control techniques for sales

7/29/2019 Control Techniques for Sales

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Control Techniques for SalesBy Charles Pearson, eHow Contributor

Sales professionals use various techniques to control the salesprocess.

In sales, professionals try to control the sales process and the customers while still giving the

customer various choices. Ultimately, sales representatives cannot force customers to do

anything, but they can persuade customers to perform certain actions, either by providing anoffer they can't refuse or playing on their emotions.

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Sales Forecasting Techniques

How to Say No to a Sales Rep and Then Choose Another One Print this article Sales Funnel

Sales funnels give sales management and representatives a way to control howthey move customers from being initial leads to becoming customers who actually

purchase the product or service. Sales funnels are called such becauserepresentatives start with a lot of customers at the beginning, but customers

periodically drop off until there are only a few left, similar to how a funnel is

wider at the top and narrower at the bottom. By looking at the number of
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customers who leave at each stage of the sales funnel, you can determine which

aspects of the sales process need the most work.

Sales Forecasts There are aspects of sales that you cannot control, such as certain products going

out of style. However, if you perform sales forecasts, which are predictions ofhow much you will sell over a given period, you can make adjustments to thosethings you can control. For example, if you forecast that sales will rise due to an

increased demand for a product, you can hire more representatives, manufacturers

and other workers to fulfill increased demand. If sales are expected to fall, youcan close down plants to cut costs.

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Pricing Pricing allows you to control the spending habits of your customers. By lowering

prices, you can encourage customers to purchase your products when you want

them to, such as when you're overstocked or trying to get customers used to tryinga particular product. Businesses can also use promotions, such as offering freebies

along with the purchase. For example, a car dealership can offer free oil changes

for a year to customers who buy a certain car.

Planned Obselecence

Businesses can drive customers to purchase products more than once throughplanned obsolescence. With this technique, manufacturers make products in a waythat causes them to fail after a certain period of time. Then, customers have to

continually purchase products to replace the ones that have broken down.

Scarcity Artificial scarcity encourages customers to buy a product quickly, decreasing the

chances that customers will purchase products somewhere else. For example, acoffee company might only offer a flavor for a limited period of time,

encouraging customers to buy in bulk and hoard the coffee flavor. Scarcity only

works with short-term sales and does not effectively help companies build

customer relationships (reference 5).

Read more:Control Techniques for Sales | eHow.com

http://www.ehow.com/info_8112798_control-techniques-sales.html#ixzz28moUdpnKSALES ANAYSIS

A determination of the extent to which asales forcehas met itssales objectiveswithin the

specified timeframe.
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Read more:http://www.businessdictionary.com/definition/sales-analysis.html#ixzz28mp8znLmCHANNELS OF DISTRIBUTION

Channels of Distribution

A channel of distribution or trade channel is defined as the path or route along which goods

move from producers or manufacturers to ultimate consumers or industrial users. In other words,

it is a distribution network through which producer puts his products in the market and passes itto the actual users. This channel consists of :- producers, consumers or users and the various

middlemen like wholesalers,selling agents and retailers(dealers) who intervene between the

producers and consumers. Therefore,the channel serves to bridge the gap between the point of

production and the point of consumption thereby creating time, place and possession utilities.

A channel of distribution consists of three types of flows:-

Downward flow of goods from producers to consumers Upward flow of cash payments for goods from consumers to producers Flow of marketing information in both downward and upward direction i.e. Flow of

information on new products, new uses of existing products,etc from producers toconsumers. And flow of information in the form of feedback on the

wants,suggestions,complaints,etc from consumers/users to producers.

An entrepreneur has a number of alternative channels available to him for distributing his

products. These channels vary in the number and types of middlemen involved. Some channels

are short and directly link producers with customers. Whereas other channels are long andindirectly link the two through one or more middlemen.

These channels of distribution are broadly divided into four types:-

Producer-Customer:- This is the simplest and shortest channel in which no middlemenis involved and producers directly sell their products to the consumers. It is fast and

economical channel of distribution. Under it, the producer or entrepreneur performs all

the marketing activities himself and has full control over distribution. A producer maysell directly to consumers through door-to-door salesmen, direct mail or through his own

retail stores. Big firms adopt this channel to cut distribution costs and to sell industrial

products of high value. Small producers and producers of perishable commodities also

sell directly to local consumers.

Producer-Retailer-Customer:- This channel of distribution involves only onemiddlemen called 'retailer'. Under it, the producer sells his product to big retailers (or

retailers who buy goods in large quantities) who in turn sell to the ultimateconsumers.This channel relieves the manufacturer from burden of selling the goods
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himself and at the same time gives him control over the process of distribution. This is

often suited for distribution of consumer durables and products of high value.

