Unit 1

• Basic Concept about distribution system

• 1.1 Basic concept of distribution system Logistics
needs
• 1.2 Setting distribution objectives.
• 1.3 Definition of physical distribution concept of
distribution cost.
• Analysis of distribution cost. Element of total cost
in physical in distribution system.
• 1.4 Developing channel design
 Introduction to Logistics
• Origin of Logistics
• The concept of “Logistics” started many years before Christ and was
used by Greek generals (Leon the Wise, Alexander the Great) in
order to describe all the procedures for the army’s procurement on
food, clothing, ammunition, etc.

• Alexander the Great was a big fan of the mobility of his troops and
he didn’t want his troops to stay in one place waiting for supplies
from Macedonia. Thus, he tried to resolve the issues of supplies by
using supplies from the local resources of his defeated enemies.

• For many years, logistics were always an issue in war affairs.

Kingdoms and generals with strategic planning on logistics were
those who won the war.
 Origin of Logistics
• World War II was the major motivation of
logistics to increase recognition and emphasis,
following the clear importance of their
contribution toward the Allied victory.

• Starting from the early ‘60s, many factors, such as

deregulation, competitive pressures, information
technology, globalization, profit leverage, etc.,
contributed to the increase of logistics science in
the form we now it today.
 The Scope of Logistics in Business
• Logistics / Supply Chain in a business aim to the
following contributions:

• Achieve maximum customer service level

• Ensure high product quality (Raw material Quality)

• Achieve minimum (possible) cost

• Be flexible in the constant market changes

 Logistics

 Logistics involves the integration of

Information,
 Transportation,
Inventory,
Warehousing,
Material Handling,,
Packaging, And
Security
 OBJECTIVES OF LOGISTICS MANAGEMENT

• Higher Level Customers Satisfaction

• Minimize the operating costs
• Reduction in time spend at every stage
• Value addition
• Inventory Control
• Competitive Tool
• Improve internal & external communication
• Implementation of JIT
• Co-operation & Co-ordination
 Functions of Logistics
• Order processing : Identify the lead time.
• Transportation Management: Own, Hiring, routing & load planning,
selection of mode of transportation, packaging & documentation
• Inventory Management : Buffer stocks, lead time, replenishment of
stocks
• Warehousing : site selection, space determination, layout & design,
receipt & issue, preservation
• Material Handling : smoothing of materials flow, handling equipment,
maintenance of equipments.
• Packaging: To ensure damage free & efficient handling
• Acquisition: To ensure availability of material at the right quantity , at
the right time , at the right place , & at the right cost.
• Product scheduling: When, What, How much, How to produce
• Information system: Database management.
k\
 HOW SCM differed from LM
• Supply Chain Management
encompasses the planning and
management of all activities
involved in sourcing and
procurement, conversion, and all
Logistics Management activities.
• it also includes coordination and
collaboration with channel
partners, which can be suppliers,
intermediaries, third-party
service providers, and
customers.
• In essence, Supply Chain
Management integrates supply
and demand management
within and across companies.
• Logistics management is that part of the
Supply Chain Management process that
plans, implements, and controls the
efficient, effective forward and reverse
flow and storage of goods, services, and
related information between the point
of origin and the point of consumption
in order to meet customers'
requirements
• "Logistics Management activities
typically include inbound and outbound
transportation management,
warehousing, materials handling, order
fulfilment, logistics network design,
inventory management of third party
logistics services providers.
 Setting distribution objectives
• Distribution Strategy: Selective, intensive
exclusive
• Distribution opportunities (Corporate &
innovative selling)
• Deciding on a strategy: Consumer buying
behaviour
 Point to be considered while
setting objectives
• Reach
• Cost
• Contribution
• Support
• Customer service
 Channel Structure Dimensions

1. Number of
levels in the channel
2. Intensity at the
various levels

Allocation Alternatives

3. Types of
intermediaries
at each level
 Number of Levels

• Range from two to five or more

• Number of alternatives is limited to two or three
choices
• Limitations result from the following factors:
– Particular industry practices
– Nature & size of the market
– Availability of intermediaries
 Intensity at the Various Levels

