Distribution and supply chain management- marketing mms notes

1. Distribution Management &
Marketing Mix
Sales and Distribution Management

2. The Marketing Mix
Product
Price
Promotion
Place
Distribution channels help in the ‘place’ aspect of the
marketing mix
Distribution provides place, time and possession utility to
the consumer

3. Example
Consumer wants to buy a tube of toothpaste
Made available at a retail outlet close to her residence –
place
Made available at 8 pm on a Tuesday evening when she
wants it – time
She can pay for the toothpaste and take it away –
possession
The company distribution function has made all
this possible.
The situation would be similar if a customer wants
to buy a refrigerator or medicines or even an
electric motor

4. Players Involved
The company and its distribution network
Direct company to consumer
Company to a C&FA / distribution center to
distributors to retailers
Distributor to wholesaler to retailer
All these intermediaries help the process of
‘exchange’ of the product or service.

5. Distribution Management
Management of all activities which facilitate
movement and co-ordination of supply and demand
in the creation of time and place utility in goods
The art and science of determining requirements,
acquiring them, distributing them and finally
maintaining them in an operationally ready condition
for their entire life.

6. Distribution Channels Defined
Are sets of interdependent organizations involved in
the process of making a product or service available
for use or consumption
– Stern & Ansary
Whether selling products or services, marketing
channel decisions play a role of strategic importance in
the overall presence and success a company enjoys in
the marketplace.

7. Distribution Channels
Are intermediaries or middlemen
Exist because producers cannot reach all their
consumers
Multiply reach and provide efficiency to the
marketing process
Facilitate smooth flow and create time, place and
possession utilities
Have the core competence and reach
Provide contact, experience, specialization and
scales of operation

8. Types of Channels
Sales channel motivates buyers, shares information
between company and its consumers, negotiates fair
bargains for consumers and finances the transactions
Delivery channel meant only for physical part of the
distribution
Service channel – performs after sales service

9. Listing of Channel Members
Company own sales team
C&FAs and CSAs
Distributors, dealers, stockists, value-added re-sellers
Agents and brokers
Franchisees
Electronic channels
Wholesalers
Retailers

10. C&FAs / C&SAs
C&FA: carrying and forwarding agent
C&SA: carrying and selling agent
Both are on contract with a company
Both are transporters who work between the company and its
distributors
Collect products from the company, store in a central location,
break bulk and dispatch to distributors against indents
Goods belong to the company
C&SA also sells the goods on behalf of the company but remits
proceeds after sale

11. Distributors, Dealers, Stockists, Agents
Name denotes the extent of re-distribution done by
them
Distributors invest in the products – buy products
from the company
Are on commission, margins or mark-up
May or may not get credit – but extend credit
Distributors cover the markets as per a beat plan. All
others merely finance the business.
Distributors could be exclusive for a company
Agents bring buyer and seller together

12. Wholesalers
Operate out of the main markets
Deal with a number of company products of their
choice
Are not on contract with any company
Sell to other wholesalers, retailers and institutions
Negotiate about 15 days credit from company
distributors – also provide credit to their customers
Operate on high volumes and low margins

13. Retailers
The final contact with consumers
Operate out of their shops and sell a large assortment
and variety of goods
Located closest to consumers
Buy from company, distributors or wholesalers
Highest margins in the network
Provide personalized services to their customers

14. Industrial Products
Producer
Producer
Agent/middleman
Industrial Distributor
Industrial Distributor
Industrial Customer
Industrial Customer
Customers may also directly purchase from company sales force

15. Consumer Products
Producer
Producer
Producer
Distributor
Distributor
Wholesaler
Retailer
Retailer
Retailer
Customer /
consumer
Customer/
Consumer
Customer/
Consumer
Retailers may also direct from company sales force

16. Patterns of Distribution
Determines the intensity of the distribution
Intensity decides the service level provided
Types of distribution intensity:
Intensive
Selective
Exclusive

17. Intensive Distribution
Distribution through every reasonable outlet
available – FMCG
Strategy is to make sure that the product is
available in as many outlets as possible
Preferred for consumer, pharmaceutical
products and automobile spares

18. Selective Distribution
Multiple, but not all outlets in the market
A few select outlets will be permitted to keep the
products
Outlets selected in line with the image the company
wants to project
Preferred for high value products
Tanishq jewelry
Keeps distribution costs lower

19. Exclusive Distribution
Highly selective choice of outlets – may be even one
outlet in an entire market - car dealers
Could include outlets set up by companies – Titan, Bata
Producer wants a close watch and control on the
distribution of his products.

20. Distribution Channel Strategy
Derived from the corporate strategy and the
marketing strategy
Steps for designing the distribution strategy are:
Defining customer service levels
Distribution objectives and steps
Structure of the network required
Policy and procedure to be followed
Define Key performance indicators
State Critical success factors

21. Customer Service Levels
Defined by the nature of the industry, the products,
competition and market shares.
Affordability also decides the service level
It should at least match competition.
Customer expectations have no limit

22. Distribution Objectives
Influenced by the customer expectations
Defines the extent of time, place and possession
utility which the customer can expect out of the
channel network

23. Set of Activities
Manner in which the company and its marketing channels
go about achieving the customer service levels
Some of these steps could be:
Periodic Sales forecasts
Dispatch plans
Market coverage beat plans
Journey plans for service engineers
Collection of sales proceeds
Carrying out promotional activities
The company also decides as to who is to perform which
task

24. Distribution Organization
Primary aim: determine who will do what
Major Decision points:
Extent of company support and outsourcing to be
decided
Budget for the cost of the distribution effort
Select suitable channel partners – C&FAs, and
distributors
Setting clear objectives for the partners
Agree on level of financial commitments by the channel
partners.

25. Policy and Procedure
Define policy and implementation guidelines
through Operating Manuals
Policy guidelines include
Code of conduct for channel members
System for redressal of complaints
Any additional subsidies etc
Handling institutional business
Service policy for engineering products

26. Key Performance Indicators
Consistent achievement of targets by product
groups, periods and territories
Achievement of market shares
Achievement of profitability
Zero complaints from customers
No stock returns
Ability to handle emergencies and sudden spurts
in demand

27. Key Performance Indicators
Balanced sales achievement during a period –
no period end skews
Market coverage with ready stocks
Excellent management of accounts receivables
Minimize losses on account of stock-outs
Minimize damages to products

28. Critical Success Factors
The distribution strategy also needs the support and
encouragement of top management to succeed
Some of the CSFs could be:
Clear, transparent and unambiguous policy and procedure
Serious commitment of the channel partners
Fairness in dealings
Clearly defined customer service policy
High level of integrity
Equitable distribution at times of shortage
Timely compensation of channel partners

29. Marketing Channels
Sales and Distribution Management

30. Channel Functions
Information gathering
Consumer motivation
Bargaining with suppliers
Placing orders
Financing
Inventory management
Risk bearing
After sales support

31. Distribution Channels
Take care of the following ‘discrepancies’
Spatial
Temporal
Breaking bulk
Assortment and
Financial support

32. Spatial Discrepancy
The channel system helps reduce the ‘distance’ between
the producer and the consumer of his products.
Consumers are scattered
Have to be reached cost effectively
Example: companies produce products in one location
even for global needs

33. Temporal Discrepancy
The channel system helps in speeding up in meeting
the requirement of the consumers
Time when the product is made and when it is consumed is
different
Limited number of production points but hundreds of
consumers
Maruti plant in Gurgaon – cars and spares are
available when the consumer wants

34. Breaking Bulk
The channel system reduces large quantities into
consumer acceptable lot sizes
Production has to be in large quantities to benefit from
economies of scale
Consumption is necessarily in small lot sizes
India is the ultimate example in breaking bulk – you
can buy one cigarette, one Anacin, one toffee etc

35. Need for Assortment
The channel system helps aggregate a range of
products for the benefit of the consumer – it could be
made by one company or several of them.
For the same product, it could be a variety of brands and
pack sizes
MICO makes fuel injection equipment, spark plugs etc
in different plants but its dealer will sell the entire
range.

