Course Modules

• Two Modules

1. Marketing/Distribution Channels

2. Sales Management

• Class Participation (Individual)– 10 % - Participation in discussions

in class and coming prepared with case study/readings

– Attendance will affect CP

• Case Presentation & Submission (Group)– 10 %

• Project (Group)– 25%

• Mid Term – 20% (Open/Closed Book - TBD)

• End Term – 35 % (Open/Closed Book - TBD)

Evaluation

Session Plan

• Sessions will have following structure

• Theory and Concepts – Mode: PPT, Class Interaction and Videos

• Case Presentation by Group

• Discussion on Case – Class Discussion

» All are expected (at least) to read the case before coming to the class

• In class, group exercise

Group Formation

• Class to be divided into 7 groups of around 9 members each

• Groups can have 8-10 members – to adjust the remaining participants

• Groups can be formed– Based on your choice– Based on Roll Numbers in Attendance Sheet

• Create the groups and inform me on or before Wednesday – September 14th

Class Presentations – Cases (10%)

• Case Presentation in Class– One groups will be asked to present the case in

the class• Pre-decided groups• Each group will have to present on two cases• Every member of the group should be present during

group presentation and should have analyzed complete case

– Total 10 marks for presentations • 5 marks for each case

– Expectations from group case presentation

• Facts of the case in short 5-10 minutes

• Analysis of case 10-15 minutes

• Recommendations with justification – 10-15 minutes

• Submission of Presentation (PPT)– Same day before at the end of the session

Class Presentations - Cases

Project – 25%

• Industry as a Topic

• 3 major players in the industry – 1 Leader or MNC– 2 others (preferably Indian companies)

• Regular Project Presentations will be organized to monitor progress in project work– Every 5th or 6th session all group will have to

present for 10 minutes

Project

• Components – Distribution Module

• Type of product (use classification schemes) • Segmentation and targeting by the companies

assigned to your group • Channel Design or Structure

– Current structure » Problems if any with this design

– Gaps or possible improvements– Suggested design

• Conflicts and Resolution techniques used by companies

Project

• Physical distribution aspects – logistics

• Rural Reach

• Use of Technology in Distribution

• Motivation Techniques use to encourage channel partners

• Trade promotions

• Video– Interview of a channel partner on one or few of the points

above

Project

• Sales Module – Sales Processes – Sales Team and Sales Organization Structure

• Territory design – Sales force compensation – Sales force motivation – Training and Selection practices – Evaluation – performance appraisal – Video

• Interview and discussion with a sales person from each company

Importance of Submissions

– Penalties, if required !!

– Late submission of Case PPT and Report– Initial delay i.e. after 11 PM on the submission day

» 25% (i.e. Marks will be given out of 7.5)– More than 2 days (48 Hours) delay from the deadline

» 50% (Marks out of 5)

– Copying as it is from Old Reports or Internet• Applies to Case Submissions as well as Projects

– Plagiarism, If found or brought to the notice – No marks for that component

» Report to PGP office

Module 1 Distribution Channels

Introduction Introduction

Session 1

Introduction

Session - 1

• Marketing and Selling– Availability

• Product and Classifications

• Emergence of Marketing and Distribution Channels

• Adapting to Change– Understanding global trends

• Concept of Distribution Channels

• Growing Importance of Channels

• What is Marketing ?

– CCDVTP

Marketing

• Marketing is specifically concerned with how goods (or services) and transactions are

• created » Product

• valued » Price

• facilitated » Place

• stimulated » promotion

Selling is only the tip of the iceberg

“There will always be a need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself. Ideally, marketing should result in a customer

who is ready to buy. All that should be needed is to make the product or

service available.”Peter Drucker

Availability

• Making products or services available for use or consumption.

• Availability vs. Brand Loyalty

– Which is more important?

• Why?

Availability

• Inside IIML Campus

• Availability of only a few selected brands in each product category

– Example: Airtel vs. Vodaphone

Product

• What is a Product?

– A product is perceived by the buyer to be a combination or bundle of utilities—qualities, processes, and/or capabilities (goods, services, and ideas) that is ex-pected to provide satisfaction

• For example, apparel stores sell their customers fashion apparels, advice on the proper fit and style, and the philosophy of “Be Fashionable”.