Relationship between the intensity of distribution

dimension & number of retail intermediaries used in a
given market area

Intensity Dimension

Intensive Selective Exclusive

Numbers of Intermediaries (retail level)

Many Few One

 Channel Strategy Decisions 5
Issues that Influence
Channel Strategy

Factors
Levels of
Affecting
Distribution
Channel
Intensity
Choice

Market Factors Intensive Distribution

Product Factors Selective Distribution
Producer Factors Exclusive Distribution

1-17
 Market Factors 5

Customer Profiles

Consumer or Industrial
Customer

Market Factors Size of Market

That Affect
Channel
Choices Geographic Location

1-18
 Product Factors 5

Product Complexity

Product Price

Product Life Cycle

Product Factors
That Affect
Channel
Choices Product Delicacy

1-19
 Producer Factors 5

Producer Resources

Number of Product Lines

Producer Factors
That Affect
Channel Desire for Channel Control
Choices

1-20
 Levels of Distribution Intensity 5
Number of
Intensity Level Objective
Intermediaries

Achieve mass market

Intensive selling. Many
Example? Convenience goods.

Work with selected

intermediaries.
Selective Several
Shopping and some
Example? specialty goods.
Work with single
intermediary. Specialty
Exclusive goods and industrial
One
Example? equipment.

1-21
 Integrated Marketing Channels
• Conventional Marketing System (CMS)
- many members at same level, similar roles, less co-
ordination, own interests & conflicts.
Eg. Small manufacturers, Farm products, unpackaged
commodities

• Horizontal Marketing System (HMS)

- same level, less distance, better interaction
- strategic alliances
eg. Direct marketing, Franchisee, Agent

1-22
 Integrated Marketing Channels
• Vertical Marketing System (VMS)
- professionally managed, co-ordination,
economy, maximum marketing impact, extensive
distribution. Eg. FMCG, Pharma,
Consumer Durables,

Types of VMS –
1. Corporate
2. Administered
3. Contractual – Franchise, Wholesaler, Retailer
1-23
 Multichannel Marketing System (MMS)

- Use of 2 or more channels

- Different distribution policies

- Channel conflict

1-24
 Channel Conflict 6

A clash of goals and methods between

distribution channel members.

Horizontal Occurs among channel members

Conflict on the same level

Vertical Occurs among channel members

Conflict at different levels

Mt
1-25
 Major reasons for Channel Conflicts
- Dual distribution
- Over saturation
- Partial treatment
- New channels
- Inadequate training, support, communication
- Delivery problems - delay, quantity
- Sales returns, damages / defects
- Competing lines, targets shortfall
- Price cutting, discounts, territory issues
- Service issues
1-26
 Resolving Channel Conflicts
- Channel leadership
- Adoption of super ordinate goals
- Exchange of persons between channel levels
- Co-optetion
- Joint memberships – trade associations
- Diplomacy
- Third party mechanism
arbitration, mediation

1-27
Managing Channel Relationships 6
Channel Power

Channel Control
Social
Dimensions
of Channels Channel Leadership

Channel Conflict

Channel Partnering

1-28
 2.5 Channel Management

• Channel Selection Process &

criteria
 Channel Design
• Channel design is the dynamic process of
developing new channels where none existing
and modifying existing channels.
• Channel structure refers to the underlying
framework: the number of channel levels, the
number and types of intermediaries and the
linkages among channel members.
 Channel Design
• Stage 1: Channel Objectives
• To formulate their marketing strategies
• To appeal to selected market segments,
• To earn targeted level of profits,
• To maintain or increase sales and market
share growth rates, and
• To achieve all this within specified resource
constraints.
 Channel Design
• Stage 2: Channel Design Constraints
• Availability of Good Intermediaries
• Competitors often “lock up” the better intermediaries; Established intermediaries
are not always receptive to new products.
• Traditional Channel Patterns
• Established patterns of distribution are difficult to violate; Large customers may
demand direct sales.
• Product Characteristic
• Technical complexity dictates direct distribution; Extensive repair requirement may
call for local distributors to service the product line.
• Company Financial Resources
• Capital requirements often preclude direct distribution
• Competitive Strategies
• Direct service by competitors may force all firms to sell direct.
• Geographic Dispersion of Customers
• A widely dispersed market of small customers often requires low-cost
representation afforded by intermediaries.
 Channel Design
• Stage 3: Pervasive Channel Tasks
• To meet customer requirements and company
goals
• Increasing manufacturer power may diminish
the distributor’s role in the channel as the
manufacturer assumes more channel
activities; the distributor’s share of profits and
revenues could be reduced accordingly.
 Channel Design
• Stage 4: Channel Alternatives
• There are four primary issues in specification of channel
alternatives:
• The number of levels in the channel (that is, the degree of
“directness”
• The types of intermediaries to use.
• The number of channel intermediaries at each level of the
channel.
• The number of channels to use.
• The decisions made for each are predicated on the
objectives, constraints, and activities previously analyzed.
 Channel Design
• Stage 5: Channel Selection
• The channel structure in response to changing markets, expanding geographic coverage, new
customer requirements, or new products.

