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Distribution Channels Distribution Channels ManagementManagement

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Physical Distribution, Supply Chains, and Logistics Management

Order processing Includes order entry in which the order is actually entered into a company’s information system; Order handling, which involves locating, assembling, and moving products into distribution; and order delivery Warehousing – Warehouses are used to store goods until they are sold Distribution centers are designed to efficiently receive goods from suppliers.

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Inventory management - Ensures that a company neither runs out of manufacturing components or finished goods nor incurs the expense and risk of carrying excessive stocks of these items

Transportation - The method or mode a company should utilize when moving products through domestic and global channels; the most common modes of transportation are rail, truck, air, and water.

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Transportation Companies. Transportation companies are classified into four basic types: common carriers, contract carriers, private carriers, and freight forwarders. A common carrier offers to perform services within a particular line of business for the general public. One example is a truck line operating in an area where general merchandise is handled. The truck line is available to serve all the people in the area who offer it general merchandise to haul. However, it may decline to handle such items as liquid petroleum gas or aviation gas. Examples of common carriers are United Airlines and Consolidated Freightways.

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.Contract carriers transport goods for hire by individual contract or agreement. • They do not offer to perform services for the general public; instead, they usually offer services that meet the special needs of their customers.

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.Private carriers transport their own property or deliver their services in

their own vehicles.

• Amoco has its own fleet of oceangoing crude oil carriers. • Hon Industries, a manufacturer of office furniture and products, maintains its own fleet of trucks to provide customers with fast delivery and reduce product damage. • The Hon trucks, painted with the company name and logo, also serve as advertisements.• Federal Express has a ground fleet of more than 17,000 vehicles and 145 airplanes to ensure fast, on-time delivery for its package service.

MODES

Mode Cost Speed Accessibility Capability Reliability Ease of tracing

Pipeline Low Slow Low Low High Moderate

Water Low Slow Low High Low Low

Truck Varies Fast High High High High

Rail Average Average Average High Average Low

Air High Fast Low Moderate High High

Internet Low Mod-fast Increasing Low High High

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Number of retail outlets in one day 40Frequency weeklyTotal no of outlets in a week 240To cover 100K outlets no of vans 416Operational cost per van 20,000Total cost of serve 100K outlets Rs.8.3MTurnover Calculation ExampleCost of Running Van/Other expenses Rs.20,000 p/monthDistributor’s Margin 5%Break-Even (Turnover) Rs.400KDistributors Profit 5%Sales ???

Building Distribution Infra-Structure

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• Profit margin of the total trade chain involving distributors, wholesalers, retailer is termed as trade margin• Stated trade margin vs. Actual trade margin, must be monitored by the company otherwise there will be issue of profit to trade becoming a reason for conflict• Depends upon speed of turnover and company’s brand franchise• Gathering of market information• Monitor Distributor’s ROI to ensure profit to trade• High margin to wholesales are not recommended as they start under-cutting

Trade Margin

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Total ROI to DistributorsExample of A Class Customer:Example of A Class Customer:

Average T/O per year

Investments

Yearly Profit

ROI

Rs.30M

Ensure Optimum Return to Customers

Rs.1.05M

Rs.3.0M

35%

Credit to the Market Rs.2.0M

Stocks Rs.1.0M Total Investment

= Rs.30M * 3.5%

= 1.05M 3.0M

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Sharing of Operational Cost

1.1. No CompensationNo Compensation2.2. 100% Compensation100% Compensation3.3. Percent of SalesPercent of Sales4.4. Percent of Sales plus fixed amountPercent of Sales plus fixed amount

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Reasons for Price Under-Cutting1. Mismatch of Demand & Supply2. Conversion of long term credit into Cash & Investing the fund

in some more profitable items3. Sales Promotion Scheme – Large Wholesalers buying in Bulk at

lower price then distributing the market at later stage4. Overpowering company’s distribution network by