How to assess satisfaction?

• The consumer assesses satisfaction in terms of benefits expected minus costs incurred

• It is an objective measure of the valuethe consumer places on the product

– In the buyer's mind, there is an expectation of value

Products

• Goods

• Services

• Ideas

How to assess satisfaction?

• These costs can be conceptualized on two independent dimensions

– Effort

– Risk

Risk & Effort

• Effort• is the amount of money, time, and energy the buyer is

willing to expend to acquire a given product• Monetary and Non-monetary effort • It is also defined as the objective amount of money

and time it takes to purchase a product. – effort can be measured in quantifiable terms—dollars and

units of time.

• Risk• Along with effort there is likelihood of buying error • It is the buyer's subjective assessment of the

consequences of making a purchasing mistake• It is the risk that the product will not deliver the

benefits sought

Five Types of Risk

• Financial Risk– The risk that the product will not be worth the financial

price • Psychological Risk

– The risk that a poor product choice will harm a consumer's ego

• Physical Risk– The risk to the buyer's or others' safety in using products

• Functional Risk – The risk that the product will not perform as expected

• Social Risk– The risk that a product choice may result in

embarrassment before one's friends/family/work group

Risk

• Financial risk – It is not the same as financial price

• Certain consumers' perceptions of the price of a product do not have as strong a relationship to the actual currency price (in Rupees or Dollars) as one may think

– Financial risk is accounted for by paying more for a product than is necessary to achieve an equivalent amount of utility

• consumers lower their financial risk by engaging in comparison shopping or by relying on known brands or sources (vendors)

Risk

• Psychological and social risk relate to the individual's ego and reference group influence

– Many products must overcome perpetual biases consumers have about them

• For instance, the congruence of an automobile brand with a buyer's self-image and reference group image is crucial

Risk

• Functional (performance)

– functional risk ranks as the most important

– This is not surprising because how a product functions is usually the major reason for purchase.

Risk

• Physical risk

– This was generally thought to be of greatest concern for complex products

• However, the additives and nutritional characteristics of relatively low cost food products is of growing importance to consumers

Type of Products

Convenience

Preference

Shopping

Specialty

Convenience Products

• Convenience products are defined as lowest in terms of both effort and risk– the consumer will not spend much money or time in

purchasing these products, nor does he/she perceive significant levels of risk in making a selection

• Examples– commodities, "unsought" (emergency) items, and

impulse products

– fresh produce and grocery staples, umbrellas, batteries etc.

Convenience Products

• Supplies and raw materials which are commodities can also be classified as convenience items for industrial buyers– some companies like DuPont label their new

chemicals as commodity products

• Convenience services – taxi or mass transit for end consumers and

garbage pickup for organizational consumers

Preference Products

• These products are slightly higher on the effort dimension and much higher on risk.

• The distinction between convenience and preference products – buyer perceived risk.

– The reason that the consumer perceives this higher level of risk is often through the efforts of the marketer, particularly branding and advertising

– Some companies have been successful in convincing consumers thattheir brands of low priced products convey greater benefits thancompeting ones

• Example: Bayer Aspirin

Preference Products

• The most prominent examples of preference products are in the consumer package goods industry – e.g., beer, soft drinks, toothpaste– Some consumers might "prefer" the taste and

image of Diet Coke, based on advertising appeals or brand preference. However, they are likely to substitute Diet Pepsi or perhaps a low calorie brand of iced tea if the monetary or time effort is too large

Preference Products

– Industrial preference goods • business magazines

– Some executives prefer Business Week over Fortune or particular brands of printer cartridges

– Television networks/programs, hair styling, and appliance repair also fall into this category

– Services examples of preference products• airlines, hotels, and rental cars are preference

products for most buyers

Preference Products

• More and more companies are developing a conscious strategy of moving their products into the preference category

Shopping Products

• Buyers are willing to spend a significant amount of time and money in searching for and evaluating these products

• Increased levels of risk are also perceived by consumers for these high involvement products