Producer-Wholesaler-Retailer-Customer :- This is the most common and traditionalchannel of distribution. Under it, two middlemen i.e. wholesalers and retailers areinvolved. Here, the producer sells his product to wholesalers, who in turn sell it to

retailers. And retailers finally sell the product to the ultimate consumers. This channel is

suitable for the producers having limited finance, narrow product line and who neededexpert services and promotional support of wholesalers. This is mostly used for the

products with widely scattered market.

Producer-Agent-Wholesaler-Retailer-Customer :- This is the longest channel ofdistribution in which three middlemen are involved. This is used when the producerwants to be fully relieved of the problem of distribution and thus hands over his entire

output to the selling agents. The agents distribute the product among a few wholesalers.

Each wholesaler distribute the product among a number of retailers who finally sell it tothe ultimate consumers. This channel is suitable for wider distribution of various

industrial products.

An entrepreneur has to choose a suitable channel of distribution for his product such that the

channel chosen is flexible,effective and consistent with the declared marketing policies andprogrammes of the firm. While selecting a distribution channel, the entrepreneur should compare

the costs,sales volume and profits expected from alternative channels of distribution and take

into account the following factors:-

Product Consideration:- The type and the nature of products manufactured is one of theimportant elements in choosing the distribution channel. The major product related

factors are:-

Products of low unit value and of common use are generally sold throughmiddlemen. Whereas,expensive consumer goods and industrial products are sold

directly by the producer himself.

Perishable products; products subjected to frequent changes in fashion or style aswell as heavy and bulky products follow relatively shorter routes and are

generally distributed directly to minimise costs.

Industrial products requiring demonstration, installation and aftersale service areoften sold directly to the consumers. While the consumer products of technical

nature are generally sold through retailers.

An entrepreneur producing a wide range of products may find it economical to setup his own retail outlets and sell directly to the consumers. On the other hand,

firms producing a narrow range of products may their products distribute throughwholesalers and retailers.

A new product needs greater promotional efforts in the initial stages and hencefew middlemen may be required.


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Market Consideration:- Another important factor influencing the choice of distributionchannel is the nature of the target market. Some of the important features in this respect

are:-

If the market for the product is meant for industrial users, the channel ofdistribution will not need any middlemen because they buy the product in largequantities. short one and may as they buy in a large quantity. While in the case of

the goods meant for domestic consumers, middlemen may have to be involved.

If the number of prospective customers is small or the market for the product isgeographically located in a limited area, direct selling is more suitable. While in

case of a large number of potential customers, use of middlemen becomes

necessary.

If the customers place order for the product in big lots, direct selling is preferred.But,if the product is sold in small quantities, middlemen are used to distributesuch products.

Other Considerations:- There are several other factors that an entrepreneur must takeinto account while choosing a distribution channel. Some of these are as follows:-

A new business firm may need to involve one or more middlemen in order topromote its product, while a well established firm with a good market standing

may sell its product directly to the consumers.

A small firm which cannot invest in setting up its own distribution network has todepend on middlemen for selling its product. On the other hand, a large firm can

establish its own retail outlets. The distribution costs of each channel is also an important factor because it

affects the price of the final product. Generally,a less expensive channel ispreferred. But sometimes, a channel which is more convenient to the customers is

preferred even if it is more expensive.

If the demand for the product is high,more number of channels may be used toprofitably distribute the product to maximum number of customers. But, if thedemand is low only a few channels would be sufficient.

The nature and the type of the middlemen required by the firm and its availabilityalso affects the choice of the distribution channel. A company prefers a

middlemen who can maximise the volume of sales of their product and also offersother services like storage, promotion as well as aftersale services. When the

desired type of middlemen are not available, the manufacturer will have to

establish his own distribution network.

All these factors or considerations affecting the choice of a distribution channel are inter-relatedand interdependent. Hence, an entrepreneur must choose the most efficient and cost effective

channel of distribution by taking into account all these factors as a whole in the light of the


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prevailing economic conditions. Such a decision is very important for a business to sustain long

term profitability.

distribution intensity

DefinitionThe level of aproduct'savailabilityin amarketselected by amarketer. The level of distribution

intensity the marketer chooses is oftendependentonfactorssuch as the size of thetarget market,pricing andpromotionandproduction capacity, inadditionto theamountofservicethe product

willneedafter itspurchaseif applicable.

Read more:http://www.businessdictionary.com/definition/distribution-

intensity.html#ixzz28mqTzvhE

Distribution Intensity Decisions

We have seen distribution intensity issues throughout the course, so here we will mostly consideroverall strategic issues related to these decisions.

Distribution opportunities. First of all, we must consider what is realistically available to each

firm. A small manufacturer of potato chips would like to be available in grocery stores

nationally, but this may not be realistic. We need to consider, then, both who will be willing tocarry our products and whom we would actually like to carry them. In general, for convenience

products, intense distribution is desirable, but only brands that have a certain amount of power

e.g., an established brand namecan hope to gain national intense distribution. Note that for

convenience goods, intense distribution is less likely to harm the brand imageit is not aproblem, for example, for Haagen Dazs to be available in a convenience store along with bargain

brandsit is expected that people will not travel much for these products, so they should be

available anywhere the consumer demands them. However, in the category of shopping goods,having Rolex watches sold in discount stores would be undesirablehere, consumers do travel,

and goods are evaluated by customers to some extent based on the surrounding merchandise.