‘large/investor’ type of wholesaler/dealer5. Not keeping track of their profitability Rolling of money by

traders6. Low cost operation – selling at lower cost7. Year-end incentive – selling at lower price in anticipation of

target incentives8. Selling the main product at cost or below cost to be

competitive in the market & earning through accessories

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Parameters For Monitoring Distributors

No of Outlets per distributorNo of ‘A’ Category outletsOptimum distance for van coverage per dayIdeal location of distributor’s warehouseOptimum No of outlets per van per dayIdeal productivity per vanOptimum van visit frequencyOptimum monthly turnover of distributors on the basis of per outlet purchase per visitOptimum distributor’s investmentNo of vans required to cover outletsIdeal credit extension in market on the basis of monthly turnover

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Parameters For Monitoring Distributors

Ideal stock cover with distributor on the basis of monthly turnoverIdeal distributors’ monthly profit including annual incentive/ Cash Discount etc (if any)Distributors’ ideal ROIIdeal sales per outlet per visit

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ConflictConflict exists when a member of marketing channel perceives another members actions to be impeding of his goalObject of each others’ frustrationExamplesPushing the inventory during lean periodExtra discount (underhand) policy to push the salesPrice Under-cutting

1. Causes of Channel ConflictRole IncongruitiesA Role is a set of prescriptions defining what the behavior of position members should be

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ConflictEach member of channel is expected to fulfill certain roleManufacturers – Demand generation, distributors – Coverage / Shelf ShareIf any one of them deviates from the given role a conflict situation may result.

2. Resource ScarcitiesDisagreement over allocation of some valuable resources to achieve goalsE.G. Allocation of retailersDirect Selling to institutions

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Conflict3. Perceptual Differences

Different perception of the same stimuli & attaching different interpretationsE.G. Pop Materials

4. Expectation DifferenceExpectations about the behavior of other channel memberPredictions/forecasts concerning the future behavior of other channelThese forecasts may turn to be inaccurate

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Conflict5. Decision domain disagreements

Channel members explicitly or implicitly carve out for themselves an area of decision making that they feel is exclusively theirsE.G. Pricing Decisions (Manufacturers’ Control VS Wholesalers’ domain)

6. Goal IncompatibilitiesEach members has his own goalsIncompatibility leads to conflictConflicting Goals on shelf share in a particular shopsConflicting Goals on Coverage

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Conflict7. Communications Difficulties

A foul-up or breakdown in communications can quickly turn a co-operative relationship into a conflicting oneFeedback on market development programChannel Conflict & EfficiencyMostly - Negative ImpactNo Effect

Higher level of dependency / commitmentPositive Effect

Conflict might serve as an impetus to re-appraise their respective policies

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ConflictManaging Channel Conflict

1. DetectAfter the fact approach – Negative EffectEarly warning systemSurveys/Visit/Actions

2. M.C. AuditA periodic/regular evaluation of key areas of relationshipCustomer focus group meetings

3. Distributors advisory councils/committeesRegular meeting to detect conflictsMake conscious efforts to detect & solve conflict

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Conflict Channel Conflict1. Pushing stock during lean period2. Extra discount (underhand) policy to push the sales3. Price under-cutting/cross flows4. Lack of consumer pull-demand generation activity by the

manufacturers5. Lack of optimization of coverage/shelf share6. Allocation of retailers7. Allocation of towns/cities – Re-organization of distribution

set-up8. New Products Distribution9. Direct selling to institutions10. Effective use of P.O.S materials

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Conflict11 Predictions / Forecasts of Sales12 Pricing decisions (Manufacturers Control VS

Distributors/Wholesalers Domain)13 Conflicting goals on shelf share/coverage14 Communication difficulties15 Feedback on business/market development program16 Expectation on year-end profitability17 Profits to the trade18 Relations with top management19 Range availability20 Selling of competition products to increase profits21 Payment on time VS delivery of stores22 Priority of stock allocation at time of shortage

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