Shopping Products

• Clothing

• Furniture

• Automobiles

Specialty Products

• Marketing managers can attempt to move their shopping products into the specialty category. – This means that consumers will no longer "shop"

for alternatives but accept only one brand

• For example– IIM

Specialty Products

• Those products that are defined to be highest on both the risk and effort dimensions are called specialty products– The major distinction between shopping and specialty

products is on the basis of effort, not risk.– The monetary price is usually higher, as is the time

– Comments such as, [I would] "wait for weeks," and "not settle for anything less" are good indicators of the time effort that distinguishes specialty products

– At the limit, the buyer will accept no substitutes

Specialty Products

• Goods– vintage imported wines, expensive sports cars,

and paintings by well-known artists

• Specialty Services – Services of a noted heart surgeon– Dr. Naresh Trehan

• Specialty Idea– to join a select donor club for a charity or

museum

MCQ !!

• Commodities purchased in bulk (e.g., a trainload of chemicals) can be classified as

– Convenience

– Preference

– Shopping

– Specialty

Product Classification

• Based on Tangibility and Profit/Non Profit

– A "broadened" typology of products using tangibility (good, service, idea, and issue or cause) and profit/nonprofit as the dimensions

• causes or issues are different from and more intangible than ideas.

– Example, family planning is an idea, while population control is a cause

Product Classification

• Can also be classified based on

– Marketer • Business, Government, Non-profit Organization

– Consumer • Individual, Household and Organization

Product Classification

Product Classification• Search Qualities

– Attributes which a consumer can determine prior to purchasing a product

– Price, color, style, fit, feel, smell

• Experience Qualities – Attributes that can only be discerned after purchase or during

consumption

– Taste, wearability, purchase satisfaction

• Credence Qualities – Characteristics which consumers may find difficult/impossible to

evaluate even after purchase or consumption

– Few consumers possess the technical skill to evaluate whether these services are necessary or they are performed properly, even after they have been prescribed and produced by the seller

Emergence of Marketing&

Distribution Channels

• Marketing began to emerge as a distinct academic discipline during the early years of the twentieth century

• Some of the early marketing scholars began to examine the role played by middlemen in distribution channels

• Butler (1917) was the first to address explicitly the need for middlemen in distribution channels

Middlemen

Why Middleman ?

The middleman is the outstanding figure in modern marketing not because he has consciously set out to make a place for himself, nor because consumers have blindly permitted him to come between them and the manufacturers of the things they buy.

It is because he has been forced into existence, on the one handby the necessities of specialized and large scale industry and, on the other hand by the necessities of consumers equally specialized in their activities and constantly demanding more and more in the way of services which the distant manufacturer must usually rely upon the middleman to give

• (Butler, 1917)

Distribution Channels - Emergence

• Around 1920s

– The core paradigm for explaining the existence of

intermediary institutions in distribution channels

– Middlemen were seen as arising in distribution channels to perform services (marketing functions) needed by manufacturers and final customers

Emergence contd…

– These intermediary institutions, composed primarily of wholesalers and retailers, must be able to provide the services (i.e. perform marketing functions) more effectively and efficiently than producers and consumers

– In order to remain viable, these distributive institutions would need to adjust and adapt over time to enhance their effectiveness and efficiency

Key Points

• Existence of Middlemen

– To perform marketing functions (provide services) needed by producers and consumers

– More efficiently and effectively than producers and consumers

– Need to adjust and adapt over time• Adapting to the changes

– Environment, Competition, Consumer Behavior, Resources

Concept of Distribution Channel

Distribution – Concepts

• Distribution – The act of spreading or apportioning

• Channel– Any distinct part of distribution system through which a

supplier reaches a customer

• Distribution Channel– A mechanism through which products are directed to

customer either through intermediaries or direct

Definition

• Set of interdependent organizations involved in the process of making a product (or service) available for use or consumption

• An organized network (system) of agencies and institutions which, in combination, perform all the functions required to link producers with end customers to accomplish the marketing task

Definition

A set of institutions necessary to transfer the title to goods and to move goods from the point of production to the point of consumption and, as such, which consists of all the institutions and all the marketing activities in the marketing process

» American Marketing Association

Marketing Channel

• Economic Utility Perspective

– Channel is an orchestrated network that produces value for consumer by creating economic utilities

