Distribution channel Distribution channel management - an management - an

introductionintroduction

Distribution channel Distribution channel management - an management - an

introductionintroduction

‘ ‘Marketing channels can be viewed Marketing channels can be viewed as set of interdependent as set of interdependent organizations involved in the process organizations involved in the process of making a product or service of making a product or service available for consumption or use’available for consumption or use’

How do distribution channels How do distribution channels contributecontribute

• Intermediaries can improve the efficiency of the Intermediaries can improve the efficiency of the exchange processexchange process

• Channel intermediaries adjust the discrepancy of Channel intermediaries adjust the discrepancy of assortment through the performance of the assortment through the performance of the sorting processsorting process

• Marketing intermediaries hang together in Marketing intermediaries hang together in channel arrangements to provide for the channel arrangements to provide for the routinisation of transactionsroutinisation of transactions

• Channels facilitate the searching processChannels facilitate the searching process

Sorting outSorting out

involves breaking down a involves breaking down a heterogeneous supply into separate heterogeneous supply into separate stocks that are relatively stocks that are relatively homogeneous.homogeneous.

AccumulationAccumulation

bringing similar stocks from a number of bringing similar stocks from a number of sources together into a larger sources together into a larger homogeneous supplyhomogeneous supply

AllocationAllocation

breaking a homogeneous supply down breaking a homogeneous supply down into smaller and smaller lotsinto smaller and smaller lots

Allocating at the wholesale level is referred to asAllocating at the wholesale level is referred to as breaking bulkbreaking bulk

AssortingAssorting

building up an assortment of products for building up an assortment of products for resale in association with each otherresale in association with each other

Role of distribution channels

• To adjust the discrepancy of assortment through the To adjust the discrepancy of assortment through the

process of sorting, accumulation, allocation, and process of sorting, accumulation, allocation, and

assorting assorting

• To minimize the distribution costs through routinising To minimize the distribution costs through routinising

and standardizing transactions to make exchange more and standardizing transactions to make exchange more

efficient and effective efficient and effective

• To facilitate the searching process of both buyers and To facilitate the searching process of both buyers and

sellers by structuring the information essential to both sellers by structuring the information essential to both

the partiesthe parties

• To provide a place for both parties to meet each other To provide a place for both parties to meet each other

and reducing uncertaintyand reducing uncertainty

Discrepancies in the process of exchange

Spatial discrepancySpatial discrepancy

Temporal discrepancyTemporal discrepancy

Need to break the bulkNeed to break the bulk

Need to provide assortment Need to provide assortment

The cost and control aspects of The cost and control aspects of intermediationintermediation

Direct Distribution Indirect distribution

Control

Cost efficiency

Distribution channel strategy• Setting distribution objectives in terms of the Setting distribution objectives in terms of the

customer requirementscustomer requirements

• Finalizing the set of activities that are required Finalizing the set of activities that are required

to be performed to achieve the channel to be performed to achieve the channel

objectivesobjectives

• Organizing the activities so that the Organizing the activities so that the

responsibility of performing the activities is responsibility of performing the activities is

shared among the entities who are meant to shared among the entities who are meant to

perform these activitiesperform these activities

• Developing policy guidelines for the smooth Developing policy guidelines for the smooth

functioning of the channel on a day to day basisfunctioning of the channel on a day to day basis

Distribution channel Distribution channel management management (contd.)(contd.)

• Distribution channel management Distribution channel management encompasses all activities dealing with encompasses all activities dealing with the distribution function of the firmthe distribution function of the firm

• The distribution strategy provides The distribution strategy provides guidelines for decision making guidelines for decision making

• The distribution management function The distribution management function can be viewed as happening in two can be viewed as happening in two phases: the ex ante phase and the phases: the ex ante phase and the ex ex posteposte phase phase

Distribution channel Distribution channel management management (contd.)(contd.)

• The The ex ante ex ante phase involves all the activities phase involves all the activities

that are associated with the design and that are associated with the design and

establishment of the distribution channel. establishment of the distribution channel.

These activities actually take place before the These activities actually take place before the

distribution channel actually starts distribution channel actually starts

functioning. functioning.

• The The exposte exposte phase involves managing the day phase involves managing the day

to day activities of the channel wherein the to day activities of the channel wherein the

behavior of the individual channel members behavior of the individual channel members

are coordinatedare coordinated

Channel Management tasks

Distribution Channel StrategyChannel Objective

Activity FinalizationOrganizing the activitiesDeveloping Policy Guidelines

Design of the channel structure

Establishing the channel

Motivating Channel Members

Resolving Conflicts among channel members

Ex ante Phase

Ex Poste Phase

Functions in marketing Functions in marketing channelschannels

Designing customer-Designing customer-oriented oriented

marketing channelsmarketing channels

Channel DesignChannel Design The channel design is normally meant to give a The channel design is normally meant to give a

clear idea about:clear idea about: The number of channel entities in the channel The number of channel entities in the channel

network, network, The way in which they are linked,The way in which they are linked, The roles and responsibilities of the entities in The roles and responsibilities of the entities in

the networkthe network The rewards for participating in the activities The rewards for participating in the activities

and also and also Clear cut guidelines for the major activities to Clear cut guidelines for the major activities to

be performed during the normal functioning of be performed during the normal functioning of the channel. the channel.

What are the service What are the service outputsoutputs

Waiting timeWaiting time

Breaking the bulkBreaking the bulk

Spatial convenienceSpatial convenience

AssortmentAssortment

Distribution channel designDistribution channel design

To consume a product

Service outputs have to be delivered

Channels

Participates in channel flows

Activities have to be performed

Thus performs activities

Example of a service output delivered template

Sl.No.

Service dimension

Service output delivered

1. Bulk-Breaking Units are delivered in ones

2. Spatial convenience There is at least one outlet for almost every 3 km radius excluding of course thinly populated areas

3. Waiting time Not more than 2 days for any model

4. Assortment Other consumer goods items including that of other competitors are available at all theoutlets where the products are otherwiseAvailable

5. Installation support Available

6. After sales support Free for first two years, but available on payment afterwards. Also available at every city from where the product was bought.

7. Consumer financing Available

Flow Direct contribution Indirect contribution Other contribution

Physical Possession

Spatial convenience, bulk breaking, waiting time

Assortment

Ownership Spatial convenience

Promotion Spatial convenience Is a service output in itself

Negotiation Spatial convenience, bulk breaking

Assortment

Risk taking Waiting time, bulk breaking, spatial convenience

Financing Spatial convenience, waiting time, bulk breaking

Assortment

Ordering Bulk breaking, spatial convenience, waiting time

Payment Bulk breaking, spatial convenience, waiting time

Channel flows and contribution to service outputsChannel flows and contribution to service outputs

Channel design effort decisions

The service output levelsThe service output levels The flows or activities that are The flows or activities that are

associated with the achievement associated with the achievement of the service output levelsof the service output levels

The type of entity who would be The type of entity who would be entrusted with the performance entrusted with the performance of each of these flows of each of these flows

Parameters for comparing Parameters for comparing channel designschannel designs

EfficiencyEfficiency EffectivenessEffectiveness EquityEquity ScalabilityScalability FlexibilityFlexibility

The channel establishment plan The channel establishment plan (contd.)(contd.)

The main purpose of the channel to be set-upThe main purpose of the channel to be set-up The profile of the customers who are the target The profile of the customers who are the target

market for the channel market for the channel The needs and requirements of the target market The needs and requirements of the target market

with regard to the identified service outputs with regard to the identified service outputs

provided by the proposed/ existing channel: provided by the proposed/ existing channel: Analysis of the operations of the existing Analysis of the operations of the existing

channels that deal in similar product/service channels that deal in similar product/service

lineslines

Detailed activity chart for achieving the service Detailed activity chart for achieving the service

output objectivesoutput objectives

Plan…..Plan….. Contd.Contd.

Details about the various channel constituents Details about the various channel constituents who will be performing these taskswho will be performing these tasks

The cost of performing the activitiesThe cost of performing the activities The designated roles and responsibilities of The designated roles and responsibilities of

the channel constituentsthe channel constituents The proposed remuneration for performing The proposed remuneration for performing

these roles and responsibilitiesthese roles and responsibilities Standards for measuring the performanceStandards for measuring the performance Procedures for reporting and information Procedures for reporting and information

sharingsharing Monitoring mechanismsMonitoring mechanisms Criteria for appointing the channel membersCriteria for appointing the channel members

Customer-orientedCustomer-orientedlogistics managementlogistics management

Logistics strategyLogistics strategy

Cost reductionCost reduction

Capital reductionCapital reduction

Service improvementService improvement

Location decisions•Number, size and location of facilities•Assignments of stocking points to sourcing points•Assignment of demand to stocking points

Inventory Management•Inventory levels•Deployment of inventories•Control methods

Transportation decisions•Modes of transport•Carrier routing/scheduling•Shipment size /consolidation

Customer Servicegoals

Logistics Planning

Direct shipmentDirect shipment

Warehousing Warehousing

Cross-dockingCross-docking

Generic types of outbound logistics strategies

MovementMovement

StorageStorage

Information transferInformation transfer

Functions of warehousing operations

•ReceivingReceiving•TransferringTransferring

•Order picking/selectionOrder picking/selection•ShippingShipping

•Stock keeping locationsStock keeping locations•Inbound and outboundInbound and outbound

shipmentsshipments•Facility space utilizationFacility space utilization•Order fulfillment dataOrder fulfillment data

Total cost

Inventory cost

Transportationcost

Warehousing cost

Number of warehouses

Totalcost

Relationship between logistics, cost, and number of warehouses

Why Inventories?Why Inventories?

To improve customer serviceTo improve customer service To smoothen the operations of the To smoothen the operations of the

logistics systemlogistics system To reduces costsTo reduces costs Inventory procurement costs Inventory procurement costs Inventory carrying costsInventory carrying costs Stock out costs Stock out costs Cost associated with inventoryCost associated with inventory

Components of inventory carrying cost

Inventory carrying cost

Capital cost

Inventory service costs

Storage space costs

Inventory carrying cost

Inventory Investments

Insurance and Taxes

Warehouse rent, maintenance

charges

ObsolescenceDamage& Pilferage

ShrinkageRelocation

costs

RetailerRetailer

StockistStockist

SupplierSupplier

RetailerRetailer RetailerRetailer RetailerRetailer RetailerRetailer

Stockist echelon lead time

Stockist Stockist echelon echelon

InventoryInventory

Echelon inventoryEchelon inventory

Product related factorsProduct related factors The density of the productThe density of the product Stow abilityStow ability Difficult in handlingDifficult in handling LiabilityLiability

Market related factorsMarket related factors Intramode competitionIntramode competition Location of marketsLocation of markets Balance or imbalance of in freight traffic in and Balance or imbalance of in freight traffic in and

out of the marketout of the market Seasonability of the product movementsSeasonability of the product movements

Factors affecting transportation costFactors affecting transportation cost

Managing Channel Member Managing Channel Member BehaviourBehaviour

Channel relationshipsChannel relationships

• Perceptions of organisational Perceptions of organisational powerpower

• DependenceDependence• ControlControl• TrustTrust• CommitmentCommitment• Co-operationCo-operation

Discrete relational exchange continuum

Arm’s length relationship

Relational exchange relationship

Channel controlChannel control

Pay–OffPay–Off

FunctionFunction

Tolerance Tolerance FunctionFunction

Supplier authoritySupplier authority

Distributor’sDistributor’s

profit earnedprofit earned

Zone of acceptanceZone of acceptance

Role of persuasion, authority, and coercion in channel control

Authority Authority persuasionpersuasion

Coercion

Pay –off Pay –off functionfunction

AA BCC

Channel members Channel members profitprofit

Tolerance Tolerance functionfunction

controlcontrol

Components of channel offering

Financial returns

Quality products

Competitive priceReliable delivery

National reputation

Promotional support

Training

Market researchCompany

policies

Technical assistance

Responsiveness systems

Manufacturer sales force incentives

Distributor sales force incentives

Distributor firm incentives

Capability building programmes

Channel core elements

Incentive programme

InfluenceStrategy

group

Types of Influence strategy Explanation

Indirect influence strategies

Information exchangeInformation control Modeling

issues and the channel program is merely exchanged with channel member personnel. Where information on general business

Direct Unmediated Strategies

RecommendationWarningPositive normativeNegative normative.

In this type of strategy the consequences of the acceptance or rejection of the channel programme orits implementation are stressed, but these consequences are based on a response from the market environment, not on the mediation of the channel Principal.

Influence strategy types Influence strategy types (contd.)(contd.)

(contd.)(contd.) Influence strategy Influence strategy typestypes

Reward andPunishment Strategies

Economic reward Non-economic rewardEconomic punishment Non-economic punishment

In this type of strategy rewards and punishments are directly given to channel members

Directunweighted strategy

Direct request This strategy involves making a direct request to the channel member where the Principal mainly communicates desires or wishes concerning the channel member’s acceptance of the channel program.

Direct Mediated strategies

Personal plea Promise Threat and Legalistic reference.

In this type of strategy specific action is requested; consequences of acceptance or rejection are stressed and are based on the mediation of the channel principal.

Influence situations in channel Influence situations in channel relationshiprelationship

Reinforcement processBehavioural reinforcement

Moderate rationalizationAttitude change

Radical rationalizationAttitude change

Inducement processBehavioural change

Moderate confrontationBehavioural and attitudinal change

Radical confrontationBehavioural and attitudinal change

PositivePositive NegativeNegativeNeutralNeutral

+ ve+ ve

- ve- ve

Attitude towards the channel progranmmeAttitude towards the channel progranmme

Behaviour

towards the channel programme

Stages in channel conflictAttitudinalAttitudinal

sources sources of conflictof conflict

Structural Structural sources ofsources of conflictconflict

ConflictConflictresolutionresolution

Cognitive/Cognitive/AffectiveAffective conflictconflict

Manifest Manifest conflictconflict

ConflictConflict outcomesoutcomes

CAUSES OF CONFLICTSCAUSES OF CONFLICTS

Attitudinal CausesAttitudinal Causes

Structural causesStructural causes

Conflict management methods at different stages of conflict

Latent conflictLatent conflict

Felt conflictFelt conflict

Manifest conflictManifest conflict

Institutional approachesInstitutional approachesJoint membership of associationsJoint membership of associations

Exchange of executivesExchange of executivesCooptationCooptation

Dealer councilsDealer councils

Third party mechanismsThird party mechanismsMediationMediationarbitrationarbitration

NegotiationNegotiation

Negotiation strategies

AccommodativeAccommodative Collaborative/problem Collaborative/problem solvingsolving

CompromiseCompromise

AvoidanceAvoidance Competitive /aggressiveCompetitive /aggressive

Concern Concern for the for the others others interestinterest

HIGHHIGH

LOWLOW

LOWLOW HIGHHIGHConcern for Concern for own interestown interest

Retail ManagementRetail Management

Merchandise characteristicMerchandise characteristic

Customer service characteristicCustomer service characteristic

Trading formatTrading format

Customer communicationCustomer communication

Retail marketing mix Retail marketing mix

Retail marketing mix Retail marketing mix (contd.)(contd.)

(i) the merchandise in the store affect the volume of (i) the merchandise in the store affect the volume of

sales as it is primarily the merchandise that attracts sales as it is primarily the merchandise that attracts

customerscustomers(ii) since profitability is based on the turnover rate of ii) since profitability is based on the turnover rate of

the inventory, the choice of merchandise and the the inventory, the choice of merchandise and the

quantity of merchandise of each category stocked quantity of merchandise of each category stocked

affects the overall profitability of the establishmentaffects the overall profitability of the establishment

How merchandising functions affects How merchandising functions affects profitability?profitability?

Factors affecting choice of retail strategy

Company’s strategic objectives in terms Company’s strategic objectives in terms

of the level of profitability desiredof the level of profitability desired Space availabilitySpace availability Preferences of target customersPreferences of target customers Relationships with manufacturersRelationships with manufacturers Availability of trained salespeople etc.Availability of trained salespeople etc.

Availability of stock and stock holding cost

Stock Stock holding holding costcost

Percentage of availabilityPercentage of availability 80% 90% 100%

+20%

Financial method of Financial method of merchandisingmerchandising

Cost methodCost method

Retail methodRetail method

Merchandise planning processMerchandise planning process

Plan reductionsPlan reductions

Develop a stock planDevelop a stock plan

Plan merchandise needsPlan merchandise needs

Calculated planned PurchaseCalculated planned Purchase

Plan mark –ups based on profitability targetsPlan mark –ups based on profitability targets

Develop a sales planDevelop a sales plan

Customer servicesCustomer services

Product servicesProduct services

Service productsService products

Support activitiesSupport activities

Customer performance measuring Customer performance measuring techniquestechniques

Frequency or browsing visitsFrequency or browsing visits

Frequency of purchase visitsFrequency of purchase visits

Average transaction per visitAverage transaction per visit

Items purchasedItems purchased

Range purchasedRange purchased

Customer service facilities usedCustomer service facilities used

Purchase process for service Purchase process for service requirement identificationrequirement identification

Pre-purchase phase

Purchase phase

Post purchase phase

Purchase processPurchase process

Service requirementsService requirementsSearchSearch

ComparisonComparison

Product relatedProduct related

Augmentation of the productAugmentation of the product

Transaction relatedTransaction related

DeliveryDeliveryInstallationInstallation

Use extensionUse extensionRepeat visitsRepeat visits

Attitude towards trading format and store

environment

Pre-purchase Stage

During

Purchase

Post-purchase Stage

Task Oriented Pleasure Oriented

Shopping Attitudes

Convenient LocationsAmple Parking

Close to Other Task Oriented

StoresRelevant Merchandise Selection

Exclusive Store Merchandise

Wide Choice

Prestigious Image

High AvailabilityCompetitive PricingRapid Cash Handling

Ambience and ExcitementVisual MerchandisingIn-store FacilitiesProduct Services Centers

Product DisplaysCustomer Advice Areas

Theme DisplaysCustomer Advice Areas

Managing the International Channels of Distribution

Factors affecting international Factors affecting international tradetrade

Differences in customer expectations Differences in customer expectations across countriesacross countries

Differences in channel structure and Differences in channel structure and trade practicestrade practices

Differences in governmental policies Differences in governmental policies and regulationsand regulations

Differences in the quality of physical Differences in the quality of physical infrastructureinfrastructure

Market entry strategy Indirect exportingIndirect exporting

Direct exportingDirect exporting

LicensingLicensing

FranchisingFranchising

Contract manufacturingContract manufacturing

Strategic allianceStrategic alliance

Joint ventureJoint venture

Wholly owned subsidiaryWholly owned subsidiary

CONTROL

RISK

Success factors in manf. – overseas Success factors in manf. – overseas distributor relationshipsdistributor relationships

Distribution inhibitors

Outcomes Remedies

Separate ownership Divided loyaltiesSeller buyer atmosphereUnclear future intentions

Offering good incentives, helpful support schemes, frank discussions, and high levels of interactions

Geographic, economic,and cultural gaps

Communication blocksNegative attitudesProblems in physical distribution

Making judicious ways of two way visits, establishing a well managed communication programme

Differences in the legal and regulatory structures

Vertical trading restrictions Dismissal difficulties

Full compliance with law,drafting a strong distributor agent.

International logistics International logistics managementmanagement

International distribution system International distribution system

International suppliersInternational suppliers

Offshore manufacturingOffshore manufacturing

Fully integrated global supply chainFully integrated global supply chain

Export procedure

ExporterExporter ImporterImporter

Bank in exporter’sBank in exporter’scountrycountry

Importers bankImporters bank

ManufacturingManufacturing

Freight Freight forwarderforwarder

Transportation and Transportation and DocumentationDocumentation

formalities securedformalities secured

Import Import warehousewarehouse

CustomsCustoms brokerbroker

CustomsCustoms

ShipShip

1

2

3

4

5

6

5

8

7

9

9

Contd.

State Process

1 The Sale•Importer makes enquiry from potential supplier•Exporter sends catalogue and price list•Importer requests samples•Exporter sends Proforma invoice•Importer sends purchase order

2 Importer arranges bank financing.

3 Letter of credit send by importer’s bank

4 Exporters bank notifies that the LOC has been received

5 Exporter produces or acquires goods

6 Exporter arranges transformation and documentation and space reserved on ship or aircraft

7 Exporter ships goods to importer

8 Exporter presents documents to bank for payment

9 Importer has goods cleared through customs and delivered to the ware house

Contd.

International logistics intermediaries

Freight forwarderFreight forwardera) To forward an export shipment from the a) To forward an export shipment from the

point of origin to the ultimate destination point of origin to the ultimate destination andand

b) To deal with transport carriers to get space b) To deal with transport carriers to get space for the shipment.for the shipment.

• Customs brokerCustoms broker

Exporting documentsExporting documents

Letter of creditLetter of credit Bill of ladingBill of lading Commercial invoiceCommercial invoice Commercial invoiceCommercial invoice Consular invoiceConsular invoice Certificate of originCertificate of origin