -Emergence of innovative distribution channel -Product entering into later stages of PLC

Refine existing channelAmity Business School

For a pre existing channel which is not effective & productive, perform a gap analysis. The difference b/w a zero based and the actual channel on the demand &supply side constitute gaps in the channel design. In a Demand side gap at least one of the SOD is not being appropriately met by the channel The SOD can be oversupplied or undersupplied. Supplying too much leads to higher prices to the end users Supplying too little will result in end users asking for more.

Contd.

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In a Supply side gap at least one flow in a channel is carried out at too high a cost.. Wastes channel profit margins Translates into higher prices for end users which they are unwilling to pay. Sales drop and thus there is a fall in market share. Generally occurs due to lack of up to date expertise in channel flow management or simply from wastage in a channel

Gap Analysis

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The Gap Analysis framework considers :a) Sources of gaps b) Types of gaps c) Closing gaps

The gap analysis framework

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Sources of gaps
Environmental Local legal constraints Local physical retailing infrastructure level Managerial Lack of knowledge Optimization at a higher

Types of gaps
Demand side gaps SOS <SOD SOS>SOD Which service outputs? Supply side gaps Flow cost too high Which flow(s)?

Closing gaps
Demand side gaps Supply side gaps Offer tiered service levels Change flow responsibilities of current channel members Expand- contract provision of SO Invest in low cost distribution technology Change segment(s) targeted Bring in new channel members

Channel Design Process

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Segmentation Segmentation * Define SODs

by segment * Identify environment -al characteristic -s & constraints

Positioning Positioning *Define optimal

channel flow performance for each Channel *Define optimal channel structure for each segment

Targeting Targeting
Choose segments to target to

Establish Establish new Channels new channels *Channel flow

Performance *Channel structure

*Environment Bounds *Managerial Bounds *Competitive benchmarks

Refine existing Refine existin Channels channels *Gap analysis

*Channel flow Performance *Channel structure

Channel Design Process