• The focus on their approach is to create an “ideal” channel system that fully addresses customer
needs; once this system is specified, it is compared with the “feasible” channel system created on
the basis of management objectives and constraints.

• The crucial element is to compare both systems on the basis of customer service performance,
structure and costs. Channel selection is facilitated by looking at “gaps” that may exist between the
systems-existing, ideal, and feasible. One of three conclusions could emerge:

• All three systems resemble each other. In this case, the existing system is about as good as it can be.
• Existing and feasible systems are similar, but differ from the ideal. Management constraints and
objectives may be causing the gap.
• All three systems are different. If the feasible system lies between the ideal and existing system can
be changed without sacrificing management goals.
• The channel decision maker must consider qualitative as well as quantitative factors. Given two
channels with similar economic performance , the critical factor may be the degree to control the
business marketer can exercise over the channel.
 Distribution costs
• Distribution costs (also known as “Distribution Expenses”)
are usually defined as the costs incurred to deliver the
product from the production unit to the end user.
• separate distribution costs at each stage would be included
in the total distribution cost.
• The cost of moving the product from the place of
production to the pick up point is also included in
distribution cost.
• Handling cost, Freight cost (transport fare), Air Freight,
Packing costs
• Distribution managerial cost such as the salary expense of
distribution manager and his/her office expenses are also
part of distribution costs.
 Analysis of Distribution cost
• Part of cost accounting
• To control distribution cost
• Types of Analysis of Distribution cost
• 1. Cost benefits analysis
• 2. Activity based costing
• 3. The resource consumption method of cost
accounting
• 4. Total distribution cost
• 5. Cost analysis in International transportation/
shipping industry
 Analysis of Distribution cost
• Distribution Cost Analysis is a technique which
examines in detail all the costs incurred in
purchasing, selling and delivery of goods to the
customer; it involves a study of cost control which
is directly applicable to retail and wholesale
operations.
• In particular, by showing the degree of expense
that each part of the merchandising activity
attracts, it helps to improve the merchandising
policy of the wholesaler or retailer.
 Cost-benefit analysis
• Cost-benefit analysis is a classic form of review
method in cost accounting. Managerial
accountants list all the benefits — monetary
and otherwise — the distribution system
brings to the company. Costs associated with
paying for these benefits are also on the list.
Distribution cost analysis starts with looking at
whether the benefits outweigh the costs.
 Activity based costing
• Activity based costing is a much more in-depth review
in terms of distribution cost analysis. Managerial
accountants define each activity that makes an impact
in the distribution system.
• All costs associated with each individual activity have
their own places in the cost review.
• The purpose of this process is to determine if the
individual activity is too costly in terms of the overall
system. In most cases, managerial accountants break
down these costs in a per-product figure because this
cost will most likely be allocated to the products.
The resource consumption method
• The resource consumption method of cost accounting is yet
another available method for distribution cost analysis. Its
purpose is to define each resource consumed in a business
process or activity and attach a cost for the use of the
resource.
• Many complex pieces may exist in a resource consumption
accounting system.
• Cost drivers, value chain integration, and fundamental
operations are all parts of the process that affect the cost
analysis phase.
• Finding ways to improve the overall distribution system
financially and operationally can be the result of resource
consumption accounting.