36. Financial Support
The channel system provides critical working
capital to its customers by extending credit.
Some channel members like stockists and
wholesalers finance the business of their
customers.
Medical diagnostic equipment to hospitals

37. Channel Flows
Forward flow – company to its customers – goods and
services
Backward flow – customers to the company – payment
for the goods. Returned goods.
Flows both ways - information

38. Three Flows Recognized
Company
Payment for goods / returns
Information
FORWARD
BACKWARD
BOTH WAYS
Customers
Goods and Services

39. The Five Channel Flows
1.
2.
3.
4.
5.
Physical flow of goods
Title flow of goods (negotiation, ownership and risk
sharing also)
Payment flows (financing and payment)
Information flow (about goods, orders placed and
orders executed)
Promotion flows

40. Channel Flows
Some channel member/s have to perform them
There is a cost associated with each flow
If a channel member is discontinued, the flow has to
be performed by another
All flows and transactions can be effective only with
timely, accurate and correct information
The channel flow is ideally to be handled by the most
competent channel member who can deliver best
service at the lowest cost.

41. Direct Distribution
Company to consumers or retailers without use of
intermediaries. Also includes reaching Institutional
buyers.
Selling on the Internet
If products are technically complex, this system is
preferred
Cost is a major consideration to adopt this mode

42. Direct Distribution - Examples
Banking services
Credit cards
Petrol / diesel – company own outlets
Land line phone connections
Health services
Utilities – electricity, water
Subsidized ration
Education

43. Indirect Distribution
Goods may move through a set of intermediaries
Most FMCG companies follow this route
The intermediary has a far better reach than the company
The cost of operations of an intermediary like a
wholesaler / retailer is shared with many businesses.

44. Role of Intermediaries
Company 1
Company 2
Intermediary
Large number of CONSUMERS
Company 3

45. Indirect Distribution - Examples
All FMCG, consumer durables and pharmaceutical
Petrol / diesel / cooking gas - franchisees
Insurance
Mobile phones
All kinds of passenger transport

46. Degree of Involvement
Manufacturer
• Physical
• Title /
ownership
• Information
• Risk sharing
• Promotions
C&FA or
Distribution Center
Distributor,
dealers
Wholesaler or
retailer
• Physical
• Title
• Information
• Payment
• Order processing
• Physical
• Title / ownership
• Information
• Payment
• Order placement
• Negotiation
• Risk sharing
• Promotions
• Physical
• Title / ownership
• Information
• Payment
• Order
placement
• Negotiation
• Risk sharing
• Promotions

47. Channel Formats
Is decided by who ‘drives’ the channel system:
Producer driven
Seller driven
Service driven
Others

48. Producer Driven
This is the effort of the manufacturer to reach the
product to his consumers. Examples:
Company owned retail outlets – petrol, Bata,
Reliance mobiles
Licensed outlets – KMF
Consignment selling agents
Franchisees
Brokers
Vending machines
Company contracted distributors

49. Seller Driven
Use of existing channels to reach the largest number of
end users
Existing wholesalers and retailers
Modern retail formats
Specialty stores – Shoppers’ Stop
Discount stores – Subhiksha
Pheriwalas

50. Service Driven
These are the people who facilitate the distribution
Transporters and freight forwarders
Providers of warehouse space
C&F agents
3P Logistics service providers
Couriers

51. Other formats
Multi-level marketing systems – Amway, Modicare,
Tupperware, Herbalife
Co-operative societies
Telephone kiosks
TV home shopping
Catalogue marketing
The internet
Exhibitions, fairs and trade shows
Database marketing

52. Channel Levels
Zero level – if the product or service is provided to
the end user directly by the company.
Used mostly by companies delivering service like
health, education, banking (also known as service
channels)
One level – consists of one intermediary
Two level – consists of two intermediaries and is the
most common for FMCG products

53. Channel Levels
Producer
Producer
Producer
Wholesaler
Retailer
Retailer
Customer /
consumer
Customer/
Consumer
Customer/
Consumer
Zero level
One level
Two level

54. Marketing Channel Systems
Vertical:
Corporate
Administered
Contractual
Horizontal
Multi-channel

55. Vertical Marketing System
Various parties like producers, wholesalers and
retailers act as a unified system to avoid conflicts
Improves operating efficiency and marketing
effectiveness
3 types:
Corporate
Administered
Contractual

56. Corporate VMS
Combines successive stages of production and
distribution under single ownership
Examples:
Bata, Bombay Dyeing, Raymond
Sears, Goodyear
Suppliers of food items could be also their own
supplying firms - like Nilgiris

57. Administered VMS
Co-ordinates distribution activities
Gains market power by dominating a channel
Usually true of dominant brands like GE,
Kodak, Pepsi, Gillette, Coke and HLL in certain
locations
Command high level of co-operation in shelf space,
displays, pricing policies and promotion strategies

58. Contractual VMS
Independent producers, wholesalers and retailers
operate on a contract
Could take the forms of:
Wholesaler sponsored voluntary chains
Retailer co-operatives
Manufacturer sponsored retail or wholesale
franchise
Franchise organizations
Service firm sponsored retail franchise

59. Horizontal MS
Two or more unrelated companies join together to
pool resources and exploit an emerging market
opportunity
In-store banking in hotels, big stores
Retail outlets in petrol bunks
Coffee Day outlets in airports

60. Multi-channel Distribution
Company uses different channels to reach /
same or different market segments
Most FMCG companies have separate
networks for retail market and institutions
Pharmacy companies may use different
channels to reach doctors, chemists and
hospitals

61. Multi-channel Distribution
Used in situations where:
Same product but different market segments
Unrelated products in same market – detergents
and ice creams (HLL)
Size of buyers varies
Geographic concentration of potential consumers
varies
Reach is difficult

62. Expectations from Channel
Variety and assortment at one location
Bulk Breaking
Close to customer location
Speed of Delivery
Additional services
Support
Installation
After-sales
Financial

63. Wholesaling
Sales and Distribution Management

64. Need for Wholesalers
Widespread economy – consumers can only reached
by thousands of retailers (except for consumer
durables and industrial products)
Reaching these retailers by a company directly is not
possible (except for consumer durables and industrial
products)
Hence the need for wholesalers in two forms:
Well established free-lance wholesalers
Contracted distributors, stockists and agents

65. Characteristics of Wholesalers
Operate on large volumes but with chosen group of
products
Food, grocery, pharma or automobile spares etc
The company itself, contracted parties or free lancers,
can operate as wholesalers
Mostly B2B business – trade and institutions
Wholesaler could also be a retailer – in rural markets
– W/s sells to other retailers and also to consumers

66. Characteristics of Wholesalers
Sell physical inputs or products – tangible goods ( Ws
in some service industries)
Optimise results, maximise service (effectiveness)
and minimise operating costs (efficiency)
Buy goods for resale, keep inventory, take risks of
price changes, negotiate terms, procure orders,
deliver and extend credit.

67. Definition
Wholesaling is concerned with the activities of
those persons or establishments that sell to
retailers and other merchants and / or
industrial, institutional and commercial users
but do not sell in large amounts to consumers
US Bureau of Census

68. Delivering Value
Keep goods accessible to customers instantly
At times, get together to bargain for better
terms
Pass on benefits or incentives to their
customers
Have a wide trading area

69. Difference with Retailers
Not too worried about location, ambience or
promotions – prefer to be in the main market
Deal with other businessmen and not consumers
Deal with a specific group of products only
Much larger trading area
Much larger transactions with suppliers and
customers
Believe in low margins but high volumes.