• Form, possession, time and place

Dimensions, Determinants and Bridging Activities

Dimensions Determinants Key Bridging Activities

1 Place Geographical Distance Transport

2 Time Production and Transport Storing

3 Quantity No. of buyers and sellers, volume of flows and transactions

Collection and Distribution

4 Quality Standardization and Classification

Processing, sorting, assorting and screening

Growing Importance

• Important asset of marketing strategy– Differentiator– Difficult to replicate

• End-user satisfaction– Overall brand image

• Awareness of channel importance is low– Opportunity for competitive advantage

• Difficult to create and maintain channel – Difficult and costly to change– Right the first time

Importance of Marketing Channels

IT & Ecommerce

• I-D-R– Intermediation-Disintermediation-Reintermediation

– Emergence of marketing with Intermediation• Middlemen

– Internet and Disintermediation• Emergence of e-commerce led some companies to believe that

producers will be able to connect to consumers directly and there wont be any need for intermediation

• Disintermediation will happen

IT & Ecommerce

I-D-R continue…

• Reintermediation

– Functions of distribution cannot be done away with

– Producers could not perform all the functions efficiently

• Hence, Reintermediation happened along with emergence of new types of middlemen – online channels

Disintermediation and Reintermediation

• Disintermediation– Emphasizes the removal or disappearance of intermediaries

from distribution channels, which if carried to the ultimate meaning of the term would result in the total elimination of middlemen from the channel

– Rosenbloom, 2002

• Reintermediation– Stresses a reformulation, realignment and perhaps even some

pruning of intermediaries in distribution channels but not totalelimination

– Carr, 1999

Yahoo!eBay

Amazon.com

The prediction/expectation:Disintermediation - reduction of number of intermediaries

The reality: Reintermediation - evolution of a new type of intermediary

Information technology and E-commerce

• Video– Supply Chain, Logistics, Distribution Challenges

Part 2

Sustainable Competitive Advantage

• Competitive advantage– occurs when an organization acquires or develops an

attribute or combination of attributes that allows it to outperform its competitors

• Sustainable Competitive Advantage (SCA)– Relevant, Unique, and Sustainable

• What could be the problems in focusing on Product, Price and Promotion for SCA?

Sustainable competitive advantage

Place (distribution), or Marketing

Channel Strategy

Sustainable competitive advantage

Potential for gaining competitive advantage because place is more difficult for competitors

to copy

Competitive Advantage & Marketing Mix

Marketing Mixor

the four Ps Challenges

Product Limited ability to gain and hold competitive advantage

Price Price wars erode profitability & provide unstable basis for sustaining competitive advantage

Promotion Expensive and short-lived

Place (Distribution)

Marketing channels support & enhance other Ps to meet demands of target markets

The growing power of distributors

Powerful retailers as Gatekeepers of consumer markets

Act as buying agents for customers rather than as selling agents for manufacturers

Myths Surrounding Distribution

1. A channel of distribution is the movement of a product from the manufacturer to the ultimate consumer

2. A channel's structure is determined by the characteristics of its products

3. A distribution channel is managed by the manufacturer

4. A firm should strive to maximize cooperation within its distribution channel

5. The primary function of a warehouse is storage

Myths Surrounding Distribution

6. A firm sells to or buys from another firm

7. Eliminating the middlemen will reduce distribution costs

8. Administered channels are more efficient than non-administered channels

9. A profitable channel is an efficient channel

10. Planning distribution strategy is the responsibility of the distribution manager

Case Study

How to Analyze ?

Types of Cases• Case

• Presents a comprehensive history of a problem, complete with multiple actors, contending interests etc.

– Retrospective or Narrative– Gives the real outcome

– Requires you to identify alternative options and analyze why this outcome resulted, when other - possibly “better” solutions -existed

– Decision-forcing – Stops short of revealing the outcome

– Requires you to identify and assess the range of possible options for action

Guidelines• Situation Analysis

– Based on case facts

– Key characters and/or players in the case

– Use analysis frameworks (if needed) SWOT and/or PESTLE and/or Porter’s Five Forces analysis

• Major issues raised through the case

– Key concerns/problems

– What kind of theoretical concepts can be applied to address these issues

• Alternative solutions of the problem(s) presented in the case

– As per your understanding what are possible/feasible solutions to the issues/problems in the case.

