Distribution management


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All about supply-chain management, distribution network from factory to consumer

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  • Distribution management

    1. 1. Distribution Channel Designand ManagementDr. Prashant Mishraprashant@iimcal.ac.in
    2. 2. Distribution’s Function• The major purpose of marketing is to satisfyhuman needs by delivering products of varioustypes to buyers when and where they want themand at a reasonable cost.• The “when and where” is the function ofDistribution
    3. 3. What is a Distribution Channel?• A set of interdependent organizations(intermediaries) involved in the processof making a product or service availablefor use or consumption by the consumeror business user.• Marketing Channel decisions are amongthe most important decisions thatmanagement faces and will directlyaffect every other marketing decision.
    4. 4. Why are Marketing IntermediariesUsed?• The use of intermediaries results from theirgreater efficiency in making goods availableto target markets.• Offer the firm more than it can achieve on it’sown through the intermediaries:– Contacts,– Experience,– Specialization,– Scale of operation.• Purpose: match supply from producers todemand from consumers.
    6. 6. Distribution ChannelDistribution ChannelFunctionsFunctionsDistribution ChannelDistribution ChannelFunctionsFunctionsOrderingOrderingPaymentsPaymentsCommunicationCommunicationTransferTransferNegotiationNegotiationFinancingFinancingRisk TakingRisk TakingPhysicalDistributionPhysicalDistributionInformationInformation
    8. 8. Business-to-Business ChannelsDirectWholesalerAgent
    9. 9. Business-to-Business Channel TrendsInfomediaries & Vertical Exchange
    10. 10. Conventional Distribution Channel vs.Vertical Marketing SystemsVerticalVerticalmarketingmarketingchannelchannelManufacturerRetailerConventionalConventionalmarketingmarketingchannelchannelConsumerManufacturerConsumerRetailerWholesalerWholesaler
    11. 11. Types of Vertical Marketing SystemsTypes of Vertical Marketing SystemsCorporateCommon Ownership at DifferentLevels of the ChannelCorporateCommon Ownership at DifferentLevels of the ChannelContractualContractual Agreement AmongChannel MembersContractualContractual Agreement AmongChannel MembersAdministeredLeadership is Assumed by One ora Few Dominant MembersAdministeredLeadership is Assumed by One ora Few Dominant Members
    12. 12. Vertical Marketing Systems• Corporate systems - total ownership• Administered - strong leadership• Contractual - legal relationships
    13. 13. Planning the Channel ofDistribution• Determining the structure– Marketing mix strategy– Organizational resources– External environmental factors– Market characteristics– Consumer preferences and behavior– The nature and availability of Intermediaries– Other environmental factors
    14. 14. Customers’ Desired ServiceLevels• Lot size• Waiting time• Spatial convenience• Product variety• Service backup
    15. 15. Steps in Distribution Planning
    16. 16. IntensiveDistributionIntensiveDistributionExclusiveDistributionExclusiveDistributionSelectiveDistributionSelectiveDistributionDistributionIntensityDistributionIntensityChoosing a Distribution System
    17. 17. Rural Market & Consumption
    18. 18. Rural Market: A Snap Shot 742 million people, largest potential market in the world Rural is bigger than urbanFMCGs 53%Durables 59% Source: NCAER, IMDR 2002 Estimated annual size of the rural marketFMCG Rs 50,000 croreDurables Rs 5,000 croreAgri-inputs (incl tractors) Rs 45,000 crore2 / 4 Wheelers Rs 8,000 croreTotal Rs1,08,000 crore Source: Francis Kanoi, 2002
    19. 19.  Some impressive facts about the rural sectorIn 2001-02, LIC sold 55 % of its policies in rural IndiaOf two million BSNL mobile connections, 50 % in small towns/villagesBilling per mobile in small towns in A P is higher than in HyderabadRural Market: A Snap ShotThe 24 million Kisan Credit Cards (KCC) issued in rural exceed the17.7 million credit-plus-debit cards issued in urban. A whoppingRs 52,000 crore has been disbursed under the KCC schemeOf 20 million Rediffmail signups, 60 % are from small towns. Similarlythe 1,00,000 who have transacted on Rediff online shopping site, 50per cent are from small towns
    20. 20.  Share of agriculture sector in electricity consumption has grownFrom 17.6 % (1980-81) to 29.2% (1999-2000) of total consumption.Industry share during same period is down from 58.4% to 34.8%Rural Market: A Snap Shot Growing rural incomesAnnual HH incomeUrban Rs 1,02,963Rural Rs 56,630Source: NCAER, IMDR 2002
    21. 21. Changing Rural Aspirations Changing lifestyle – restraint to release philosophy among youth Youth and women are the demand generators Buy value for money, not cheap products (branded consumption in FMCGsaccounts for 80% of sale, brands could be national or regional) Source: ORG-MARG Land and gold (traditional symbols of security) being replaced withmodern financial savings instruments1999-00 Urban Rural (million HHs)Investments made 6.23 6.18Of these, New Investors 2.53 (40%) 5.13 (80%) Source: NCAERFor marketers this means money liquidity and access to formal funds by rural customersfor purchase of high ticket items
    22. 22. What Constitutes Rural?Census of India Definitioni. Revenue villages with clear surveyed boundaries not having aMunicipality, Corporation or Boardii. Density of population not more than 400 per sq km; andiii. At least 75% of the male working population is engaged inagriculture and allied activitiesBut for most companiesIn FMCG category up to 20,000 popFor Durables up to 50,000 pop
    23. 23. Distribution of Villages in IndiaPopulation No of villages % of total villagesLess than 200 1,14,267 17.9200-499 1,55,123 24.3500-999 1,59,400 25.01,000-1,999 1,25,758 19.72,000- 4,999 69,135 10.85,000- 9,999 11,618 1.810,000 & above 3,064 0.5Total no. of villages 6,38,365 100.00Source: Census 2001
    24. 24. Distribution of Towns in IndiaTown Class Population No of towns % of total townsClass I 1 lac and above 423* 8.4Class II 50,000-99,999 498 9.9Class III 20,000- 49,999 1386 27.5Class IV 10,000- 19,999 1560 31.0Class V 5,000- 9,999 1057 21.0Class VI less than 5000 110 2.2Total no oftowns5034 100.0*10 lac+ – 275-10 lac – 421- 5 lac - 354Source: Census 2001
    25. 25. Issues in Rural Marketing Inadequate data on rural markets Lack of understanding of rural consumers Reaching products / services to 6.4 lac villages Poor infrastructure Only 40% villages connected by all weather road Though > 90 % villages electrified, only 1/3rdrural homes have electricconnections Poor availability of shops in smaller villages (figures in %) Source: IMRBShopsvillagesNone 1-4 5-15 16+< 500 pop 26 56 15 3500-1,999 pop 7 41 42 102000+ pop 2 8 44 46
    26. 26. Issues in Rural Marketing Low levels of literacyRural Literacy 59.4%Urban Literacy 80.3%Source: Census 2001 Poor reach of mass mediaSource: NRS 15 official languages and tremendous cultural diversity23263657Press Cinema TV All Media%
    27. 27. Myth 2: Purchasing power is low Number of middle class HHs (annual income Rs 45,000- 2,15,000)Rural 15.6 millionUrban 16.4 million Source: NCAERFor same income level, disposable surplus in rural is much higher thanurbanRural MythsMyth 1: Rural market is a homogeneous mass15 languages, 4 religions, cultural diversity, vastly varying ruraldemographicsLiteracy (Kerala 80%, Bihar 35%)Population Below Poverty Line (Orissa 62%, Punjab 14%)
    28. 28. Myth 3: Reaching 6 lac+ villages is a distribution nightmare Consumption in villages but purchase from townsDurables: 95% bought from 20k+ towns ( 4,000 nos)FMCGs: bought from 2,000+ pop villages ( only 84,000, or 13% oftotal villages) where 50% of rural population lives, the more affluent.Smaller villages very poor and lack shopsRural MythsMyth 4: Marketers/Ad agencies believe in TV for rural TV reach 36% only, media dark area of 240 million in Bihar, Orissa,East UP, MP and Rajasthan During sowing and harvest time electricity for agriculture but notime to watch TV, after harvest when farmers are free, electricityis diverted to industry
    29. 29. Myth 5: Urban ads are equally suitable for rural audiencesRural MythsMyth 6: Individuals decide about purchases Decision making process is often collective for expensive items Purchase process- user, influencer, decider, buyer, one whopays can all be different.So marketers must address brand message at several levels
    30. 30. Myth 7: Western market research methodology suitable for rural too Visuals/colors more effective than numerical scales for ranking/ratingSource: MARTMother of All Myths : The rural boom is over Market size has grown rapidlyBelow normal monsoons and weak agricultural prices in last 2 yearsRural Myths
    31. 31. Rural Market: Macro Scenario Flow of Institutional Credit to AgricultureNinth Plan (1997-02) Rs 2,33,700 croreTenth Plan (2002-07) Rs 7,36,570 crore Kisan Credit CardsIssued 24 million (cumm loan Rs 64,000 cr)Target (2004-05) All Eligible Farmers (50+ million ?)Source: NABARD Road construction programme to connect 1,90,000 villagesduring Tenth Plan, thus total villages connected will be 70%Source: Planning Commission
    32. 32. Marketing Opportunities Low penetration rates in rural (per 1000 HHs)Durables Urban Rural TotalMotor Cycle 56 19 29CTV 212 26 79Pressure Cooker 562 130 253Refrigerator 252 21 86FMCGsWashing Powder 759 553 612Toothpaste 712 330 438Source: NCAER
    33. 33. Source : RK SwamyRural share of household products
    34. 34. The FMCG Range - A few examplesRural Urban Rural UrbanEdible Oil Hair OilPenetration 91% 98% Penetration 71% 84%FOP Weekly Monthly FOP Fortnightly MonthlyWashing Cakes Washing PowdersPenetration 90% 92% Penetration 79% 89%FOP Weekly Fortnightly FOP Fortnightly MonthlyToothpastes ToothpowderPenetration 34% 71% Penetration 36% 37%FOP Monthly Monthly FOP Monthly MonthlyBathing Soap BiscuitsPenetration 88% 97% Penetration 56% 72%FOP Fortnight Fortnight FOP weekly Fortnight
    35. 35. Urban Rural All indiaHair Oil (ml) 211 47 93Toilet Soap (gram) 887 266 439Tooth Powder (gram) 51 15 25Tooth Paste (gram) 191 32 76Washing Powder (gram) 2523 872 1331Detergent Cakes (gram) 2138 641 1057Per Capita Consumption of key CategoriesPeriod : 2002-03Source : ORGEnormous scope to increase consumption!
    36. 36. Opportunity in Rural IndiaSource: ORGValue in RsCr**Contributionto All India –2003Population inCrPer CapitaConsumptionin RsURBAN 33100 69% 28.52 1161RURAL 14700 31% ** 73.92 199TOTAL 47800 102.44 467** Value in packaged/brandedFMCG Market Size1381282Rental455101Education211103Clothing851414Health22461175Other food items929844CerealUrbanRuralHeadFig in RsPER CAPITA ANNUAL EXPENDITURE• Raising Disposable incomeLow rental & Education cost• No.of of Middle Income House HoldsUrban is 1.6 cr & Rural is 1.5 cr(Middle income is annual house hold incomeof Rs.45k to Rs.215k: Source NCAER)50% of Rural consumption happens through whole sale coverage fromnear by feeder markets
    37. 37. Consumer Insights
    38. 38. Emerging Rural Consumer: An Insight• Not only economic indicators are encouraging, we have observedsignificant changes in values and aspirations of rural consumers• The earlier stereotypical picture of a rural consumer is giving wayto a new, ambitious and impatient consumer who clearly seemsto be in a hurry to get ahead in life.• Values such as ‘satisfaction and contentment’ are becoming passéand the emerging values seem to be:IndulgenceMaterialismAmbition – urge to get ahead in life in a hurryTransition to Partnership from Dominance (Especially withwomen)Source: Various Qualitative studies commissioned by Dabur
    39. 39. • The successful communication to rural consumers needs to besimple, not necessarily stereotypical• Functionality does dictate brand-choice; but there can be smartuse of emerging aspirations in communication and productdevelopment to create better connect with rural consumers• While rural consumers have a desire to use quality, brandedproducts, the task remains to deliver products that are in line withtheir changing life-style aspirations at a price affordable to themEmerging Rural Consumer: An Insight
    40. 40. Rural Infrastructure
    41. 41. Change & Continuity in Rural• Increased Disposable incomeSubsidy by the GovernmentMinimum Agriculture Price fixedAgricultural committees (MSP)• Increased literacy levelsEducational Policies ( Free & Mid day meals)Rural Literacy rates jumped from 44.7% to59.4% in 2001 over 1991• Increased consumptionRural Markets are prosperous & accessible for FMCG
    42. 42. • Better Transportation & infrastructureRail & RoadsMore than Rs. 4600 cr allocated to PradhanMantri Gram Sadak Yojna (PMGSY) : with avision to connect all villages above 500 popby 2007• Better Communication (Project SARI*)Telephone InternetTeledensity per 100 people : 0.3 (1995-96) to1.5 (2003-04)Television through village panchayats*Sustainable access in Rural IndiaChange & Continuity in RuralRural Markets are prosperous & accessible for FMCG
    43. 43. Growth in Rural Infrastructure• 60 % villages - connected by all-weather roads• 73 % villages - electrified• >35000 branches of commercial banks• 35 lac outlet for consumer goods• 3,05,499 fair price shops• 111.5 million Households
    44. 44. Challenges in Rural Distribution• COST OF COVERAGEViability & FrequencyHigh whole sale dependenceLogistics in coverageCost of Infrastructure• MAPPING ROUTE PLANIdentifying the towns and routesDigitized Maps• AVAILABILITY OF RIGHT CHANNEL PARTNERSUnderstanding the channel needs in Rural, like, ROI ,Appropriate credit policy, etcThrust in STR & Coverage• Synergy & Scale is critical for Rural Distribution• Appropriate hygiene in terms of Market rates is equally vital
    45. 45. Rural Distribution Models
    46. 46. Source ORGIN LACSZONE URBAN RURAL TOTAL OUTLETSNORTH 4.8 10.4 15.2EAST 3.5 10.3 13.8WEST 4.2 7.2 11.4SOUTH 4.4 7.1 11.5TOTAL 16.8 35.0 51.8OUTLETS PER LAC POPZONE URBAN RURAL TOTAL DENSITYNORTH 171 218 203EAST 137 208 190WEST 193 209 203SOUTH 172 209 195Universe of OutletsOutlet DensityZonal Distribution Spread
    47. 47. FMCG companies also responding positively to exploit the potential• Increased thrust on Direct coverageBig Companies operate with two models Van operation Sub Stockist• Making products more affordableEmergence of Sachet SKUsRs.5/- & Rs10/- price segments to increase the penetration insmaller marketsReduced Unit selling priceThe FMCG Thrust
    48. 48. Prevalent Rural Distribution ModelsVAN/SUB STOCKISTRURAL MARKETRETAILFEEDER TOWNS –WHOLE SALE –RETAILWHOLE SALESmaller companies adopt whole sale activation route owing tolack of viability
    49. 49. Van Operation• Stockist from near by Urban Market covers 4 to 5 rural markets perday• Distance covered per day will be max of 60 to 70 km (both ways)• Operated mostly on cash as per the desired frequency• It can be exclusively for the division or company as a wholeSub Stockist Operation• Gets stocks from Super Stockist’s appointed in the district• Super Stockist covers typically 10 to 15 Sub Stockist’s in thedistrict• Sub Stockist covers all outlets in his village like regular Stockist byextending credit and services• Local person in the Market results in Better Market information & Service tooutlets• Sub Stockist can cover another 4 to 5 satellite markets near by.• Better control on distributionThe Two Distribution Models
    50. 50. Designing Rural Distribution NetworkPCSMPVThe most prevalent Rural distribution models like Van & SuperStockist operation can be adopted effectively only with theabove studiesTwo Concepts:
    51. 51. Introducing the concept of P.C.SPER CAPITA SALES = ___________ANNUAL SALESTOWNPOPULATION
    54. 54. MPV – A study by RK Swamy BBDOMPI(Market Potential Index)Contributions ofAgriculture+Industry+InfrastructureTo the economic status ofthe district is used to measureMarket potentialAdjusted topopulationMPV(Market potential value)Market Potential Value is the potential that the StateDistrict hasbased on these parameters
    55. 55. MPI Parameter• Agriculture Value of output of major crop averaged over three year No. of cultivator/ labor No. of large landowner• Industry Bank advances to Industry No. of workers employed in mining & quarrying• Infrastructure to All India GDP Bank Deposit Bank credit to trade Petrol & Diesel consumption Literate Population Urban Population
    56. 56. 05001000150020002500MPVZONESMPVMPV 2393.77 1372.19 2352.42 1877.14NORTH EAST WEST SOUTHSTATE UT MPV All India RankUttar pradesh 800.41 2Punjab 507.58 6Delhi 498.37 7Rajasthan 279.37 12Haryana 230.74 13Himachal Pradesh 42.97 18Chandigarh 34.33 19North 2393.77West Bengal 724.2 3Bihar 333.7 11Orissa 154.77 15Assam 108.04 16Tripura 14.68 20Meghalaya 8.23 22Nagaland 7.64 23Arunachal Pradesh 7.31 24Manipur 7.2 25Mizoram 4.08 26Sikkim 2.34 28East 1372.19Maharastra 1532.09 1Gujarat 412.84 8Madhapradesh 357.31 10Goa 47.4 17Daman & Diu 1.6 30Dadra & Nagar Haveli 1.18 31West 2352.42Andhra Pradesh 630.37 4Tamilnadu 629.99 5Karnartaka 381.21 9Kerala 221.78 14Pondichery 8.65 21Lakshadweep 3.48 27Andaman & Nicobar 1.66 29South 1877.14North and West have the highest MPVSource RK SWAMY
    59. 59. Key Challenges in the Future Increasing occasions for use in FMCGs (consumption) Reaching the product to remote rural locations and entering more ruralhomes (penetration) Increasing rural incomes (market growth) Communicating with diverse rural audiences speaking diverse languages Making effective use of the large available infrastructurePost Offices 1,34,000Haats (periodic markets) 47,000Melas (exhibitions) 25,000Mandis (agri markets) 7,000Public Distribution Shops 3,50,000
    60. 60. Rural Markets: The Future Technology will play a key role in transforming marketsITC’s e-choupal and other IT initiatives (EID Parry, Amul DairyInformation System Kiosk)STD revolution/ mobile connectivity Proliferation of large format rural retail storesDSCL Haryali storesM & M Shubh Labh storesTATA/Rallis Kisan KendrasEscorts rural storesWarnabazaar, Maharashtra (annual sale Rs 40 crore)
    61. 61. Developing Distribution TacticsSelecting Channel PartnersSelecting Channel PartnersReward orCoercivePowerReward orCoercivePowerLegitimatePowerLegitimatePowerEconomicPowerEconomicPowerManaging the Channel of DistributionChannel Leader PowerManaging the Channel of DistributionChannel Leader PowerDistribution Channels & the Marketing MixDistribution Channels & the Marketing Mix
    62. 62. Channel Relationships• Cooperation• Conflict• Power– Coercive– Expert– Legitimate
    63. 63. Decision Making FrameworkProspectsofDestructiveConflictImportance of threatenedchannel in terms of current orpotential volume or profitabilityHigh LowHigh (FIRE) Act to avert or addressconflictAllow threatenedchannel todeclineLow(Smoke)Look for opportunitiesto reassure threatenedchannel and leverageyour powerDo nothing
    64. 64. Channel Conflict: IdentifyingThreats• First, are the channels really attempting toserve the same end users?• Second, do channels mistakenly believethey are competing when in fact they arebenefiting from each others actions?• Third, is the deteriorating profitability of agriping player genuinely the result ofanother channels encroachment?• Fourth, will a channels declinenecessarily harm a manufacturersprofits?
    65. 65. Managing Channel ConflictWHEN TWO OR MORE CHANNELS TARGETTHE SAME CUSTOMER SEGMENT• Differentiate the Channel offer.• Define Exclusive Territories.• Enhance or Change the Channels Value.
    66. 66. Managing Channel ConflictCHANNEL ECONOMICS DETERIORATE• Change the channels economic formula: (Grant rebatesif an intermediary fulfill certain requirements; Adjustmargins between products to support different channeleconomics; and Treat channels fairly to create levelplaying field)• Create Segment Specific Programs (certain servicesnot available via direct channels)• Complement value proposition of the existing channelby introducing a new channel• Foster consolidation among intermediaries in adeclining channel.
    67. 67. Managing Channel ConflictTHREATENED CHANNEL STOPPERFORMING OR RETALIATE AGAINSTTHE SUPPLIER• Leverage Power (eg. Strong Brand) againstthe channel to prevent retaliation• Migrate volume to winning channel• Back off
    68. 68. Thank You