70. Functions of Wholesalers
Varies in degree between free-lance, company
distributors and stockists / agents
Sales and promotion of chosen company products
Buying the assortment of goods
Breaking bulk to suit customer requirements
Storage and protection of goods till sold

71. Functions of Wholesalers
Grading and packing of commodities
Transportation of goods to customers
Financing the buying of customers
Bearing the risks associated with the business
Collecting and disseminating market information to both
suppliers and customers

72. Types of Wholesalers
Full service: stocking, selling, offering credit, delivery
and business assistance (company distributors,
wholesale merchants)
Limited service: range of service is limited (examples
include Metro C&C, mail order)
Merchant w/s: independent businesses
Brokers and agents: bring buyer and seller together –
do not take possession of goods
Others: agri business, auction companies etc

73. Limitations of Wholesalers
Some of them do not give complete information to
suppliers for selfish reasons
Cannot be relied on to do equitable distribution
At times, do not want company and customers to
meet
Tend to hoard goods and influence pricing
Consumers have no say in pricing or quality in a w/s
dominated system

74. Major Wholesaling Decisions
Which markets to operate in
Manpower to employ
What products to sell
Pricing decisions / Promotional support
Credit and collections
Image and customer perception
Warehouse location and design
Inventory Control

75. Favourable Factors
Companies have limitations in market / outlet
coverage. Wholesalers are required to fill the gaps
Hundreds of small companies who cannot afford to
set up distribution networks – need to depend on
wholesalers
In food grains, fruits and vegetables – hardly any
organised distribution network. Wholesalers help
move goods from farm gate to consumers

76. Favorable Factors
Big companies also need wholesalers to get big volumes
W/s extend credit to customers. Companies cannot
match this
Retailers have to visit w/s markets to buy food grains,
cereals and pulses – buy a lot more.

77. Unfavorable Factors
Companies coverage focus on retailers and institutions
through their distributors
Using modern retail formats as wholesalers
More outlets like Metro C&C being encouraged
Enforcing strict price control so that w/s do not sell below
company prices.

78. Distributor
Is a wholesaler nominated by a company to
exclusively re-distribute the company products to its
customers in a designated territory. He does not deal
in competitor’s products. Does not sell from his
premises. Extends credit selectively.
A redistribution stockist for HLL
A distributor for Philips lighting division
A distributor for L&T engineering division

79. Dealer
Role similar to a distributor but
May not have a clearly defined territory and may sell both in
the market and from his shop
May deal with competitive products also
Extends credit selectively.
Dealers in industrial products may have better defined roles.
Examples:
Dealer for an edible oil company
A dealer for garment brands

80. Stockist
May be working for a company with a designated
territory but does not re-distribute the stocks. Sells from
his premises. Extends credit selectively.
A stockist for paper products
A stockist for automobile spares
Re-distribution is visiting customer premises to sell
products

81. Managing Distributors
The principles are similar across industry verticals. FMCG
is the most complex.
Has the capacity to maximize sales and market shares.
Has to ensure buying goods from the company and redistribution to the trade

82. Managing Distributors
Distributor responsibilities include:
Buying adequate quantities by Stock Keeping Unit (SKU) for
redistribution
Ensuring full market coverage of all customers in the territory
assigned to him
Help finance the operations – pays for the goods upfront but
extends credit to his customers
Maintaining inventory of company products adequate at all
times to service the market
Assist company in its promotional efforts

83. Need for Distributors
Under three circumstances:
For entering a new town
For additional coverage in the same town
For replacing an existing distributor
For entering a new town, assess the potential for
business to decide:
If the town can sustain a full fledged distributor
The number of distributors required
Starts with a town profile of potential, number of
customers to be serviced and the competition.

84. Cost of Servicing
Cost benefit of using distributors to be assessed
Logistics cost of serving the market
The number of customers to be covered by category –
wholesalers, retailers, institutions
Frequency of visits to markets and outlets
Sales revenue estimate from each visit
Markets to be covered with ready stocks or order booking
for later delivery
Likely collections during each visit – gives an idea of the
credit requirements

85. Expectations from a Distributor
To be stated at the start of the relationship
Helps get the right kind of distributor also
Achieving sales targets – volume, value and packs
Financial commitment on inventory and credit
Investment in infrastructure – space, vehicles
Manpower – front line and back office
Distribution effort – market and outlet coverage as per a
beat plan with productive calls
Developing new markets and new accounts
Managing key accounts and institutional business

86. Expectations from a Distributor
Merchandising and displays in the market
Secondary sales efforts and tracking – critical for fmcg
and pharma (secondary sales is sales from the
distributor to the outlets in the market)
Effectively handling promotions and schemes
initiated by the company
Managing damaged stocks

87. Expectations from a Distributor
Organising and participation in promotional events
Assist company in making a success of launching new
products and packs
Handling consumer quality complaints
Handling statutory requirements on behalf of the
company
Payments and remittances promptly to the company

88. Retailing
Sales and Distribution Management

89. What is Retailing?
Any business entity selling to consumers directly is
retailing – in a shop, in person, by mail, on the
internet, telephone or a vending machine
Retail also has a life cycle – newer forms of retail
come to replace the older ones – the corner grocer
may change to a supermarket
Includes all activities involved in selling or renting
products or services to consumers for their home or
personal consumption

90. Retailing
Term retail derived from French word ‘retaillier’ meaning
‘to break bulk’
Characteristics:
Order sizes tend to be small but many
Caters to a wide variety of customers. Keeps a large assortment
of goods
Lot of buying in the outlet is ‘impulse’- inventory management is
critical
Selling personnel and displays are important elements of the
selling process
Strengths in ‘availability’ and ‘visibility’
Targeted customer mix decides the marketing mix of the retailer

91. Retailing
Retail stores are independent of the producers – not
attached to any of them
A survey shows that only 35% of purchases are preplanned.
The rest are ‘impulse’- greatly influenced by quality of
the merchandising efforts

92. Functions of Retailers
Marketing functions to provide consumers a wide variety
Helps create time, place and possession utilities
May add form utility (alteration of a trouser bought by a
customer)
Helps create an ‘image’ for the products he sells

93. Functions of Retailers
Add value through:
Additional services – extended store timings, credit, home
delivery
Personnel to identify and solve customer problems
Location in a bazaar to facilitate comparison shopping

94. How do Customers Decide on a Retailer?
Price
Location
Product selection
Fairness in dealings
Friendly sales people
Specialized services provided

95. Kinds of Retailers
Type of
retailer
Characteristics
Specialty store
Narrow product line with deep assortment – apparel,
furniture, books
Department
store
Several product line in different departments – Shoppers
Stop, Big Bazaar
Supermarket
Large, low-cost, low-margin, high volume, self-service
operation with a wide offering
Convenience
store
Small stores in residential areas, open long hours all days of
the week – limited variety of fast moving products like
groceries, food
Discount store
Standard merchandise sold at lower prices for low margins Subhiksha

96. Kinds of Retailers
Type of
retailer
Characteristics
Corporate
chains
More outlets owned and controlled by one firm – Globus
Voluntary chain
Wholesaler sponsored group of independent retailers
Retailer co-ops
Independent retailers with centralized buying operations
and common promotions
Consumer coops
Co-op societies of groups of consumers operating their own
stores – farmers, industrial workers etc
Franchise
organisation
Contractual arrangement between the producer and
retailers – selling products exclusively – Kemp Toys

97. Retailers’ Strengths
Choice of merchandise is their prerogative – put
pressure on producer suppliers
Many new products on offer. Can charge penalty if
products do not do well
New developments in IT help them run operations
optimally and keep track of loyal customers. Also
helps them identify profitable store locations.

98. Trade / Retail Format
Range of goods and customer service dimensions
determine the ‘format’. Elements distinguish
between stores and include:
Store ambience. (Kemp Fort)
Saving in time for shopping – interiors of practical design –
reduce time for search and pick-up of goods
Location
Physical characteristics – external appearance,
arrangement of goods
All these are parts of the positioning strategy and
influence the ‘footfalls’ to the store.