• What is your recommendation (best solution according to you, if any) along with justifications?

Guidelines

• Case is usually about multitude of problems and issues– Along with specific course/topic related issues it

may have some other issues which can be addressed using some of the concepts

– Expectation from Participants• Primarily, focus on Course and/or Topic related issues • Analyze other Marketing Area related issues in short • Highlight other issues

– Need not go into in-depth analysis

Porter’s Five Forces Model

PEST Analysis

Guidelines

• Identify key issues or concerns in the case

– May be explicit or implicit

• Address all major issues/concerns

• Answer the questions in the case, if any

Projects

Groups and Topic

1. Automotive Battery (Group-2)Exide, Standard Furukawa + any smaller player (like Addo battery)

2. Adhesives (Group-8)Huntsman, and Pidilite, Resinova Chemie, Atul Ltd. etc

3. Detergents (Group-4) P&G, Ghari (Rohit Surfactants), Jyoti Laboratories

4. Crop Protection (Group - 6)(Fertilizers, Insecticides, Herbicides etc.) - Bayer Crop Sciences, CFCL

5. Paper (Group-5)Ballarpur, Orient Paper,

Topics and Groups

6. Cement (Group-7)ACC or Ambuja, Binani, Cemex

7. Glass (Group-2)Float glass toughened glass etc. (Modi, Saint Gobain,etc.)

8. Sanitary ware (Group-3)H&R Johnson, EID Parry, Hindware etc.

9. Bicycle (Group-10)Hero, Atlas, Avon etc. & Imported Cycles

10. Tires (Group-1)Bridgestone, Michelin, Ceat/MRF

Topics and Groups

Segmentation

Segmentation

• Traditional demographic traits

• such as age, gender, education levels, and income

– no longer serve enough as a basis for marketing strategy

Segmentation • Consumers are changing

– they have become less predictable in their buying habits

– many have become affluent

– some with sophisticated tastes have become very price conscious

• As a result– tastes and purchasing patterns no longer neatly

align with age and income,

– purely demographic segmentations have lost their ability to guide companies' decisions

Segmentation

• Non-demographic traits • such as values, tastes, and preferences

– They more likely to influence consumers' purchases than their demographic traits were

• Sound marketing strategy depended on identifying segments that were potentially receptive to a particular brand and product category

Segmentation

• The most common error marketers commit is applying segmentations designed to shed light on one kind of issue to some other purpose for which they were not designed

– Which raises an important question

• What kinds of segmentations are best for which purposes?

Segmentation

• Begin by evaluating the expectations consumers bring to a particular kind of transaction

– These can be located on ‘gravity of decision’spectrum,

• which suggests how deeply you need to probe consumers' motives, concerns, and even psyches

Segmentation

• Some decisions people make are relatively inconsequential– if the product is unsatisfactory, at worst a small amount

of money has been wasted and a bit of inconvenience incurred

• But decisions such as buying a home or choosing a cancer treatment have momentous significance – given their potential for benefit or harm and the

expense associated with them

Segmentation

• At the shallow end of the spectrum– consumers are seeking products and services they think

will save them time, effort, and money• So segmentations for items such as toiletries and snacks try to

measure things like the price sensitivity, habits, and impulsiveness of the target consumer

• Middle of Spectrum– Segmentations for big-ticket purchases like cars and

electronic devices• test how concerned consumers are about quality, design,

complexity, and the status a product might confer

Segmentation

• The deepest end of spectrum– consumers' emotional investment is great, and

their core values are engaged.

– Those values are often in conflict with market values, and segmentations need to expose these tensions.

• Health care is a high-gravity issue– Next slide : "What Is at Stake?" maps out the differences in

business decisions, consumer decisions, and approaches to segmentation that emerge as the gravity of a consumer's buying decision increases

What is at Stake?

• Is Brand Loyalty different from Outlet Loyalty?