(Please see the chart in the PowerPoint notes).

The product life cycle. In general, a brand can expect lesser distribution in its early stagesfewer retailers are motivated to carry it. Similarly, when a product category is new, it will be

available in fewer storese.g., in the early days, computer disks were available only in specialty

stores, but now they can be found in supermarkets and convenience stores as well. Certainproducts that are not well established may have to get their start on "infomercials," only slowly

getting entry into other types out outlets. (Please see PowerPoint chart).

Brief review of distribution intensity issues:

Full service retailers tend dislike intensive distribution. Low service channel members can "free ride" on full service sellers. Manufacturers may be tempted toward intensive distributionappropriate only for some;

may be profitable in the short run.
http://www.businessdictionary.com/definition/product.htmlhttp://www.businessdictionary.com/definition/product.htmlhttp://www.businessdictionary.com/definition/availability.htmlhttp://www.businessdictionary.com/definition/availability.htmlhttp://www.businessdictionary.com/definition/availability.htmlhttp://www.businessdictionary.com/definition/market.htmlhttp://www.businessdictionary.com/definition/market.htmlhttp://www.businessdictionary.com/definition/market.htmlhttp://www.businessdictionary.com/definition/marketer.htmlhttp://www.businessdictionary.com/definition/marketer.htmlhttp://www.businessdictionary.com/definition/marketer.htmlhttp://www.businessdictionary.com/definition/dependent.htmlhttp://www.businessdictionary.com/definition/dependent.htmlhttp://www.businessdictionary.com/definition/dependent.htmlhttp://www.businessdictionary.com/definition/factor.htmlhttp://www.businessdictionary.com/definition/factor.htmlhttp://www.businessdictionary.com/definition/factor.htmlhttp://www.businessdictionary.com/definition/target-market.htmlhttp://www.businessdictionary.com/definition/target-market.htmlhttp://www.businessdictionary.com/definition/target-market.htmlhttp://www.businessdictionary.com/definition/promotion.htmlhttp://www.businessdictionary.com/definition/promotion.htmlhttp://www.businessdictionary.com/definition/promotion.htmlhttp://www.businessdictionary.com/definition/production-capacity.htmlhttp://www.businessdictionary.com/definition/production-capacity.htmlhttp://www.businessdictionary.com/definition/production-capacity.htmlhttp://www.businessdictionary.com/definition/addition.htmlhttp://www.businessdictionary.com/definition/addition.htmlhttp://www.businessdictionary.com/definition/addition.htmlhttp://www.businessdictionary.com/definition/amount.htmlhttp://www.businessdictionary.com/definition/amount.htmlhttp://www.businessdictionary.com/definition/amount.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.businessdictionary.com/definition/need.htmlhttp://www.businessdictionary.com/definition/need.htmlhttp://www.businessdictionary.com/definition/need.htmlhttp://www.businessdictionary.com/definition/purchase.htmlhttp://www.businessdictionary.com/definition/purchase.htmlhttp://www.businessdictionary.com/definition/purchase.htmlhttp://www.businessdictionary.com/definition/distribution-intensity.htmlhttp://www.businessdictionary.com/definition/distribution-intensity.htmlhttp://www.businessdictionary.com/definition/distribution-intensity.htmlhttp://www.businessdictionary.com/definition/distribution-intensity.htmlhttp://www.businessdictionary.com/definition/distribution-intensity.htmlhttp://www.businessdictionary.com/definition/distribution-intensity.htmlhttp://www.businessdictionary.com/definition/purchase.htmlhttp://www.businessdictionary.com/definition/need.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.businessdictionary.com/definition/amount.htmlhttp://www.businessdictionary.com/definition/addition.htmlhttp://www.businessdictionary.com/definition/production-capacity.htmlhttp://www.businessdictionary.com/definition/promotion.htmlhttp://www.businessdictionary.com/definition/target-market.htmlhttp://www.businessdictionary.com/definition/factor.htmlhttp://www.businessdictionary.com/definition/dependent.htmlhttp://www.businessdictionary.com/definition/marketer.htmlhttp://www.businessdictionary.com/definition/market.htmlhttp://www.businessdictionary.com/definition/availability.htmlhttp://www.businessdictionary.com/definition/product.html


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Market balance suggests a need for diversity in product categories where intensivedistribution is appropriate.

Service requirements differ by product category.Termination of brands. A retailer may terminate a brand when carrying it under existing terms

no longer seems attractive. This can be done overtlythe channel member explicitly announcesthat the brand will no longer be carriedor more indirectly in the sense that inventory holdings

are reduced and customers are recommended substitute brand and/or products.

Maintaining channel member performance. One way to motivate channel members to carryones product is through a pull strategy. This involves establishing consumer demand, usually

through advertising and/or a strong brand image. For example, most pharmacies need to carry the

brand name Bayer aspirin to satisfy their customers. Note, however, that Bayer has invested a

great deal of money in this. Alternatively, a firm may offer contract provisions making itattractive to be carriede.g., prices may be guaranteed for some period of time. Geographical or

target market exclusivity may also be offereda retailer who knows that no one else in the area

carries the Vengeful Visions gun line will be more motivated to aggressively push the brand.

Stopping short of exclusivity, a firm may attempt to stop supplying channels that sell below acertain retail price "maintenance" levele.g., Levis may decide that they will sell to anyone

who wants to carry their jeans so long at such retailers do not sell them below a certain price.

Then, retailers can be assured that a certain margin can be achieved, and can invest in services.

"Simulating" exclusivity. When truly exclusive distribution proves undesirable, intra-brandcompetition can be reduced by offering slightly different, and thus, non-comparable versions to

different retailers.

Making exclusivity attractive. Manufacturers can motivate channel members to emphasize

their brands by creating mutual dependence. For example, Sony might agree to make a new lineof high definition televisions for sale exclusively at Best Buy if Best Buy in return will invest

heavily in repair facilities for this new product. If one retailer forsakes other brands in return for

a large discount on high quantity orders, both sides may also save money through economies ofscale. Finally, the retailer and manufacturer may develop a certain joint brand identity. For

example, the high end department stores need to carry high end cosmetics to be credible, and in

order to maintain their credibility, high end cosmetics must be available in high end stores.

Physical distribution management by Geoff LancasterThe full text of Geoff's notes is displayed below without diagrams. You can download a fullcopy of the notes in Word format (which should display diagrams correctly) byclicking here

(74k).

1 Introduction

An earlier resource pack described the decisions that must be taken when a company organises achannel or network of intermediaries who take responsibility for the management of goods as

they move from the producer to the consumer. Each channel member must be carefully selected

and the company must decide what type of relationship it seeks with each of its intermediatepartners. Having established such a network, the organisation must next consider how these
http://www.da-group.co.uk/images/stories/lecturedocs/physical_distribution.dochttp://www.da-group.co.uk/images/stories/lecturedocs/physical_distribution.dochttp://www.da-group.co.uk/images/stories/lecturedocs/physical_distribution.dochttp://www.da-group.co.uk/images/stories/lecturedocs/physical_distribution.doc


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goods can be efficiently transferred, in the physical sense, from the place of manufacture to the

place of consumption.

Physical distribution management (PDM) is concerned with ensuring the product is in the right

place at the right time.

Place has always been thought of as being the least dynamic of the 4Ps. Marketingpractitioners and academics have tended to concentrate on the more conspicuous aspects of

marketing. It is now recognised that PDM is a critical area of overall marketing management.

Much of its expertise is borrowed from military practice. During the Second World War andthe Korean and Vietnam wars, supplies officers had to perform extraordinary feats of PDM, in

terms of food, clothing, ammunition, weapons and a whole range of support equipment having to

be transported across the world. The military skill that marketing has adopted and applied toPDM is that of logistics. Marketing management realised that distribution could be organised in

a scientific way so the concept of business logistics developed, focusing attention on and

increasing the importance of PDM.

As marketing analysis became increasingly sophisticated, managers became more aware of the

costs of physical distribution. Whilst the military must win battles, the primary aim of business isto provide customer satisfaction in a manner that results in profit for the company. Business

logistical techniques can be applied to PDM so that costs and customer satisfaction are

optimised. There is little point in making large savings in the cost of distribution if, in the longrun, sales are lost because of customer dissatisfaction. Similarly, it does not make economic

sense to provide a level of service that is not really required by the customer and leads to an

erosion of profits. This cost/service balance is a basic dilemma that faces physical distributionmanagers.

A final reason for the growing importance of PDM as a marketing function is the increasinglydemanding nature of the business environment. In the past it was not uncommon for companies

to hold large inventories of raw materials and components. Although industries and individual

firms differ widely in their stockholding policies, nowadays, stock levels are kept to a minimumwherever possible. Holding stock is wasting working capital for it is not earning money for the

company. A more financially analytical approach by management has combined to move the

responsibility for carrying stock onto the supplier and away from the customer. Gilbert andStrebel (1989) pointed out that this has a domino effect throughout the marketing channel, with

each member putting pressure on the next to provide higher levels of service.

Logistical issues facing physical distribution managers today is the increasing application by

customers of just-in-time management techniques or lean manufacturing. This topic wasdiscussed in Chapter 4, but it is re-emphasised here. Hutchins (1988) stresses that companies

who demand JIT service from their suppliers carry only a few hours stock of material and

components and rely totally on supplier service to keep their production running. This

demanding distribution system is supported by company expediters whose task it is to chase theprogress of orders and deliveries, not only with immediate suppliers, but right along the chain of

supply (called supply chain integration). Lean manufacturing has been widely adopted

throughout the automotive industry where companies possess the necessary purchasing power toimpose such delivery conditions on their suppliers. Their large purchasing power also

necessitates stringent financial controls, and huge financial savings can be made in the reduction

or even elimination of stockholding costs where this method of manufacturing is employed.


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To think of the logistical process merely in terms of transportation is much too narrow a view.

Physical distribution management (PDM) is concerned with the flow of goods from the receipt of

an order until the goods are delivered to the customer. In addition to transportation, PDMinvolves close liaison with production planning, purchasing, order processing, material control

and warehousing. All these areas must be managed so that they interact efficiently with each

other to provide the level of service that the customer demands and at a cost that the companycan afford.

2 Definitions

This material considers the four principal components of PDM:

Order processing; Stock levels or inventory; Warehousing; Transportation.

PDM is concerned with ensuring that the individual efforts that go to make up the distributive

function, are optimised so that a common objective is realised. This is called the systemsapproach to distribution management and a major feature of PDM is that these functions be

integrated.

Because PDM has a well-defined scientific basis, this chapter presents some of the analyticalmethods which management uses to assist in the development of an efficient logistics system.

There are two central themes that should be taken into account:

The success of an efficient distribution system relies on integration of effort. An overall serviceobjective can be achieved, even though it may appear that some individual components of the

system are not performing at maximum efficiency.

It is never possible to provide maximum service at a minimum cost. The higher the level ofservice required by the customer, the higher the cost. Having decided on the necessary level ofservice, a company must then consider ways of minimising costs, which should never be at the

expense of, or result in, a reduction of the predetermined service level.

3 The distribution process

The distribution process begins when a supplier receives an order from a customer. The customer

is not too concerned with the design of the suppliers distributive system, nor in any supplyproblems. In practical terms, the customer is only concerned with the efficiency of the suppliers

distribution. That is, the likelihood of receiving goods at the time requested. Lead-time is the

period of time that elapses between the placing of an order and receipt of the goods. This can

vary according to the type of product and the type of market and industry being considered.

Lead-time in the shipbuilding industry can be measured in fractions or multiples of years, whilstin the retail sector, days and hours are common measures. Customers make production plans

based on the lead-time agreed when the order was placed. Customers now expect that the

quotation will be adhered to and a late delivery is no longer acceptable in most purchasingsituations.


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3.1 Order processing

Order processing is the first of the four stages in the logistical process. The efficiency of orderprocessing has a direct effect on lead times. Orders are received from the sales team through the

sales department. Many companies establish regular supply routes that remain relatively stableover a period of time providing that the supplier performs satisfactorily. Very often contracts are

drawn up and repeat orders (forming part of the initial contract) are made at regular intervalsduring the contract period. Taken to its logical conclusion this effectively does away withordering and leads to what is called partnership sourcing. This is an agreement between the

buyer and seller to supply a particular product or commodity as an when required without the

necessity of negotiating a new contract every time an order is placed.

Order-processing systems should function quickly and accurately. Other departments in thecompany need to know as quickly as possible that an order has been placed and the customer

must have rapid confirmation of the orders receipt and the precise delivery time. Even before

products are manufactured and sold the level of office efficiency is a major contributor to a

companys image. Incorrect paperwork and slow reactions by the sales office are often anunrecognised source of ill-will between buyers and sellers. When buyers review their suppliers,

efficiency of order processing is an important factor in their evaluation.

A good computer system for order processing allows stock levels and delivery schedules to be

automatically updated so management can rapidly obtain an accurate view of the sales position.Accuracy is an important objective of order processing as are procedures that are designed to

shorten the order processing cycle.

3.2 Inventory

Inventory, or stock management, is a critical area of PDM because stock levels have a direct

effect on levels of service and customer satisfaction. The optimum stock level is a function of the

type of market in which the company operates. Few companies can say that they never run out of

stock, but if stock-outs happen regularly then market share will be lost to more efficientcompetitors. Techniques for determining optimum stock levels are illustrated later in this

chapter. The key lies in ascertaining the re-order point. Carrying stock at levels below the re-order point might ultimately mean a stock-out, whereas too high stock levels are unnecessary and

expensive to maintain. The stock/cost dilemma is clearly illustrated by the systems approach to

PDM that is dealt with later.

Stocks represent opportunity costs that occur because of constant competition for thecompanys limited resources. If the companys marketing strategy requires that high stock levels

be maintained, this should be justified by a profit contribution that will exceed the extra stock

carrying costs. Sometimes a company may be obliged to support high stock levels because the

lead-times prevalent in a given market are particularly short. In such a case, the company must

seek to reduce costs in other areas of the PDM mix.

3.3 Warehousing

American marketing texts tend to pay more attention to warehousing than do British texts. This

is mainly because of the relatively longer distances involved in distributing in the USA, where it

can sometimes take days to reach customers by the most efficient road or rail routes. Thelogistics of warehousing can, therefore, be correspondingly more complicated in the USA than in

the UK. However, the principles remain the same, and indeed the European Union should be


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viewed as a large home market. Currently, many companies function adequately with their own

on-site warehouses from where goods are despatched direct to customers. When a firm markets

goods that are ordered regularly, but in small quantities, it becomes more logical to locatewarehouses strategically around the country. Transportation can be carried out in bulk from the

place of manufacture to respective warehouses where stocks wait ready for further distribution to

the customers. This system is used by large retail chains, except that the warehouses andtransportation are owned and operated for them by logistics experts (e.g. BOC Distribution,Excel Logistics and Rowntree Distribution). Levels of service will of course increase when

numbers of warehouse locations increase, but cost will increase accordingly. Again, an optimum

strategy must be established that reflects the desired level of service.

To summarise, factors that must be considered in the warehouse equation are:

Location of customers; Size of orders; Frequency of deliveries; Lead times.

3.4 Transportation

Transportation usually represents the greatest distribution cost. It is usually easy to calculatebecause it can be related directly to weight or numbers of units. Costs must be carefully

controlled through the mode of transport selected amongst alternatives, and these must be

constantly reviewed. During the past 50 years, road transport has become the dominanttransportation mode in the UK. It has the advantage of speed coupled with door-to-door delivery.

The patterns of retailing that have developed, and the pressure caused by low stock holding and

short lead times, have made road transport indispensable. When the volume of goods being

transported reaches a certain level some companies purchase their own vehicles, rather than use

the services of haulage contractors. However, some large retail chains like Marks and Spencer,Tesco and Sainsburys have now entrusted all their warehousing and transport to specialist

logistics companies as mentioned earlier.

For some types of goods, transport by rail still has advantages. When lead-time is a less criticalelement of marketing effort, or when lowering transport costs is a major objective, this mode of

transport becomes viable. Similarly, when goods are hazardous or bulky in relation to value, and

produced in large volumes then rail transport is advantageous. Rail transport is also suitable for

light goods that require speedy delivery (e.g. letter and parcel post).

Except where goods are highly perishable or valuable in relation to their weight, air transport isnot usually an attractive transport alternative for distribution within the UK where distances are

relatively short in aviation terms. For long-distance overseas routes it is popular. Here, it has the

advantage of quick delivery compared to sea transport, and without the cost of bulky and

expensive packaging needed for sea transportation, as well as higher insurance costs.

Exporting poses particular transportation problems and challenges. The need for the exporters

services needs to be such that the customer is scarcely aware that the goods purchased have been

imported. Therefore, above all, export transportation must be reliable.

The development of roll-on roll-off (RORO) cargo ferries has greatly assisted UK exporters whodistinguish between European and Near-European markets that can usually be served by road,


12/19

once the North Sea has been crossed. Deep sea markets, such as the Far East, Australasia and

America, are still served by traditional ocean-going freighters, and the widespread introduction

of containerisation in the 1970s made this medium more efficient.

The chosen transportation mode should adequately protect goods from damage in transit (a factorjust mentioned makes air freight popular over longer routes as less packaging is needed than for

long sea voyages). Not only do damaged goods erode profits, but frequent claims increaseinsurance premiums and inconvenience customers, endangering future business.

4 The systems or total approach to PDM

One of the central themes of this text has been to highlight the need to integrate marketing

activities so they combine into a single marketing effort. Because PDM has been neglected in thepast, this function has been late in adopting an integrated approach towards it activities.

Managers have now become more conscious of the potential of PDM, and recognise that

logistical systems should be designed with the total function in mind. A fragmented or disjointed

approach to PDM is a principal cause of failure to provide satisfactory service, and causesexcessive costs.

Within any PDM structure there is potential for conflict. Individual managers striving to achievetheir personal goals can frustrate overall PDM objectives. Sales and marketing management willfavour high stock levels, special products and short production runs coupled with frequent

deliveries. Against this, the transport manager attempts to reduce costs by selecting more

economical, but slower transportation methods, or by waiting until a load is full before making a

delivery. Financial management will exercise pressure to reduce inventory wherever possible anddiscourage extended warehousing networks. Production managers will favour long production

runs and standard products. It is possible for all these management areas to appear efficient if

they succeed in realising their individual objectives, but this might well be at the cost of the

chosen marketing strategy not being implemented effectively.

Burbridge (1987) has provided guidelines to how levels of service to customers can be provided

at optimal cost. Senior management must communicate overall distribution objectives to all

company management and ensure that they are understood. Ideally, the systems approach to

PDM should encompass production and production planning, purchasing and sales forecasting.Included in the systems approach is the concept of total cost, because individual costs are less

important than the total cost. The cost of holding high stocks may appear unreasonable, but if

high stocks provide a service that leads to higher sales and profits, then the total cost of all thePDM activities will have been effective. Costs are a reflection of distribution strategy, and

maximum service cannot be provided at minimum cost.

PDM as a cost centre is worth extensive analysis as this function is now recognised as a valuable

marketing tool in its own right. In homogeneous product markets, where differences in

competitive prices may be negligible, service is often the major competitive weapon. Indeed,many buyers pay a premium for products that are consistently delivered on time. Similarly, the

salesperson whose company provides a comprehensive spare parts and service facility, has a

valuable negotiating tool when discussing prices.

Distribution is not, therefore, an adjunct to marketing; it has a full place in the marketing mix

and can be an essential component of marketing strategy. In terms of marketing planning, a well-

organised business logistics system can help to identify opportunities as well as supplyingquantitative data that can be used to optimise the marketing mix as a whole.


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5 Monitoring and control of PDM

The objective of PDM is: Getting the right goods to the right place at the right time for the

least cost.

The objective seems reasonable, although it gives little guidance on specific measures of

operational effectiveness. Management needs objectives or criteria that, in turn, allow

meaningful evaluation of performance. This is the basis of monitoring and control.

5.1 Basic output of physical distribution systems

The output from any system of physical distribution is the level of customer service. This is akey competitive benefit that companies can offer existing and potential customers to retain or

attract business. From a policy point of view, the desired level of service should be at least

equivalent to that of major competitors.

The level of service is often viewed as the time it takes to deliver an order to a customer or thepercentage of orders that can be met from stock. Other service elements include technical

assistance, training and after-sales services. The two most important service elements to the

majority of firms are: Delivery - reliability and frequency; Stock availability - the ability to meet orders quickly.

To use a simple example, a companys service policy may be to deliver 40 per cent of all orders

within seven days from receipt of order. This is an operationally useful and specific serviceobjective that provides a strict criterion for evaluation. A simple delivery delay analysis (see

Figure 1) will inform management whether such objectives are being achieved or whether

corrective action is necessary to alter the actual service level in line with stated objectives. Such

an analysis can be updated on receipt of a copy of the despatch note. Management can beprovided with a summary, in the form of a management report, from which they can judge

whether corrective action is necessary. There can, of course, be over-provision of service, as wellas under provision.

Delivery date Number of orders Percentage of total orders

As promised 186 37.2

Days late

1 71 14.2

2 49 9.8

3 35 7.0

4 38 7.6

5 28 5.6


14/19

6 14 2.8

7 13 2.6

8 10 2.0

9 8 1.6

10-14 17 3.4

15-21 15 3.0

22-28 10 2.0


15/19

80

70

60

50

40

30

20

10

0 10 20 30 40 50 60 70 80 90 100

Service level (%)

Figure 2 Illustration of possible diminishing returns to service level provision

In reality, maximum consumer satisfaction and minimum distribution costs are mutually

exclusive, and there has to be some kind of trade-off. The degree of trade-off will often depend

on the degree of service sensitivity or service elasticity in the market or market segments. Two

industries may use the same product and may purchase that product from the same supplier, buttheir criteria for choosing a supplier may be very different. For example, both the sugar-

processing and oil exploration industries use large high pressure on-line valves: a sugar

processing company to control the flow of its sugar beet pulp in the sugar-making process; an oil

exploration company to control the flow of drilling fluids and crude oil on the explorationplatform. The oil industry is highly service sensitive (or elastic), and when dealing with

suppliers, price is relatively unimportant, but service levels are critical. Because of the very high

costs of operations, and the potential cost of breakdown, every effort is made to cover everycontingency. On the other hand, the sugar-processing industry is more price sensitive. Sugar

processing is seasonal, with much of the processing work being carried out within two months,

so as long as these critical two months are not disrupted, service provision can take a relativelylow priority for the remainder of the year.

In theory, service levels should be increased up to the point where the marginal marketing

expense equals the marginal marketing response. This follows the economists profit

maximisation criterion of marginal cost being equal to marginal revenue. Figure 3 illustrates this

point and it can be seen that the marginal expense (MME) of level of service provisionx1 is Yand the marginal revenue (MMR) isZ. It would pay the firm to increase service levels, since the

extra revenue generated by the increased services (MMR) is greater than the cost (MME). At

service levelx2, however, the marginal expense (Z) is higher than the marginal revenue (X), soservice provision is too high. Clearly, the theoretical point of service optimisation is where

marginal marketing expense and marginal marketing response are equal, service levelxe.

MME


16/19

Z

Y MMR

0x1

xe

x2

Service level

Figure 3 Service level versus cost/revenue

5.3 Inventory management

Inventory (or stockholding) can be described as the accumulation of an assortment of itemstoday for the purpose of providing protection against what may occur tomorrow. An inventoryis maintained to increase profitability through manufacturing and marketing support.

Manufacturing support is provided through two types of inventory system:

An inventory of the materials for production; An inventory of spare and repair parts for maintaining production equipment.

Similarly, marketing support is provided through:

Inventories of the finished product; Spare and repair parts that support the product.

If supply and demand could be perfectly coordinated, there would be no need for companies tohold stock. However, future demand is uncertain, as is reliability of supply. Hence inventoriesare accumulated to ensure availability of raw materials, spare parts and finished goods. Generally

speaking, inventories are kept by companies because they:

Act as a hedge against contingencies (e.g. unexpected demand, machinery breakdown); Act as a hedge against inflation, price or exchange rate fluctuations; Assist purchasing economies; Assist transportation economies Assist production economies; Improve the level of customer service by providing greater stock availability.

Inventory planning is largely a matter of balancing various types of cost. The cost of holdingstock and procurement has to be weighed against the cost of stock-out in terms of production

shut-downs and loss of business and goodwill that would undoubtedly arise. These various costs

conflict with each other.

Larger inventories mean more money is tied up in stock and more warehousing is needed.

However, quantity discounts are usually available for large orders (e.g. of materials for


17/19

production) and if fewer orders have to be placed, then purchasing administrative costs are

reduced. Larger inventories also reduce the risks and costs of stock-outs.

When the conflicting costs just described are added together, they form a total cost that can be

plotted as a U-shaped curve. Part of managements task is to find a procedure of ordering,resulting in an inventory level that minimises total costs. This minimum total cost procurement

concept is illustrated in Figure 4.

Total costs (A + B + C)

Inventory carrying costs (A)

Procurement costs (B)

Out-of-stock costs (C) Minimum cost re-order quantity

0 Stock replenishment quantity

Figure 4 Cost trade-off model

The economic order quantity (EOQ) is based on the assumption that total inventory costs are

minimised at some definable purchase quantity. The EOQ method simply assumes that inventorycosts are a function of the number of orders that are processed per unit of time, and the costs of

maintaining an inventory over and above the cost of items included in the inventory (e.g.

warehousing). The EOQ concept is simplistic in that it ignores transportation costs (which may

significantly increase for smaller shipments) and the effects of quantity discounts. Because ofthese limitations, the EOQ concept decreased in significance in the management of inventory,

but the widespread adoption of business computing has allowed the use of more sophisticated

versions of EOQ. An example of the traditional EOQ method is provided to give a generalunderstanding of the principles. The economic order quantity can be calculated using the

following formula:

EOQ = 2AS

I

where: A = annual usage (units)

S = ordering costs ()

I = inventory carrying cost as a percentage of inventory value

e.g. For: Annual usage = 6,000 units


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Ordering costs = 13

Inventory carrying cost = 17% (= 0.17)

Unit cost = 1.30

EOQ = 2 x 6,000 x 1.30 x 13

0.17

= 202,800

0.17

= 1,192,941.18

= 1,092.22, or 840 units at 1.30 per unit

The EOQ concept and its variations basically seek to define the most economical lot size when

considering the placement of an order. The order point method can be used to determine the idealtiming for placing an order. The calculation uses the following equation:

OP = DLt + SS

where: OP is the order point

D is the demand

Lt is the lead time

SS is the safety stock

e.g. For: Demand = 150 units per week

Lead time = 6 weeks

Safety stock = 300 units


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OP = (150 x 6) + 300

= 900 + 300

= 1,200 units

i.e. A replenishment order should be placed when inventory levels decrease to 1,200 units. The

actual size of the order placed when stock reaches this level can be calculated using the EOQformula.

As with EOQ, the order point method incorporates certain assumptions. The order point assumes

that lead times are fixed and can be accurately evaluated, which is rarely the case. However,

despite the limitations of both the EOQ and order point models, the basic principles are valid and

form the basis of more realistic and useful computer-based inventory models.

6 Summary

Discussion of PDM usually takes place from the viewpoint of the supplier. Understanding of

physical distribution is, however, just as important to the purchaser. In addition to understandingthe distribution tasks that face the supplier, the purchasing department must also appreciate

logistical techniques for inventory control and the order cycle. There is consequently a close linkbetween PDM and purchasing.

Work study-techniques and operations management can also be linked with PDM because

management is concerned with efficiency and accuracy throughout the distributive function.

Whilst a logistical system should not be inflexible, if routines can be established for certainfunctions they will assist the distribution process.

As a function of the marketing mix, PDM is linked to all other marketing sub-functions and is an

important element that plays a large part in achieving the goal of customer satisfaction.

control techniques for sales

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