99. Categories of Shoppers (1)
Identified by Cook & Walters
Task focused shopper – visits the store to buy
specific things he has planned for
Convenience, minimum time, easily accessible goods,
pleasing store format
Grocery shopping is an example
Leisure shopper – more interested in the ambience
and environment
Has plenty of time, wants to have a good time while
shopping
Lifestyle stores are examples

100. Category of Shoppers (2)
Convenience goods (low value): probable gain from
shopping and making comparisons is small compared
to the time, effort and mental discomfort required in
the search -toothpaste
Shopping goods (high value): gain is large refrigerator
Specialty goods: clearly distinguished by brand
preferences – Maruti Zen car or Tag-Heuer watch

101. Trading Area
Catchment area from where most of the customers of
a retail store come
Corner grocery store caters to the locality in which it is
situated
Discount stores have a wider area. Subhiksha locations for
consumers in 2 km radius
Specialty stores have a much wider trading area – MTR,
Shoppers’ Stop etc
Trading area increases with the size of the store and
the variety it offers

102. Retail Strategy
Positioning of the retailer
Merchandising
Customer service
Customer communication

103. Positioning Strategy
Wide range with a high value add – Lifestyle brand of
stores
Limited range but a high value add – Tanishque jewelry
store
Limited range with a limited value add – Bata stores
Wide range of goods but a limited value add – a Food
World outlet

104. Merchandising
A set of activities involved in acquiring goods and
services and making them available at the places,
times and prices and the quantity that enable a
retailer to reach his goals
The most critical function in retail
Directly effects the revenue and profitability of the
store
Also takes into account the assortment of goods and
their quality

105. Customer Service Strategy
Developed to create ‘stickiness’ in customers
Personal data collected using IT – including
purchasing practices and preferences
Customer loyalty programs planned
Create ‘customer’ delight
Location strategy to give competitive advantage
Understanding the buying profile of the customers

106. Customer Communication
The manner in which the retailer makes himself
known to his customers. Has two parts to it:
The messages which the retailer sends to his customers and
prospects
The word of mouth support which satisfied customers give
to the retailer by talking to others
Retailer communicates about:
Announcing the opening of a store
Promotions running in the store
Additional facilities introduced by the stores

107. Pricing Strategy
Premium and indicating high value
Reasonable pricing with good value
Low pricing but high value for money
All strategies are focused on giving value to the customer

108. Product Differentiation
Feature exclusive national brands not available in
competing retailers – unlikely
Exclusivity of products – specialty stores
Mostly private labels – Westside
Feature, big, specially planned merchandising events
– Kemp Fashion sows
Introduce new products before competition - -again
unlikely

109. Retail Performance Measures
Gross margin return on inventory investment – GMROI
Gross margin multiplied by ratio of sales to inventory (50%*4=
200%)
Gross margin per full time equivalent employee
Gross margin per square foot

110. Franchising
Franchisor is the firm which wants to sell its goods or
services
Franchisee is the firm or group that are willing to sell the
products or services on behalf of the franchisor
The first party gives advice and help to the second to find good
locations, blue prints for a store, financial, marketing and
management assistance

111. Benefits to Franchisor
Faster expansion
Local franchisee pays lower advertising rates than a
national firm
Owners motivated to work more hours than mere
employees
Local taxes and licenses are responsibility of franchisees

112. Benefits to Franchisee
Quick recognition among potential customers
Management training provided by principal
Principal may buy ingredients and supplies and sell to
franchisee at lower prices
Financial assistance
Promotional aids, in-store displays etc

113. Retailing on the Internet
Unlimited assortment
Items may not be on hold – someone has to deliver
the product – delays
No product touch or feel
More info makes the customer a better shopper
Comparison shopping possible
Consumer has to plan purchases ahead
No need to handle cash – payment can be on-line
Shopping is 24X7

114. E-tailing Issues
Logistics support to selling
Payment gateway
Customer product returns
Conflicts with Brick &Mortar – overcome by selling
separate products

115. Designing Distribution Channels
Sales and Distribution Management

116. Channel Design Factors
Product mix and nature of the product
Width and depth of market / outlet coverage planned
Long term commitments to channel partners
Level of customer service planned
Cost affordable on the channel system
Channel control requirements of the company

117. Channel Design Steps
Define customer needs
Clarify channel objectives
Look at alternative systems which can meet these
objectives
Estimate cost of operating the channel system
Evaluate available alternatives
Finalise the ‘ideal’ system

118. Customer Needs
Lot size – most convenient pack size which the
consumer can buy at a time
Waiting time – time elapsed between the desire to
buy the product and the time when he can actually
buy it – should be almost zero
Variety – choice of products, brands, packs
Place utility – choice of buying where he wants. For a
consumer product it has to be at a location closest to
his residence

119. Channel Design Components
Revenue generation or the commercial part
Physical delivery of the goods or services – the logistics
part
The ‘service’ part to take care of after-sales support
Each part of the system is likely to be handled by a
different entity.

120. Channel Design Issues
Activities required and who will perform
Activities relationship to service levels
Number of channel members required and the
relationship between categories
Roles, responsibilities, remuneration and appraisal of
performance of channel members

121. Channel Design Process
Segmentation
Positioning
Focus
Development

122. Segmentation
Putting customers in similar clusters based on their
needs
Doctors who prescribe medicines
Chemists who dispense medicines
Hospitals and nursing homes who use them
Each segment has a different need to be serviced by
the channel
Gives an idea to the sales manager as to the kind of
channel members he should be planning for.

123. Positioning
Defines the channel element required to service each
of the segments
The sales manager decides the channel partner who is
‘ideal’ to meet the expectations of the segments.
The number of each category of intermediary is also decided
based on the number of customers to be serviced in each
segment.
The service objectives and flows for each channel partner
are also frozen

124. Focus
It may not be possible to meet the needs of all segments
– cost and practicality considerations (the managerial
talent available for instance)
The sales manager has to firmly decide which of the
segments he will service
The competitive scenario also helps in this decision

125. Development
At this stage the channel system is being put in place
to achieve the objectives
Select the best of the alternatives
Comparison with the most successful competitor could be a
good benchmark
Channel partners of competitors may be willing to
share best practices of their principals
For modifying an existing channel, the gap between
the ideal and the existing is to be identified for
remedial action.

126. Channel Objectives
Defines what the channel system is supposed to do to
support customer service.
Customer needs could include:
Lot size convenience
Minimum waiting time
Variety and assortment
Place utility
The product characteristics and the market profile
also impact the objectives.
Competition could also affect the objectives

127. Channel Alternatives
Are planned after deciding the customer segments to
be serviced and the levels of service
Business intermediaries currently available like C&FAs,
distributors, dealers, agents wholesalers and retailers.
The number and type of intermediaries required
Developing new channel types
Roles of each channel member

128. Evaluation of Major Alternatives
Cost of operations
Ability to manage
and control
Adaptability
Range and volume
to be handled

129. Evaluation Critieria
Cost:
If existing sales force can be expanded cost effectively, this is
the best alternative
Cost of alternatives at different volumes can only be
estimated for comparison
System with the lowest cost is preferred
Adaptability – the channel should be flexible to
handle different types of markets and changes in the
market conditions
Volume and range to be handled – Capable even
when business grows or expands

130. Evaluation Criteria
Ability to manage and control:
Distribution network being an extended arm of the company,
the channel partners have some obligations
Operating guidelines specify these rules
The channel system should help the company enforce these
rules fairly to all channel partners
Some of the operating rules are……
Company trains channel personnel and provides proper
product literature

131. Selecting Channel Partners
Getting good channel partners is a difficult part of
doing business
Some of the methods employed to select channel
partners are:
Sales people identify prospects and talk to them
Press advertising (industrial goods)
Existing channel partners can give good references
Competitors’ channel members for reference, not poaching

132. Selection Criteria
Qualitative: willingness, confidence in company products,
willingness to abide by company rules, building company
image, innovativeness etc
Quantitative: financial status, infrastructure, location,
present businesses, customer relationships, market
standing etc

133. Training Channel Members
Starts from the time of recruitment
Channel member owner and his staff
Market views channel member as part of the
company – he has to behave in a like manner – hence
training assumes significance
Training could be on the job field training or
classroom training
Training is an ongoing process.

134. Subjects for Training
Field training on how the markets are to be worked to
achieve sales, collect payments and ensure the right
kind of merchandising
Class room training on company products,
competition and how to tackle it to gain market
shares
Special meetings for new product launches
Submitting reports and maintaining records
Statutory compliance

135. Subjects for Training
Care of company products
Technical specifications and answering FAQs of
customers
For technical and industrial products – recognition of
specs, installation procedure, repair and maintenance
and effective demonstrations
Servicing of automobiles and other engineering
products

136. Motivating Channel Members
Ambitious volume and growth targets – continuous
motivation required to achieve
Motivation includes:
Capacity building programs
Training
Promotions support
Marketing research support
Working with company personnel
Incentives

137. “Power” of Motivation
Reward – positive support
Coercion- threat of punitive action
Referent – positive effects of association
Legitimate – enforcing a contract
Expert – support of special knowledge
Support – additional benefits for performers
Competition – pitting against peers
French & Raven

138. Channel Members Evaluation
Effectiveness of the distribution channel determines
the success of the company
Company would like its channel partners to perform
at the highest standards possible
Need to constantly evaluate performance on sales
targets, coverage, productivity, inventory holdings,
attending to servicing requests etc

139. ROI as a Measure
Leading FMCG companies feel that an ROI of 30% for
a distributor is healthy and is a fair indication that he
is performing well.
If the ROI is more, additional tasks are given
If the ROI is less, the company may provide additional
support
Post evaluation tasks include counseling, retraining
and motivating. In extreme cases it may result in
termination.

140. Performance Evaluation
On pre-agreed tasks only. No surprises.
Specific targets on periodical basis are set.
Targets on volume and outlet productivity could be for a
week or a month
Targets relating to increasing market shares or total outlet
coverage could be for 6 months
Different weightages could be given for each of the
parameters for evaluation
The performance appraisal is open and transparent

141. Steps for Modifying Networks
Service level desired and willing to deliver
Activities required to deliver service level, who will do
it and at what cost
Derive ideal channel structure and compare with
existing to know gaps by evaluating based on
standard parameters relating to effectiveness and
efficiency
Action to bridge the gaps and put modified channel
system into place
Define key performance indicators

142. Channel Comparison Factors
Efficiency
Effectiveness
Scalability
Flexibility
Consistency
Reliability
Integrity

143. Non-store Retailing
Selling door-to-door
Vending machines
Tele-shopping networks
Selling through catalogs
Other forms of direct selling
Electronic channels

144. Retailing on the Internet
Unlimited assortment
Items may not be on hold
No product touch or feel
More information makes the customer a better
shopper
Comparison shopping possible
Consumer has to plan purchases ahead
No need to handle cash – payment can be on-line
Shopping is 24X7

145. Vertical Integration
This means owning the channel. The company does the
work of production, branding and distribution.
Downstream integration means the producer of the
goods also does the distribution – Eureka Forbes, Bata

146. Vertical Integration
Upstream integration means the seller also produces the
goods – private labels of modern retailers.
If the organization does the work of production, branding
and distribution, it is said to be vertically integrated.
Vertical Integration provides better control over the
distribution function

147. Outsourcing Distribution
Is the most prevalent situation as:
The ‘reach’ is better
The cost may be lower
The company can exploit the ‘core competence’ of its
channel partners, which is distribution
Vertical integration is a choice which will become
long term and cannot be easily changed once the
resources have been committed.
However, direct distribution (owning the channel) is
still the best solution for ‘intensive’ distribution.

148. Channel (Conflict) Management
Sales and Distribution Management

149. Channel Management
Channel system has a set of players:
Not equally motivated to implement the ideal channel
design
Whose expectations from the system differ
Is in three broad phases:
Use of power bases
Identifying and resolving channel conflicts
Channel co-ordination

150. Use of Channel Power
Channel members are dependent on each other.
The power equations between them keep them
working together.
There are basically 5 types of power bases – reward,
coercion, expert, reference and legitimacy.
2 more can be considered in Indian context as
support and competition.
Extent of dependence defines the power base which
is appropriate.

151. “Power” (Bases) of Motivation
Reward – incentives for good performance
Coercion – threat of punishment for non-performance
Referent – benefit of sheer association with a strong
company
Legitimate – arising out of a contract
Expert – specialized knowledge
Support – additional benefits for better performers only
Competition – created between channel partners

152. Countervailing Power
Balances the power exerted by one channel member.
It is not a one-sided equation.
Both the channel member and the principal can have
influence on each other.
Results from interdependence within the channel
system.
Company exerts power on the distributor to get its
coverage and revenues
Distributor has enough influence on his customers and this
is critical for the company also
Weaker partners do get exploited – ancillary units

153. Channel Coordination
Channel system is well coordinated if each member
understands his role correctly and performs it to help
the system achieve its customer service objectives.
In a coordinated channel:
Interests of all channel members are protected
Actions of all are in line with overall objectives
Flows are streamlined to desired customer service
objectives
Channel co-ordination is an on-going effort

154. Channel Conflict
Situation of discord or disagreement between
partners in the same channel system – has negative
connotations and is driven more by feelings than
facts
Conflict is part of any social system – getting
disparate entities to work together as in a channel
system is also one such social unit
If any member feels that another is working in a
manner as to affect him, conflict results

155. Channel Conflict
CHANNEL CONFLICT
GOAL
DOMAIN
PERCEPTION
Goal conflict – rising out of mismatch in understanding of
objectives by various channel members
Domain conflict – resulting due to mismatch of understanding
of responsibilities and authority
Perception conflict – due to mismatch in reading of the
market place and thus proposed actions

156. Conflicts Result From…
Each channel member wanting to pursue his own
goals
Each wants to retain his independence
There are limited resources which all of them want to
utilize in achieving their goals
Features of conflicts:
Initially latent and does not affect the working
Is not normally possible to detect till it becomes disruptive

157. Four Stages of Conflict
PERCEIVED
FELT
MANIFEST
Each stage is progressively
more severe than the earlier
one
LATENT

158. Types of Conflicts
Latent Conflict:
Some amount of discord exists but does not affect the
working or delivery of customer service objectives.
Disagreement could be on roles, expectations, perceptions,
communication.
Perceived Conflict:
Discords become noticeable – channel partners are aware of
the opposition.
Channel members take the situation in their stride and go
about their normal business
No cause for worry but the opposition has to be recognized

159. Types of Conflicts
Felt Conflict:
Reaching the stage of worry, concern and alarm. Also known as
‘affective’ conflict.
Parties are trying to outsmart each other.
Causes could be economical or personal
Needs to be managed effectively and not allowed to escalate.
Manifest Conflict:
Reflects open antagonistic behavior of channel partners.
Confrontation results.
Initiatives taken are openly opposed affecting the performance of
the channel system.
May require outside intervention to resolve

160. Root Causes for Channel Conflict
Roles not defined properly
Allocation of scarce resources between members seem unfair
to some
Differences in perception of the business environment
Future expectations not likely to materialize
Decision domain disagreements – who has to decide on what
(key account pricing)
Channel members do not agree on objectives
Misunderstanding or misinterpretation of routine business
communication

161. Resolving Conflicts
Understanding nature and intensity
Tracing the source of the conflict
Understand the impact of the conflict
Strategy and plan of action for resolution

162. Conflict Resolution Styles
Styles are a combination
of assertiveness and co-operation.
Avoidance
Aggression
Accommodation
Compromise
Collaboration
Least effort and results
Maximum effort and Best results
Kenneth W Thomas

163. Avoidance
Used by weak channel members.
Problem is postponed or discussion avoided.
Relationships are not of much importance.
As there is no serious effort on getting anything done,
conflict is avoided.

164. Aggression
Also known as a competitive or selfish style.
It means being concerned about one’s own goals
without any thought for the others.
The dominating channel partner (may be the
principal) dictates terms to the others. Long term
could be detrimental to the system.

165. Accommodation
A situation of complete surrender.
One party helps the other achieve its goals without
being worried about its own goals.
Emphasis is on full co-operation and flexibility in
approach. May generate matching feelings in the
receiver.
If not handled properly, can result in exploitation

166. Compromise
Obviously both sides have to give up something to meet
mid way.
Can only work with small and not so serious conflicts.
Used often in the earlier two stages.