Goodyear – The Aquatred Launch

Summing Up - Aquatred Launch

• Theoretical Concepts

– Intensity of Distribution

– Type of Channel Participants/Members

– Effect of type of product, consumer behavior, tastes, preferences, loyalty on channel choice

• Segmentation and Positioning

– Design/modification and management of distribution channels

– Channel Relationships

Franchising

– AHLL Case Presentation and Discussion

What is Franchising

• Independent businesses made to appear as a corporate chain

– Franchisor

– Franchisee

• Franchising is a way to do business between two companies

– One party, called franchisor, creates a way/method to do business with the second party, called a franchisee

– Franchisors normally charge a fee and demand a percentage of the profits that the franchisee makes

What is Franchising?

Why Franchising?

• Franchising provides one of the best ways to enter the market for a company that is looking for rapid expansion

• It is also the most commonly used form in service distribution as well as retailing

• Franchising does not require upfront investment from the company

• The company is able to retain its control over brand value and processes so as to ensure a good quality of service

delivery

Franchising vs. Dealership

– The basic difference between franchising and dealership lies in the focus

– Process vis-à-vis Product

Franchising vs. Dealership

• In case of Franchising– the process of doing business and serving the

customer is the key• it is assumed that a good process would lead to good

delivery• Achieving this is not easy

– practice is more integral to success than the policies

• It requires regular implementation and developing a habit leading finally to an attitude of the provider that would in turn be followed by good practices in almost all situations

Two Basic Types of Franchises

1. Authorized franchise systems - product and trade name franchising

– Minimal requirements to be an “authorized dealer”

– Vending machine operators may have franchise rights to a particular type of machine, but might not have a method of conducting the business

Two Basic Types of Franchises

2. Business format franchising

– Licensing of an entire way of doing business

• Common name or sign

• Uniform presentation of the premises

• Expertise shared by franchisor

• Continuing business and technical assistance

Most critical element of franchising

• A proven repeatable system

• A good system

Becoming a Franchisee

• Have capital to invest

• Desire to own a business

• Want proven business model and assistance

• Willing to give up some independence in exchange for assistance

Benefits to Franchisees

• Brand name

• Brand equity

• Market intelligence, market survey and site selection

• Facility design

• Lease negotiations advise, Financing advice

• Operating manuals

• Management training programs

• Training of franchisee’s employees

• Pooled Advertising

Becoming a Franchisor

• Fast growth

• Source of capital

• Source of good managers

• Minimized monitoring costs

• Source of new ideas

• Consultants in specific markets

Franchise Contract

1. Payment system

2. Real estate

3. Termination

Franchise Contract

1. Payment System

–Lump-sum fee

–Initial investment

–Royalty fee

Franchise Contract

2. Real Estate

–Franchisor as landlord

• Capital and effort intensive

• Prime locations

• Can assist franchisees

• Can evict franchisees

Franchise Contract

3.Termination

–Difficult and costly for franchisor

• Replacing franchisee

–Protections for franchisor

• Hostages

• Transfer fees

• Right-of-first-refusal– ROFR

Multi-Unit Franchising

• Master franchisee

• Faster growth

– Learning curves

• Unfamiliar markets

– Adjacent markets

• Simplifies for franchisor

– Influence other franchisees

Apollo Health & Lifestyle Limited

Unique Franchising Model

Summing Up - AHLL

• Design Issues– Whether to franchise or own?

• System Issues

• Management Issues– Training – Motivation– Conflict of interests– Evaluation and Feedback

Marketing Channel Concepts

What is a marketing channel?What is a marketing channel?

• A set of interdependent organizationsinvolved in the process of making a

product or service available for use or consumption.

What is a marketing channel?What is a marketing channel?

External contactual organization that management operates to achieve its

distribution objectives

Outside

the firm

Firm involved

in negotiatory

functions

Management’s involvement in the

processGoals that change, causing

variations in contactual

organization & the way in

which management operates it

Channel Strategy and Logistics Management

Part of distribution variable

• Concerned with entire process of starting and operating contactualorganization

• Formulated beforelogistics management

Focused specifically on providing product availability at appropriate time & place

Channel vs. Ancillary Structure

Channel Structure

The group of channel members to which aset of distribution tasks has been allocated

Ancillary Structure

The group of institutions that assist channel members in performing

distribution tasks

Why are single-channel

structures currentlythe exception?

Why is managing the ancillary structure

most likely to be less complex than

managing the channel structure?

Role of Marketing Channel

Market Functions Primary Market Function Sub-Functions

Matching Buyers and Sellers

Determination of Product Offerings

Searching

Price Discovery

Facilitation of Transactions

Logistics

Settlement

Trust

Role of Intermediaries Primary Market Function

Sub-Functions Role of Channel/Intermediaries

Matching Buyers and Sellers

Determination of Product Offerings

Monitoring, Alerting

Searching Reducing search cost

Price Discovery Facilitating but increasing cost

Facilitation of Transactions

Logistics Shipping, distribution, warehousing

Settlement Facilitating, Monitoring

Trust Rating, Guaranteeing

Producers &

Manufacturers

• lack expertise• lack economies of scale

Intermediaries

• spread high fixed costsover large quantities ofdiverse products

• achieve economies of scope and economies of scale

Why shift distribution tasks to intermediaries?

Economic Considerations

• Contactual efficiency

– the level of negotiation effort between sellers and buyers relative to achieving a distribution objective

• Specialization and Division of Labor

– breaking down complex tasks into smaller, less complex ones and allocating them to parties who are specialists at

performing them at greater efficiencies

Specialization & Division of Labor

Distribution Tasks Production Tasks

Distributed interorganizationally

Distributed intraorganizationally

Supply and Demand Side

• Demand-side factors

• Supply-side factors

Demand-Side Factors

• Facilitation of search

• Adjustment for assortment discrepancy

– Sorting

– Accumulation

– Allocation (breaking bulk)

– Assorting

Supply-Side Factors

• Routinization of transactions– Continuous replenishment programs (CRP)

• Reduction in number of contacts

Manufacturers

Wholesaler

Retailers

Manufacturers

Retailers

Channel Flows

Marketing Channel Flows

• Processes flow through the channel

• Done at different points in time by different channel members

Marketing Channel Flows

1. Product

2. Ownership

3. Promotion

4. Negotiation

5. Information

Marketing Channel Flows

Product Flow

Promotion Flow

Information Flow

Ownership Flow

Negotiation Flow

Product Flow

Manufacturer

Transportation Company

Wholesalers

Retailers

Consumers

Negotiation Flow

Manufacturer

Wholesalers

Retailers

Consumers

Ownership Flow

Manufacturer

Wholesalers

Retailers

Consumers

Information Flow

Manufacturer

Wholesalers

Retailers

Consumers

Transportation Company

Promotion Flow

Manufacturer

Wholesalers

Retailers

Consumers

Advertising Agency

Channel Analysis Framework

Channel Management versus DesignChannel Management versus Design

“Setting up”the channel

Channel Design Channel Management

“Running”the channel

Channel Analysis Framework

• CHANNEL DESIGN

• Segmentation

• Channel Structure• Splitting the Workload• Degree of Commitment• Gap Analysis

• CHANNEL IMPLEMENTATION & MANAGEMENT

• Channel Power Channel Conflict

• Manage/Defuse Conflict

• Channel Coordination

INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS

Segmentation

• Splitting market into groups of end-users– Similar within groups

– Different between groups

– Based on demands for the outputs of the marketing channel

• Added value

• Service outputs

• Example: Segments of book end-users– Recreational readers– University students

• Convenience-oriented• Price-oriented

Segmentation

Selecting Target Segments

• Those we can serve most profitably

• Restrictions

– Managerial bounds

– Environmental bounds• Legal

– Competitive benchmarks

Channel Structure

1. Number of levels

2. Types of channel members

3. Channel intensity• Number of each type

4. Number of channel structure • Multichannel

Splitting the Workload

• Assign channel flows to channel members

– Meet target segment’s service output demands

– Reliable

– Minimize total cost, while meeting service level

Degree of Commitment• Transactional relationships

– Pursue individual goals– No guarantee of continued business

• Alliances– Enduring connections throughout companies– Pursue common goals

• Vertical integration– Own channel members– Reasons

– Channel members do not exist– Company can handle flows as efficiently– Channel member is not sufficiently committed

– Can be done in degrees

Gap Analysis

• The difference between optimal and actual channels

• Demand side gaps– Service output demands are not being met

• Undersupplied• Oversupplied

• Supply side gaps– At least one flow is costing too much– Lack of expertise– Waste

• Closing gaps is difficult and costly

Channel Power

• Ability to control other channel

members

• Necessary to implement channel design and management– May be used to optimize channel to benefit of all

channel members

– May be used to achieve own ends without regard to other channel members

Channel Conflict

• Actions of channel members prevent channel from achieving its goals

– Goal conflict

– Perceptual conflict

Manage/Diffuse Conflict

• Identify sources of conflict– Poor channel design– Poor performance

• Take action– Exercise channel power

Channel Coordination

• Result of– Channel designed to meet

service output demands of target end-user segments

– Application of channel power to ensure smooth implementation of the channel design

• Ongoing process

Channel Management

Channel Management versus DesignChannel Management versus Design

“Setting up”the channel

Channel Design Channel Management

“Running”the channel

Channel Management

The administration of existing channels to secure the cooperation of channel members in achieving

the firm’s distribution objectives

Conflict & PowerConflict & Power

Marketing Channel as Social System

Social System

• Generated by any process of interaction on sociocultural level• Between two or more actors

• Actor is individual or collectivity

Individuals or collectivitiesInteracting within marketing channel

=Interorganizational

SocialSystem

How Conflict Emerges

When a channel member perceivesthat another member’s actions impede the

attainment of his or her goals

Cause

Conflict

Direct, personal, and opponent-centered behavior

Behavioral Trademarks

Conflict

• An intensity between two or more objects (persons, groups or organizations) that comes from reaction to actual or desirable things

» Pandey and Kumar (1997)

• Conflict begins when one member in the marketing channel perceives that the other member is trying to prevent his ambitions or disturb his efficient activity

» Etgar 1997

Videos

• Conflict Management – Overview

• Video3

• Video4

• Conflict management conception is risky– Why?

• The influence of conflict on channel activity is not always negative

– Conflict could be useful for all channel activity if• Conflicts are not connected with expenses of channel

participants

• Different points of view form better quality ideas

• Any manifestation of aggression in this situation is not irrational or destructive

» (Webb & Hogan; 2002)

Conflict

• Role Incongruities

• Resource Scarcities

• Perceptual Differences

• Expectation Differences

• Goal Incompatibilities

• Communication Difficulties

Causes of Channel Conflict

Goals Roles Communication

Causes of

Channel Conflict

Causes of Channel Conflict

Roles in Marketing Channels

• Roles change over time

• straying far from a role may cause conflict

• Roles help describe & compare the expected behavior of channel members and provides insight into the constraints under which they operate

A set of prescriptions defining what the behaviorof a channel member should be

Goals and Communication

Behavioral Problems in Channel Communications

1.Differences in goals

between manufacturers &

their retailers

2.Differences in the kinds of

language they useto convey information

Goals and Communication

Behavioral Problems in Channel Communications

3.Perceptual differences

among members

4.Secretive behavior

5.Inadequatefrequency

ofcommunication

Conflict & Channel Efficiency

Can conflict increase efficiency?

Does conflictdecrease

efficiency?

Does conflict have any affect?

How does conflictaffect channel

efficiency?

Channel Efficiency and Conflict

Effects of Channel Conflict

Negative Effect: Reduced Efficiency

As the level of conflict increases

Channel efficiency declines

Effects of Channel Conflict

No Effect: Efficiency Remains Constant

Exists in channels characterized byhigh level of dependency amongmembers

Channel efficiency is not affected

Effects of Channel Conflict

Positive Effect: Efficiency Increased

Conflict might be impetus for eitheror both members to reappraise their policies

Channel efficiency increases

Conflict FII’s

Frequency Intensity Importance

Levels of Conflict

Stages of Conflict– Latent conflict

• underlines origins of organizational conflict that are divided to 3 main types

– Competition for deficit resources;– Competition for autonomy;– Disparities of functional aims.

– Perceived conflict • conditions of latent conflict do not exist

– Felt conflict • personification and sense of hostility and worriment

– Manifest conflict • behavior that blocks other’s person pursuit of the aim

– