distribution channels
TRANSCRIPT
DISTRIBUTION
Distribution is one of the four elements of the marketing mix, the other three being
product, pricing and promotion. This marketing mix is also referred to as the four Ps of
marketing; distribution is here called physical distribution or place. Simply put,
distribution is the process of delivering the products manufactured or service provided by
a firm to the end user. Various intermediaries are involved in this process. This chain of
intermediaries which helps in transferring the product from one intermediary to the next
before it reaches the end user is called the Distribution Chain or Distribution Channel. Each
intermediary has a specific role and need which the marketer caters to.
Distribution channels are not limited to products only even the services provided by a
producer may pass through this channel and reach the customer. Both direct and indirect
channels come into use in this case. For instance, the hotel industry provides facility for
lodging to its customers, which is a non-physical commodity or a service. The hotel may
provide rooms on direct booking as well as through indirect channels like tour operators,
travel agents, airlines etc. Distribution chain has seen several improvements in the form of
franchising. Also there has been link ups between two service sectors like travel and
tourism which has made services available more accessible to the customer. For instance
hotels also provide cars on rent.
FUNCTIONS OF A DISTRIBUTION CHANNEL
The primary function of a distribution channel is to bridge the gap between production and consumption.
A close study of the market is extremely essential. A sound marketing plan depends upon thorough market study.
The distribution channel is also responsible for promoting the product. Awareness regarding products and other offers should be created among the consumers.
Creating contacts or prospective buyers and maintaining liaison with existing ones.
Understanding the customer's needs and adjusting the offer accordingly.
Negotiate price and other offers related to the product as per the customer demand. Storage and distribution of goods
Catering to the financial requirements for the smooth working of the distribution chain.
Risk taking for example by stock holding
Three Levels of the Distribution Channel
In level (1) there are no intermediaries involved, the manufacturer is selling directly to the
customer. This is called the ‘direct-marketing' channel. Examples of direct marketing
channel can be seen at factory outlet stores. Various hotels prefer direct-marketing, they
market their services directly to their customers without taking the help of any retail
intermediary (travel agent).
Levels (2) and (3) are examples of 'indirect-marketing' channels. In level (2) one
intermediary or retailer is used. A Retailer sells goods/services directly to the end users.
Retailer buys products from manufacturers.
In level (3) along with retailer a second member is added to the distribution chain. He is the
wholesaler. A wholesaler buys and stores products in bulk from manufacturers. He sells
these products in smaller quantities to retailers.
Why should a producer not indulge in selling his product directly to the consumer?
The reason is that the intermediaries manage the distribution costs efficiently. They are
experienced and have potential contacts which add to their productiveness. Their scale of
operation is large as compared to the manufacturer alone which means the scale of sales
reached would be higher. While there are various organizations which operate their own
distribution channel or do not take any help from channel members, there are others who
are in need of some level of channel partnership.
LEVEL OF DISTRIBUTION COVERAGE
A marketer needs to consider various factors before he decides upon the right level of
distribution coverage. It is well understood that distribution always increases company
costs. A part of this cost is covered by the customer for instance shipping costs but the rest
cannot be passed on to the customer. The marketer can determine the right level of
distribution by comparing the profit made (example, more sales) with the cost incurred in
achieving the profit. There are three levels of distribution coverage:
1. Mass Coverage
Mass coverage is also known as intensive distribution. As the name suggests in this
level of distribution coverage the product is distributed to nearly all the locations
where that type of product is sold. Mass coverage is suitable for low priced products
with huge consumer demand. An example of such a product is Coca Cola. The
product is available at all kind of stores, grocery stores, convenience stores, vending
machines, hotels and more. The distribution cost for such products is very high
however huge sales volume keeps the profits running high for the marketer.
2. Selective Coverage
In selective coverage the product distribution is limited to certain selected locations.
This is the case with products with a smaller market size. As the market size is small
the number of locations needed to support the distribution of the product is also
smaller.
3. Exclusive Coverage
Exclusive coverage is ideal for products that target relatively smaller markets, for
instance high-end products have small customer size. These products are more than
often purchased by customers who satisfy most of their needs with high quality,
expensive products (example- cars) Efficient and well-trained customer service is
essential for satisfying and helping such customers. Due to these characteristics of
the product as well as its buyers the marketer sells his products at select stores or
exclusive group of resellers. Another kind of product which gets exclusive coverage
is the one found only in company owned outlets. These may not be high-end
products or very expensive but since they are found only in select outlets they are
distributed exclusively.
With the advent of internet the effectiveness of these three levels of distribution
coverage has been severely challenged. This is so because all products sold on
internet are distributed by mass coverage. Therefore these three distribution levels
are best options for distribution of products that are physically purchased by a
customer.
ISSUES IN ESTABLISHING DISTRIBUTION CHANNELS
A manufacturer must conduct a thorough market research before deciding upon the
distributive method he wants to employ. Like all marketing decisions this too requires lot
of thought and study. There are various factors which determine his choice of a distribution
system. These factors can be grouped into two. Factors can be either related to marketing
decisions which determine a distribution channel or the kind of relationship that exists
between channel members.
1. Marketing Decision Issues
2. Channel Relationship Issues
MARKETING DECISION ISSUES
Various marketing decisions regarding the product help in establishing its distribution
channel. For instance the following factors:
A. Product Issues
The nature of the product often determines the distribution option. Various
products which need to be distributed are very delicate and fragile for instance
flowers. Here the marketer will choose an appropriate channel on the other hand a
marketer selling tough or durable products like steel beams will have other kinds of
distribution channels in mind.
B. Promotional Issues
Apart from issues like whether a product needs special handling or not the marketer
also needs to keep in mind how the product needs to be promoted before he
chooses a distribution channel for it. Certain products need extensive salesperson-
to-customer contact for instance automobile purchase. On the other hand a product
like bread will need a different distribution channel as its buyers require no help
from salesmen.
C. Pricing Issues
The price at which the marketer wants to sell his product is another factor to be
kept in mind before choosing a distribution system. The number of resellers
involved in the distribution channel affects the final price of the product. This is so
because each channel member tries to make some profit for their contribution to
the sale of the product. Therefore more the number of channel members the
marketer has to increase the product price to maintain his profit and the
distribution channel.
D. Target Market Issues
The primary motive of utilizing a distribution channel is to ensure the products
reach the end user. The nature of the target market is another important point to
consider while deciding upon the distribution channel. In this regard it is beneficial
to determine the level of distribution coverage needed to effectively meet
customer’s needs. Distribution coverage is measured in terms of the intensity by
which the product is made available to the end user.
CHANNEL RELATIONSHIP ISSUES
Apart from marketing decisions the marketer must consider the quality of relationship that
exists between distribution channel members. Relationship between channel members just
like marketing decisions has the potential to effect product sales.
Relationship issues can be broadly studied under the following three heads:
A. Channel Power
A distribution channel usually has several members, each having a set of duties to
perform and each add on to the value of the product. Among these members some
may hold a stronger position than the others. This phenomenon is known as channel
power. This member/s tries to influence the rest of the distribution chain. In such a
situation they start demanding for terms and conditions more favorable to them.
Like, they would buy more products only if the prices are lowered, will sell only if
the prices are higher. Or would demand other members for instance to do more
marketing to customers etc.
Channel power can be exerted in the following ways:
Backend or Product Power
Backend or product power usually lies in the hand of manufacturers whose
products enjoy high consumer demand. The rest of the channel members have to
carry forward the product in the chain or else they are at the risk of losing their
customers.
Middle or Wholesale Power
Here the power lies in the hands of the wholesaler who is in the commanding
position in the distribution chain. Often a wholesaler distributes products among
several smaller retailers and he himself obtains products from various
manufacturers. The small retailers cannot buy products in bulk or variety because of
cost constraints therefore is dependent on the wholesaler who can exert channel
power in this situation.
Front or Retail Power
Front or retail power as the name suggests stays in the hands of the retailers. This
state is reached when the retailer generates a high percentage of sales and therefore
the rest of the channel members are dependent on them.
DISTRIBUTION CHANNEL ARRANGEMENTS
A distribution channel is made up of various channel members like retailers and
wholesalers. For a smooth working of this channel the relationship between the members
must be strong. Trust and understanding between the members go a long way into
successful working of the chain.
A retailer often buys products from a wholesaler and expects him to deliver products on
time so that the retailer can meet the consumer demands. Similarly the wholesaler expects
the retailer to buy products on a regular basis and make payments on time.
Relationship between channel members is a function of the arrangement that occurs
between the channel members. Channel arrangements are of two types:
1. Independent Channel Arrangements
2. Dependent channel arrangements
Independent Channel Arrangements
In this kind of arrangement the channel members prioritize their own objectives and are
not concerned about the chain as a whole. It is a more conventional form of arrangement
where the members are free to take decisions which are in their own interest. As a result
the chain suffers as a whole as its objectives are not achieved. There is no binding or unity
in the group as each member functions selfishly. The members in this kind of arrangement
enjoy the freedom of moving away from a relationship they feel is not advantageous.
Dependent Channel Arrangements
In this kind of arrangement the channel members feel they are bound together and
working together towards a similar goal. There is more unity. They form a more stable
distribution channel. This form of arrangement is also called the "vertical marketing
system". In this system a single member cannot make changes in the way the product is
distributed in the channel.
The dependent channel arrangement can be further divided into three categories:
1. Corporate
In this form of arrangement the supplier maintains his own distribution channel.
This arrangement is commonly seen in the retail industry. For instance Starbucks
operates a chain of retail stores. Starbucks sells coffee by first importing it. It is then
processed by them and sold under their brand name in their retail stores. It should
be mentioned that Starbucks uses a multi-channel approach to market its product.
For instance coffee is also distributed through grocery stores and mail orders.
2. Contractual
In this kind of arrangement the supplier provides a legal document to his
distributors who are supposed to stick to its contents. The legal document clearly
mentions which member of the chain is permitted to perform what and what not.
This arrangement can be
a. Wholesaler-sponsored: where a wholesaler brings together and is
responsible for the working of several independent retail stores. The
retailers here are supposed to use the same name as well.
b. Retail-sponsored: here again several independent retail stores come together
but the retailers are themselves responsible for managing the channel.
c. Franchised: In this arrangement there exists a central organization which is
responsible for controlling the activities of all channel members.
3. Administrative
In this arrangement a single member controls the activities of all channel members.
This is possible when a single channel member attains a very powerful position.
This channel member may be the manufacturer who has attained this position as his
products are enjoying high consumer demand. Or it may be the retailer because of
his size and market coverage.
ADVANTAGES OF A DISTRIBUTION CHANNEL
When a customer is considering buying a product he tries to access its value by looking at
various factors which surround it. Factors like its delivery, availability etc which are
directly influenced by channel members. Similarly, a marketer too while choosing his
distribution members must access what value is this member adding to the product. He
must compare the benefits received to the amount paid for using the services of this
intermediary. These benefits can be the following:
Cost Saving
The members of distribution channel are specialized in what they do and perform at
much lower costs than companies trying to run the entire distribution channel all by
itself.
Time Saving
Along with costs, time of delivery is also reduced due to efficiency and experience of
the channel members. For example if a grocery store were to receive direct delivery
of goods from every manufacturer the result would have been a chaos. Everyday
hundreds of trucks would line up outside the store to deliver products. The store
may not have enough space for storing all their products and this would add to the
chaos. If a grocery wholesaler is included in the distribution chain then the problem
is almost solved. This wholesaler will have a warehouse where he can store bulk
shipments. The grocery store now receives deliveries from the wholesaler in
amounts required and at a suitable time and often in a single truck. In this way cost
as well as time is saved.
Customer Convenience
Including members in the distribution chain provides customer with a lot of
convenience in their shopping. If every manufacturer owned its own grocery store
then customers would have to visit multiple grocery stores to complete their
shopping list. This would be extremely time-consuming as well as taxing for the
customer. Thus channel distribution provides accumulating and assorting services,
which means they purchase from many suppliers the various goods that a customer
may demand. Secondly, channel distribution is time saving as the customers can find
all that they need in one retail store and the retailer
Customers can buy in small quantities
Retailers buy in bulk quantities from the manufacturer or wholesaler. This is more
cost effective than buying in small quantities. However they resell in smaller
quantities to their customers. This phenomenon of breaking bulk quantities and
selling them in smaller quantities is known as bulk breaking. The customers
therefore have the benefit of buying in smaller quantities and they also get a share
of the profit the retailer makes when he buys in bulk from the supplier.
Resellers help in boosting sales
Resellers often use persuasive techniques to persuade customers into buying a
product thereby increasing sales for that product. They often make use of various
promotional offers and special product displays to entice customers into buying
certain products.
Customers receive financial support
Resellers offer financial programs to their customers which makes payment easier
for the customer. Customers can buy on credit, buy using a payment plan etc.
Resellers provide valuable information
Manufacturers who include resellers for selling their products rely on them to
provide information which will help in improving the product or in increasing its
sale. High-level channel members often provide sales data. On all other occasions
the manufacturer can always rely on the reseller to provide him with customer
feedback.
DISTRIBUTION SYSTEMS
Before settling for a distribution system the marketer has too keep in mind various factors
affecting distribution system (like marketing decision and relationship issues).
The following distribution designs are available to the marketer for his distribution system:
1. Direct Distribution Systems
In direct distribution system the marketer reaches the target consumer directly
without the use of any intermediary. The distribution chain is small and no other
party can take ownership of the product being distributed. The direct distribution
system can be further sub-divided on the basis of the methods of communication
that takes place during sale between marketer and consumer. These methods are:
Direct Marketing Systems
In this system the consumer buys the product based on information gained
from impersonal contact with the marketer like by visiting the marketer's
website or ordering from the marketer's catalog. Or he buys based on
information gathered through some personal communication with a
customer service personnel who is not a salesperson and can be reached
through a toll-free number.
Direct Retail System
In this type of system the marketer operates his own retail stores. A perfect
example of this system is Starbucks.
Personal Selling Systems
In this system the distribution of the product is carried forward by people
whose main responsibility is creating and managing sales (for instance a
salesperson). He persuades the buyers into placing an order. This order may
not be handled by the salesperson but through websites or toll-free
telephone numbers. The sales person plays a vital role here in generating
sales.
Assisted Marketing System
In this form of distribution system the marketer handles the distribution of
his product and helps it reach directly to the end user. However he needs
assistance from others to spread awareness about his product among the
customers. An example of assisted marketing system is e-bay, here the
buyers and sellers are brought together for a fee. Agents and brokers can also
be included in this category.
2. Indirect Distribution System
In indirect distribution system the marketer includes intermediaries or other
members in his distribution chain. These resellers make sure the product reaches
the end user, while performing their duties they take complete ownership of the
product. However the reseller may sell products on a consignment basis wherein
the reseller pays for the product only when the product is sold. The resellers may be
expected to take up a few responsibilities to help boost the sales of the product.
Indirect methods include the following:
Single-Party Selling System
In this system the marketer involves another party to sell and distribute his
product to the end user. An example of single-party selling can be when the
product is sold through large store-based retail chains or through online
retailers. In this case the distribution system is also referred to as trade
selling system.
Multiple-Party Selling System
In multiple-party selling system the distributor involves two or more reseller
in the distribution process before the product reaches the end user. This is
most likely to happen when a wholesaler buys the product from the
manufacturer and then sells it to the retailer.
3. Multi-Channel (Hybrid) Distribution System
A marketer is said to be using a multi-channel or hybrid distribution system when
he utilizes more than one distribution design. As we have studied earlier in the
example of Starbucks, multiple distribution designs are put to use in the distribution
of its product. It uses a direct retail system when it sells its products in company-
owned stores, a direct marketing system by selling via direct mail and single party
selling system is put to use when its products are sold through grocery stores. Apart
from these other distribution systems are also put to use.
Multi-Channel distribution system is advantageous as it expands the distribution
system and more customers can be reached. The possible disadvantage again is
channel conflict of which the marketer should always be cautious.
Imported cars
Vehicles are either,
(1) Directly imported from the overseas manufacturers (official import)
(2) Imported through overseas dealers (parallel import). The official import is only for new
cars, but parallel import is for both new and used cars.
ISSUES:
Criteria in selecting channel members. Typically, the most important consideration
whether to include a potential channel member is the cost at which he or she can perform
the required functions at the needed level of service. For example, it will be much less
expensive for a specialty foods manufacturer to have a wholesaler get its products to the
retailer. On the other hand, it would not be cost effective for Procter & Gamble and Wal-
Mart to involve a third party to move their merchandise—Wal-Mart has been able to
develop, based on its information systems and huge demand volumes, a more efficient
distribution system.
A manufacturer enlists another manufacturer that already has a channel to a desired
customer base, to pick up products into an existing channel.
Parallel Distribution. Most manufacturers find it useful to go through at least one
wholesaler in order to reach the retailer, and it is simply not efficient for Colgate to sell
directly to pathetic little "mom and pop" neighborhood stores. However, large retail chains
such as K-Mart and Ralph’s buy toothpaste and other Colgate products in such large
volumes that it may be efficient to sell directly to those chains. Thus, we have a "parallel"
distribution network whereby some retailers buy through a distributor and others do not.
Note that we may also be tempted to add a direct channel—e.g., many clothing
manufacturers have factory outlet stores. However, note that the full service retailers will
likely object to being "undercut" in this manner and may decide to drop or give less
emphasis to the brand. It may be possible to minimize this contract by precautions such as
(1) having outlet stores located in vacation areas not within easy access of most people, (2)
presenting the merchandise as being slightly irregular, and/or (3) emphasizing
discontinued brands and merchandise not sold in regular stores.
Evaluating Channel Performance. The performance of channel members should be
periodically monitored—a channel member may have looked attractive earlier but may
not, in practice be able to live up to promises. (This can be either because of complacency
or because the channel member simply did not realize the skills and resources needed to
perform to standards). Thus, performance level (service outputs) and costs should be
evaluated. Further, changes in technology or in the market place may make it worthwhile
to shift certain functions to another channel member (e.g., a distributor has expanded its
coverage into another region or may have gained or lost access to certain retail chains).
Finally, the extent to which compensation is awarded in proportion to performance should
be reassessed—e.g., a distributor that ends up holding inventory longer or taking on more
returns may need additional compensation.
Internal Considerations
• do I have enough money to add another channel member ?
• is it compatible with my other businesses ?
• will any change cause more problems than solutions ?
• for example, IBM, Compaq threatened by Dell
Is it compatible with my business model e.g. Dell in China these internal considerations have a bearing on type of channel
Legal Considerations
• a manufacturer cannot insist that they sell their own products only (unless in case of a franchisee)
• a manufacturer cannot tie the sale of certain goods to certain others
• “you buy 100 crates of Vanilla Coke, if you want 500 crates of Coke”
• I am sure, though, that this is happening
• Cost and Profit Considerations
• a low profit margin, high volume company will have many channel members
• a high profit margin, low volume member will have only a few members
Channel Conflict
• This is defined as tension/clashes between channel members as a result of perceived unfairness
• vertical conflict arises when there is a clash of interests between members at 2 different levels (like wholesaler and retailer)
• horizontal conflict is between members at the same level - Retailer A Vs. Retailer B
• conflict can be caused by unfair manufacturer policies, a few “rotten” apples, partisanship etc
• conflict can be potentially dangerous and can snowball
• McDonald’s franchisees for instance; if care is not taken, the grumbles might become a roar
• however, a little conflict is good
• manufacturers must be fair
Case 1
TATA NANO
Profile:
Tata Motors Limited is India’s largest automobile company, with revenues of Rs.35651.48
crores (USD 8.8 billion) in 2007-08. It is the leader in commercial vehicles in each segment,
and among the top three in passenger vehicles with winning products in the compact,
midsize car and utility vehicle segments. The company is the world’s fourth largest truck
manufacturer, and the world’s second largest bus manufacturer. In March 2008, Tata
Motors acquired Ford’s UK based car brands Jaguar and Land Rover (BBC News, 2008).
According to Ratan Naval Tata (Chairman of Tata Group), the need for an innovation like
Nano has got to do something for the people of India and transport. Unavailability and poor
quality of mass transport is a common problem in India. In a two wheeler, father driving
with elder child standing in front and wife behind holding a baby is norm in this country.
Thus, this is a relatively an unsafe mode of transporting a family. Thus, with this in mind
Tata Nano was created as a safer form of transport.
As one of its objectives is to become an Indian business conglomerate operating in many
countries, Tata Nano will be introduced in Malaysia.
Distribution review
Just like in India, Tata Nano will be positioned as an affordable car even in overseas
markets. ‘Easy-to-assemble kits’ will be imported from Tata in India. The car then will be
assembled at pre-defined locations. The proposed locations are Shah Alam, Selangor and
Pasir Gudang, Johor Bahru. It will be then redistributed to showrooms that will be set up
based on region. 30 sales offices will be opened throughout Malaysia.
Direct marketing channel (zero-level channel)
We perform the Tata Nano in Malaysia by selling it directly to customers. Customers can
deal directly with our dealers and make the booking for Tata Nano by visit our sales office
or at any special event/campaign. By this way we can save more cost and maintain the
cheapest purchasing price rather than through retailers or resellers.
Physical flow:
From the diagram, can know that Tata Nano will send the paths to the Malaysia after
received the order from the sales office. After that, we will assemble a car at the workshop.
Finally, send to the customers directly. From here, we can often provide faster delivery to
customers because we are closer to the customers.
Payment flow:
Customers can pay bills by cash or do the financing from bank. Customers pay less by this
diagram due to not need to pay extra commission to third party such as wholesalers or
retailers. Tata Motor also can collect the payment more efficient.
Information flow:
Customers can get the information directly from Tata Motor such as new product, price
development and so on. Tata Motor can more understanding customer's needs when
receiving customers, response calls and mailings or through internet blog. If customers
have any need or complaint, we can satisfy them immediately by deal with customers
directly.
Case 2
TATA – FIAT
Profile
About Fiat
One of the pioneer companies in the automobile industry, Fiat has produced more than 85
million passenger cars and light commercial vehicles, including no less than 400 models,
since 1899, when the company was founded in Turin, Italy. Some of them have represented
milestones in the automotive industry. The Fiat Group’s Automobiles Sector operates
world-wide with the following brands: Fiat, celebrated for value, economy, and innovation
and whose mass produced cars are distributed over almost the entire price class spectrum;
Lancia (acquired in 1969) means prestige cars noted for their elegant styling, and comfort;
Alfa Romeo (acquired in 1986) is famous as a maker of sport and luxury vehicles of style
and distinction; Maserati (acquired in 1992) represents a landmark in the history of the
automobile; Ferrari (acquired in 1969), well renowned for unsurpassed design,
performance, and luxury, is a legendary automobile that imparts special cachet to its
owner.
Fiat India Private Limited, with its renewed brand strategy for the Indian market, is
focused on the premium end of the B & C category in the growing automobile sector. Fiat
Adventure Sport is the latest offering targeted at the new generation of customers who
enthusiastically seek out the latest trends in style, safety, engine and performance. Fiat’s
superiority in design and technology has been re-emphasized from the fact that its 1.3-
multi jet has been chosen as the “Engine of the Year 2005” in the 1 to 1.4 litres by the Jury
of the “International Engine of the Year” award.
About Tata Motors
Tata Motors is India’s largest automobile company, with revenues of US$ 4.7 billion. The
company is a market leader in commercial vehicles in India and is the second largest
passenger car company in the domestic market. It is the world’s fifth largest medium and
heavy commercial vehicle manufacturer. Tata Motors vehicles are being marketed in
several countries in Europe, Africa, the Middle East, South East Asia, South Asia and
Australia. The company has manufacturing operations in South Korea and Spain, and a
Technical Centre in the U.K.
Tata- Fiat Dealer Network
Tata Motors and Fiat India Private Limited today announced the commencement of the
new Tata-Fiat dealer network to sell both Tata and Fiat branded cars, along with service
and sales of spare parts, in 11 cities across India.
The Tata-Fiat dealer network comprises 25 existing Tata Motors Passenger Vehicles
dealers and 3 existing Fiat India dealers. Starting today, the 28 Tata-Fiat dealers will sell
the Fiat Palio (1.2 EL PS, 1.2 ELX, 1.6 Sports) and the Fiat Adventure (1.6 Sports), and all
Tata Motors Passenger Vehicles – the Tata Indica, the Tata Indigo, the Tata Indigo Marina,
the Tata Sumo and the Tata Safari.
The Fiat Palio range will now be available from an attractive price of Rs.3.8 lakhs onwards
(all prices ex-showroom Delhi). The 1.6 litre Adventure Sports is now available at a new
uniform price across the country at Rs.5.65 lakhs.
The 28 Tata-Fiat dealers, who together have 44 outlets, are located in 11 cities – Mumbai,
Pune, Ahmedabad, NCR Delhi, Chandigarh, Ludhiana, Bangalore, Chennai, Hyderabad, Kochi
and Kolkata.
The beginning of operations of the Tata-Fiat dealer network follows the agreement,
announced by the Fiat Group and Tata Motors on January 13, 2006, to cooperate on dealer
network sharing. The execution of the distribution arrangement is the first initiative post
the signature of the Memorandum of Understanding signed between the Fiat Group and
Tata Motors in September 2005. Discussions are on to explore other areas of co-operation,
on which specific announcements can be expected once their feasibility is established.
Commenting on the commencement of the Tata-Fiat dealer network, Mr. Rajiv Dube, Sr.
Vice-President (Manufacturing & Commercial – Passenger Cars Business Unit), Tata
Motors, said, “Tata Motors is delighted to be partnering Fiat India in bringing a larger
portfolio of products under a single roof at our joint dealerships. Between the Tata and Fiat
brands, the company is in a position to offer one of the widest product offerings in the
Indian market with the promise of several exciting options to come.”
Mr. Giovanni de Filippis, Managing Director of Fiat India Private Limited, said, “The coming
together of Tata and Fiat through the dealer network sharing signifies better service, after
sales support and more convenience to Fiat customers. Our customers have always been
delighted with the superior build quality of our cars. The after sales support that comes
with the Tata trust will complement this, and Fiat is confident of serving its customers
better.” Existing Fiat dealers will continue to retail the full range of Fiat offerings, including
the Fiat Petra.
Case 3
Toyota calls back cars
It began with two separate issues – floor mats that interfere with the accelerator, and
“sticking” accelerator pedals, causing the car to speed up or the pedal to return too slowly
to the idle position. The discovery has caused Toyota to issue a recall on more than 7
million cars, including models of the popular RAV4, Corolla, Camry, Highlander and
Sequoia. (Toyota didn’t move fast enough on the recalls for public taste, however. It has
been suggested that the company was forced into initiating the action by the U.S.
government. So much for the fundamentals of crisis management.)
More recently, we’ve witnessed the recall of nearly 500,000 Prius and Lexus models
worldwide for a braking problem which stems from the software that runs the control
system. Assuming Toyota isn’t sitting on more bad news, the combined effect of those flaws
could be devastating enough to the world’s number-one automaker. IHS says Toyota is
likely to lose sales of some 10,000 units for both January and February. D&B’s Lawton
quotes an estimate by investment banker UBS that the event will cost the company $155m
a week to fix. And that doesn’t even allow for the long-term effects from this blow to
Toyota’s carefully burnished image.
There’s an extra twist to this story. Industry experts are always telling companies about the
importance of focusing on major suppliers. Yet the smaller ones can cause the biggest
headaches. Elkhart, Ind.-based CTS Corp. is the maker of the pedal assemblies that
prompted the Jan. 21 recall. But automotive business reportedly accounts for less than a
third of the company’s sales. And Toyota contributes about 3 percent of that. (CTS calls
Toyota “a small, but important” customer.)
Was it CTS’s fault? In a rather chilly statement on Jan. 27, the company stated that its
products “have been manufactured to Toyota’s design specifications.” It went on to say that
the two are “actively working” to develop a new pedal that meets tougher specifications.
And that’s about it. In fact, the boilerplate “Safe Harbor” language tacked on to the end of
the CTS press release is longer than the statement itself.
Regardless of where the blame ultimately falls, there appears to have been too little
communication between Toyota and CTS. The lapse is hardly rare. Lawton says there are
numerous “natural barriers” in any corporate environment that prevent businesses from
discovering and coming clean about product defects. Maybe the screwup can be fixed
before the public finds out, top executives might reason. Or perhaps we’d better run it by
Legal first. But the failure to act quickly and decisively often does more damage than the
original flaw. Do the words “Ford” and “Firestone” ring a bell?
Lawton says it’s vital that companies review their suppliers on a regular basis, to flush out
problems related to financial condition or product quality. Are your vendors working with
liens against them? Have they been charged with violations of environmental or worker-
safety laws? Are there issues related to their financial stability? Buyers and suppliers “need
to create an environment from a technology perspective where it’s easy and cost-effective
to share information,” Lawton says. The issue becomes even more critical in tough
economic times, when partners in the chain pare back resources to an absolute minimum.
The price of failure is high. According to a report by the CFO Executive Board
(https://cfo.executiveboard.com/Public/Default.aspx), the number of supply disruptions
has been on the rise. Typical results include an 11-percent increase in costs, 7-percent
decline in sales growth and 35-percent plunge in shareholder returns.
So we’re left with a major automaker that must accelerate from a slow start in reassuring
consumers and regulators of its commitment to safety. Company president Akio Toyoda
finally got around to apologizing to customers at a Feb. 5 news conference (although
observers have been debating the depth of his bow), but “sorry” by itself doesn’t cut it. Real
results will come from a commitment to better supplier relationships within the Toyota
organization. Meanwhile, costs continue to mount. Says Lawton: “The clock is ticking.”