167. Collaboration
Also known as a problem solving approach
Tries to maximize the benefit to both parties while
solving the dispute.
Most ideal style of conflict resolution – a win-win
approach
Requires a lot of time and effort to succeed.
Sensitive information may have to be shared

168. Channel Policies
Defines how the channel is required to operate.
Normally framed by the channel principal to guide
the operations of the channel system
If not framed properly could prove the starting point
of channel conflicts.
Some subjects of channel policies could be as seen in
the next slide:

169. Channel Policies
Markets to be covered
Customer coverage
Pricing
Product portfolio to be handled
Selection, termination of channel members
Ownership of the channel

170. The Services Sector
Twice the size of the manufacturing sector
Services offered are to be in line with customer
demand
Services have to be presented in an appealing
manner to sustain customers.
Needs specialized channels which understand the
characteristics of service delivery

171. 5 Characteristics of Services
They are intangible – can only be felt. No visual
features like size, style.
They are inseparable from their service providers – a
3P cannot deliver
They cannot be standardized – custom made and
delivered
Customers are involved to a great degree – define the
services
They are perishable – cannot be stored for delivery
later. Salvage value of an unsold service is zero.

172. Channels Used
Shorter channels than for products
Some channels used are:
Direct from service provider to user
Agents or brokers to bring buyer and seller together
Franchisees or contractors
Electronic channels
High degree of customization is provided

173. Channel Information Systems
Sales and Distribution Management

174. CIS Purpose
CIS is Channel Information Systems
CIS is the orderly flow of pertinent operational data
both internally and between channel members, for
use as a basis of decision making in specified
responsibility areas of channel management
CIS is of primary use of sales managers.

175. Information - Advantages
Useful in marketing planning – helps improve quality of
marketing decisions
Can help tap market opportunities
Provides an alert against competition
Helps spot trends – favourable or otherwise
Helps develop action plans for growth
Gives feedback on consumer needs

176. Classification of Information
Based on the use made of it by marketing – planning,
operations, decision making or control
Based on subjects – consumers, products,
competition, channels, promotions, pricing, sales
volume, value etc
Operations data – facts and figures
Also based on assumptions, anticipated occurrences
– forecasts relating to the channel system

177. Information Process
COLLECTION
PROCESSING
STORAGE
USE

178. Information Process
Collection: acquiring and placing raw data – monthly
sales by each territory
Processing: analyzing data to get meaning out of it –
arranging, modifying and interpreting the data by the
user – comparison of sales between periods
Storage: keeping the information intact till it is
needed
Use: application of information for management
decision making – sales data of the last 6 months to
forecast the sales of the next month.

179. Developing a Channel MIS
Decide what information is required
Organize information in a manner suitable
for interpretation and action
Decide who will use the information
when and for what purpose

180. Use of Information
Planning: sales forecasts or distributor indents
Control: expenses against budget
There is always a cost of collecting information.
If data collected is not used properly, the data
provider will hesitate to give the information.
The channel MIS works at the sales operational level.
It has very little strategic intent.

181. Sources of Data
Reports (oral and written) and records of channel
members, sales people
Letters, statements and market research
Any other info collected by the sales people and the
channel members from the market
External sources like business publications, magazines,
newspapers, trade journals.
In a dedicated channel system the collection of info is
well streamlined – in the JC meeting
With use of IT enabled systems collection and processing
has become simpler.

182. A Good Channel MIS…
Integrated system to handle all regular data
Useful decision support system
Reflects the style of the marketing organization
User friendly and user oriented
Convincing to the providers of the info as to its
purpose
Be cost effective
Not need for verification from other sources
Be fast and totally reliable

183. Element Importance
In a good channel MIS, it is necessary to define upfront
for each element of the MIS, the following:
Purpose of the info
Source of the info
Action possible
Impact on customer service

184. Competition Tracking
Purpose
Plan day to day corrective action to protect
market shares and shelf space
Source
Trade, channel partners and sales people
Action
possible
Spot action while in the market and taken by
channel partners or sales people
Impact on
service
Timely action to provide better support to the
trade and retain their goodwill

185. Market Logistics and SCM
Sales and Distribution Management

186. Materials Management
Materials forms the largest single cost item in most
manufacturing companies – needs to be carefully
managed
Materials management function includes planning
and control, purchasing and stores and inventory
control
Materials management is the precursor to logistics
and supply chain management

187. Logistics Defined
Logistics means having the right thing, at the right
place, at the right time
The procurement, maintenance, distribution and
replacement of personnel and materials – Webster’s
Dictionary
The science of planning, organizing and managing
activities that provide goods or services – Logistics
World, 1997

188. Logistics
Functions: planning, procurement, transportation,
supply and maintenance
Processes: requirements determination, acquisition,
distribution and conservation
Business: science of planning, design and support of
business operations of procurement, purchasing,
inventory, warehousing, distribution, transportation,
customer support, financial and human resources

189. Scope of Logistics
Choice of markets
Procurement
Plant location and layout
Inventory management
Location and management of warehouses
Choices of carriers, mode of transport
Packaging decisions
Relevant to all enterprises: manufacturing,
Government, Institutions, service organizations

190. Components of Logistics Management
Logistics Activities
Input
•Natural
Resources
•HR
•Finance
•Information
Customer service
Demand forecasting
Distribution
Communications
Inventory control
Materials handling
Order processing
Parts and service support
Plants and warehouse selection
Procurement
Packaging
Return goods handling
Salvage and scrap disposal
Traffic and transportation
Warehouse and storage
Output
• Marketing
Orientation
(competitive
Advantage)
• Time and Place
utility
• Efficient move
to customer

191. Links and Flows
General material flow/ service flow
Information flow
Information flow
Customer’s
customer
Customer
Lead Firm
Supplier
Supplier’s
supplier
General cash flow
Outbound / Downstream logistics
Inbound / Upstream logistics

192. Logistics and Marketing
Interface on:
Product design and pricing
Customer service policies
Sales forecasts and order processing
Inventory policies and location of warehouses
Channels of distribution and dispatch planning
Transportation to reach products to customers
Production wants larger production runs to minimize
time spent on set up changes on the machines.
Marketing wants smaller runs of a variety of
products.

193. Support
Activities
Value Chain (Michael Porter)
Firm’s Infrastructure
Human Resources (Organization, people, methods)
Systems and Technology
Procurement
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Primary Activities

194. Logistics Plan Outline
Internal analysis (current position)
Organization
Human resources
Transportation
Relations with internal customers
Quality of product
Quality of Service
External / situation analysis
Competitor logistics performance
Trends
External environment / economy
Public, private and contract warehouse
Public, private and contract carriage

195. Principles of Logistics Excellence
Strategic
Link logistics to corporate
strategy
Organize comprehensively
Use the power of
information
Emphasize human resources
Form strategic alliances
Operational
Focus on financial
performance
Target optimum service levels
Manage the details
Leveraging logistics volumes
Measure and react to
performance
Alling & Tyndall

196. Logistics Focus Areas
Customer service related
Packaging
Order processing
Spare parts and service support
After sales Customer service
support
Demand forecasting
Distribution communications
Return goods handling
Operations related
Plant and warehouse site
location
Procurement
Inventory control
Materials handling
Salvage and scrap disposal
Traffic and transportation
Warehousing and storage
Logistics may be confined to the company whereas SCM extends beyond

197. Supply Chain Management
Business context:
Globalization of the market place
Advances in technology
Increasingly demanding, informed customer base
Purchase decisions on dimensions of quality, price and time
Innovative supply chain:
To meet customer driven challenges
To reduce costs
Improve service levels
Enhance speed to market

198. Supply Chain Integration
Optimizing the supply chain requires
supplier and customer involvement
to integrate
processes,
policies,
systems,
database and
strategies
between diverse trading partners

199. Supply Chain Integration
Customer Analysis
Purchasing/Supplier
Partnering
Order Fulfillment
Storage &
Transportation
Integrated
Supply Chain
Management
Manufacturing/
Re-manufacturing/
Assembly
Inventory Management
and control
Demand & Lead Time
Management
Materials
Management

200. Why Carry Inventory?
Support production requirements
Support operational requirements
Maximize customer service – ensure availability when
needed – protect against uncertainty
Hedge against marketplace uncertainty
Take advantage of order quantity discounts

201. Functions of Inventory
Inventory serves as a buffer between:
Supply and demand
Customer demand and finished goods
Requirements for an operation and the output from the
previous operation
Parts and materials to begin an operation and the suppliers of
the materials

202. Factors Which Drive Inventory
Target service level parameters
Lot sizing practices
Safety stock and safety time conventions
Volume discounts and purchase arrangements
Seasonal build up needs

203. Categories of Inventory
Anticipation – built in anticipation of future demand
– peak season, strike, promotion
Fluctuation (safety) – to cover random, unpredictable
fluctuations in supply and demand and lead time – to
prevent disruption in operations, deliveries etc
Lot-size – to take advantage of quantity discounts,
reduce shipping, set up and clerical costs – also called
cycle stock

204. Categories of Inventory
Transportation – pipeline or movement inventories –
to cover the time needed to move from one point to
another – factory to distribution point for example
Hedge – for materials where prices are volatile
Maintenance, repair and operating supplies (MRO) –
to support M and O – spare parts, lubricants,
consumables etc

205. Types of Inventory
Obvious….
Raw materials
Work-in-process
Finished goods – of primary concern to marketing
Maintenance, repair and operating (MRO) supplies
In-transit, pipeline

206. Performance Measures
Inventory turns = Annual cost of goods sold /average
inventory in value
Days of sales = inventory on hand / average daily sales

207. Types of Inventory Systems
Pure Inventory – when and how much to order. RM
procurement. Simple manufacturing operations
Production Inventory – finite production rates.
Demand fluctuation. Products compete for
manufacturing capacity
Production – distribution Inventory – compete for
production capacity. Geographic placement of
inventory for best service of demand

208. Types of Classification
ABC category – most common for all
HML - high, medium, low - similar
FSND – fast moving, slow moving, non-moving, dead –
spare parts / FG
SDE – scarce, difficult, easy to obtain – procurement /
Spares
GOLF – govt, ordinary, local, foreign source –
procurement / Spares
VED – vital, essential, desirable – spare parts / FG
SOS – seasonal, off-seasonal - commodity

209. ABC Inventory Analysis
Based on Pareto’s law:
A – 20% items worth 80% of value
B – 30% items worth 15% of value
C – about 50% items account for 5% of the usage
Classify items based on the above criteria
Apply degree of control in proportion to the
importance of the group

210. Inventory Related Costs
Unit costs – basic value of the item carried
Ordering costs – generating and sending a material
release, transport, any other acquisition costs
Carrying costs – capital, storage, obsolescence
Stock-out costs
Quality costs – non-conforming goods
Other costs – duties, tooling, exchange rate
differences etc

211. Approaches for Controlling Inventory
Continuous review:
Safety stocks and forecasting methods
Excess and obsolete inventory
Part simplification and re-design
On-site supplier managed inventory
Use of supply chain inventory management systems,
Materials Requirement Planning, Distribution
Requirement Planning etc
Automated inventory tracking systems
Supplier – buyer cycle-time reduction

212. Stores Management Objectives
Providing efficient service to users
Reduce cost of carrying goods
Providing correct, updated stock figures
Controlling inventory
Preventing damage to or obsolescence of materials
Achieve all of the above with good housekeeping

213. Functions
Warehouses
Material handling
Customer Service
Receive goods
Identify goods
Sort goods
Dispatch to storage
Hold inventory
Recall, select goods
Marshal the shipment
Dispatch the shipment
Prepare records and advices
Information Transfer
Storage Function
Temporary
Permanent

214. Purpose of Warehousing
To provide desired level of customer service at the
lowest possible total cost
It is that part of the firm’s logistics system that stores
products (RM, Packing Materials, WIP, FG) at and
between point of origin and point of consumption
and provides info to management on the status,
condition and disposition of items being stored
Distribution warehousing relates mainly to FG

215. Reasons for Warehousing
Service related
Cost related
Maintain source of supply
Support customer service policies
Meet changing market conditions
Overcome time and space
differentials
Support JIT programs of suppliers
and customers
Provide customers with the right
mix of products at all times
Temporary storage of materials to
be disposed or re-cycled
Achieve production economies
Achieve transportation economies
Take advantage of Quantity
Purchase discounts and forward
buys
Least Logistics cost for a desired
level of customer service

216. Warehouses
Support manufacturing
Mix products from multiple facilities for shipment to a
single customer
Break-bulk
Aggregate
Used more as a ‘flow-thru’ point than as a ‘hoarding’
point

217. Distribution Warehousing
The objective is to set up a network of warehouses
closest to the customer locations to service markets
better and minimise cost
Could be C&FA s, depots or distribution centers
Macro location strategies:
Market positioned
Production positioned
Intermediately positioned

218. Distribution Center
Warehouse designed to speed the flow of goods and
avoid unnecessary costs
Speeds bulk-breaking to avoid inventory carrying costs
Helps to centralise control and co-ordination of logistics
activities
Products can also be cross-docked (one vehicle to
another)

219. Market Positioned
Warehouses located nearest to the final customer
Factors influencing are:
Order cycle time
Transportation costs
Sensitivity of the product
Order size
Levels of customer service offered

220. Production Positioned
Warehouses located close to the production facilities
or supply sources
Not the same level of customer service as the earlier
one
Serve as points of aggregation / collection for
products made in a number of plants
Factors influencing are:
Perishability of raw materials
Number of products in the product mix
Assortments ordered by customers
Transport consolidation rates ex; FTL

221. Intermediate Positioned
Mid point locations between the final customer and
the producer
High customer service levels possible even if products
made in number of units
Other macro approaches look at cost minimisation or
cost and demand elements to maximise profitability

222. Transportation
Very important in the Logistics function:
Movement across space or distance adds value to products
Transportation provides time and place utility
Role of transportation includes:
Provides opportunity for growth under competitive
conditions
Deeper penetration into markets
Wider distribution means greater demand
Can influence product prices favourably

223. Transportation Principles
Continuous flow
Optimise unit of cargo - stackability
Maximum vehicle unit – capacity utilization
Adaptation of vehicle unit to volume and nature of
traffic
Standardisation
Compatibility of unit load equipment
Minimum of dead weight to total weight
Maximum utilization of capital, equipment and
personnel

224. The Selection Criteria
Environmental analysis: shipper, carrier, government
regulations, public influence
Deciding objectives
Selecting mode
Select transport type within the mode
Define functions of transport
Evaluation and control – customer perception /
satisfaction, best practice benchmarking

225. Cost Factors
Can be product related or market related.
Product related: density, stowability, ease or difficulty
of handling and liability
Market related: competition, location of markets,
Government regulations, traffic in and out of the
market, seasonality of movements and impact on
customer service
Five prominent modes:
Road, rail, air, water and pipeline.
Sixth one is use of Ropeways

226. Customer Service Factors
Consistency, dependability
Transit time
Coverage – door-to-door for example
Flexibility in handling a range of products
Loss and damage performance
Additional services provided

227. Reverse Logistics
Movement of goods from the market or customer
back to the company
The need:
Increased awareness of the environment
Stringent legislation
For some it is part of the business
Profitability of dealing with scrap, surplus
Surplus, obsolescence can result due to:
Over optimistic sales forecasts, change in product specs,
errors in estimating material usage, losses in processing or
overbuying based on incentives

228. Advantages of Rail
Economy – more so for goods over long distances
Efficiency of energy
Reliability – not affected by weather conditions

229. Disadvantages
Uneconomical for small shipments and short distances
Not suitable for remote stations
Costly terminal handling facilities
Inflexible time schedules

230. Road Freight Advantages
Through movement – direct from consignor to
consignee, no transshipment
Flexibility – routes and loading routines can be easily
altered, operate day and night
Less capital costs – for own fleet + immunity from
industrial action
Fast turn-around – if articulated units like tractors
and trailers are used
Minimum delays

231. Disadvantages
Susceptibility to weather and road conditions – in
spite of the best protection
Unsuitability for heavy loads – rail transport more
economical for bulk loads
Unsuitability for long distances – again the rail
telescopic rates are more favourable

232. Air Transport Advantages
Faster mode
Reduction in cost particularly inventory
Broad service range
Increasing capabilities
Disadvantages:
High cost
Weather affects flight conditions
Limitations on heavy consignments

233. Water Transport
Advantages:
Mass movement of bulk
Lowest freight cost
Preferred for long haul of low value commodities
Disadvantages:
Not for quick transit
Suitable for certain types on commodities only

234. Pipeline Movement
Advantages:
Reliable, continuous, all weather transport
Low energy consumption – hence low cost
Low maintenance and operating costs
Underground, no space problem
Can traverse difficult terrain
Minimal transit losses
Operation round the clock, safe
Economies of scale – double the throughput for only 30%
additional cost
Disadvantage is in the investment cost

235. Ropeways
Advantages:
In hilly or inaccessible areas
Long and circuitous routes with streams / deep valleys
For commodities capable of movement in ropeway buckets
Short haulages of less than 50 kms
Areas where other carriers are uneconomical
Disadvantages:
Heavy investments
Limitations on size and quantity of haul

236. Carrier Selection
Traffic Related
Length of haul
Consignment weight
Dimensions
Value
Urgency
Regularity of shipment
Fragility
Toxicity
Perishability
Type of packing
Special handling required
Shipper related
Size of firm
Investment priorities
Marketing strategy
Network of production
and distribution
Availability of rail
sidings
Stockholding policy
Management structure
System of carrier
evaluation
Service related
Speed (transit time)
Reliability
Cost
Customer relationship
Geographical coverage
Accessibility
Availability of special
vehicles / equipment
Monitoring of goods
Unitisation
Ancillary services – bulk
breaking, storage

237. Chart of Relative Merits
Parameter
Weightage
Rail
Road
Air
Water
Pipe
line
Rope
way
Speed
30
5
6
8
4
3
3
Versatility
10
6
8
5
6
3
2
Reliability
20
6
8
5
5
7
4
Availability
10
7
8
5
6
3
2
Continuity of
service
10
6
7
5
5
8
3
Distribution cost
20
4
5
6
6
7
8
Total score
10
5.4
6.7
5.1
5.1
5.1
4.0
Overall ranking
10
2
1
4
5
5
6

238. International Sales & Distribution
Sales and Distribution Management

239. Why International?
The WTO agreement has resulted in opening up of new areas
for freer trade (Textiles, Services & Agricultural products)
China, Russia, India & the East European countries have
embraced free market policies resulting in huge opening up of
underserved populations.
Domestic competition has increased especially from imports.
Outsourcing in manufacturing and services has increased due
to cost pressures & improvement in infrastructure.

240. Choosing the Market
Factors to be borne in mind while choosing markets:
Size of the market
Language & Culture of the market
Competition in the market
Proximity of the market
Political and Financial stability of the country
Ease of doing business

241. Culture and International Business
Culture influences everything from taste &
preferences to consumption patterns and attitude to
foreigners.
Culture influences communication modes
Culture influences dress and behavior
Culture influences usage of a product
Language is very important in international business
to communicate effectively.

242. Legal Aspects of International Business
Laws vary from country to country – there is no “international
law”
Important to know the local laws to do business – on
investment, management, employment, marketing, pricing,
royalties, profit repatriation, taxation etc
Developed countries have stringent laws on safety, pollution,
intellectual property rights etc.
In times of disputes, which law will prevail – this needs to be
spelt out in contracts

243. Risks in International Business
Two main risks in international business:
Political risks – involve disruption of contracts or
payments due to sudden political changes,
expropriation of businesses etc
Commercial & Financial risks – failure of the buyer to
pay due to bankruptcy or sudden changes in the
exchange availability or rate.

244. Risks in International Business
Risks can be insured with agencies like the export
credit guarantee corporation(ECGC) for a premium
based on the country’s risk.
Letters of credit may be guaranteed by international
banks located in major financial centers like London,
New York, Singapore etc.

245. Trade Between Countries
Reasons for trade between countries include:
Non availability of a product or resource
Cost advantages in buying rather than making a
product locally
Differentiated products-Luxury products or better
designed products in the same category may be
available from different countries (cars, electronics,
textiles and garments etc)

246. International Trade-Company Perspective
Companies may choose to sell internationally for the
reasons given below:
Limited growth in home market
Overseas markets offer large profitable opportunities
Excess capacity which cannot be absorbed locally
Cost advantage over international competitors
Mitigating risk of increased domestic competition

247. Entry Strategy
Exporting through local agent
Exporting through foreign agent
Exporting to foreign importer / distributor
Setting up local office / representative
Licensing / Franchising
Setting up Joint ventures for distribution /
manufacture
Setting up wholly owned manufacturing facilities

248. Organizing for International Sales
Structure depends on volume of sales and nature of
the product.
In situations of low volumes, exporting through local
or foreign agents is cost effective
As volume grows and in complex products or large
value deals, using own sales personnel is preferable.
To be effective, it is preferable to have local personnel
in the sales force

249. Distribution
Distribution is a vital aspect of marketing – ensuring
availability of the product in the right quantity, at the right
time and right place.
More important in international markets due to distance and
transportation time.
Importers, manufacturers and retailers are increasingly asking
for Just in Time deliveries.
Distribution strategy varies from market to market depending
on size and local conditions.
Multiple channels may be used in countries.

250. Distribution Options
Depends on the volume of the business
Positioning of the product
Infrastructure of distribution in the country
Local laws – some countries insist on local companies
in the distribution business
Internet as a channel of sales and distribution

251. Role of Logistics
Very important aspect of international selling
Logistics can make up over 15% of the cost of the product
Involves multiple modes of transport – land, sea and air
Considerable paperwork and formalities to be completed
in international trade
Logistics providers now offer complete one stop solution
including distribution, invoicing and collection of payment

252. Profile of International Salespersons
Pleasant and amiable personality
Ability to adapt to foreign culture – especially food, drink etc
Conversant in one or more foreign languages
Ability to act independently and decisively
Ability to understand complexities of financing, foreign
exchange etc
Some local sales persons in the force will be useful to
overcome some barriers and leverage local networks for
business development

253. Pricing and Payment Terms
Common pricing terms are:
Ex Works – at the mfrs factory gate
FOT, FOR – free on truck / rail –loaded on truck/rail
FAS – free along side – at port next to ship
FOB – free on board – loaded on ship
C&F – cost and freight – inclusive of to destination
CIF – cost, insurance and freight – inclusive to
destination

254. Pricing and Payment Terms
Payment terms can include:
Cash in advance
Cash on delivery – cash against documents
Consignment basis – payable after sale
Usance – payment … days after acceptance of documents
Letter of credit
Long term credit financing – for machinery / projects
Each method has risks for the buyer or seller. The LC offers
safety and comfort for both

255. Currency of Pricing
The US Dollar is the most widely used currency for pricing
international sales
Importers in some countries may prefer invoicing in local
currencies like Japanese Yen or Euro or Pound Sterling,
Singapore Dollars or UAE Dirhams Saudi riyals etc.
This reduces the risk of exchange rate fluctuations for the
buyer
Exchange fluctuation is a major risk for sellers and can be
managed by hedging the currency.

256. Packing and Shipping
Packing is of two types:
Industrial packing – bulk for protection during shipping &
transport
Consumer packing – to enhance sales appeal
Packing could makeup up to 5% of product costs
Countries have laws or practices in packing which must be
understood and adhered to.
Packing depends on the product and must be suitable for
containerized shipping and mechanical handling.

257. Market Intelligence
Secondary data is very easy to gather from various
publications, agencies like chambers of commerce, trade
bodies, embassies, trade shows, internet, banks etc
Usually secondary data is sufficient to establish the feasibility
of the market.
Care must be taken to understand the data and the measures
used before drawing conclusions.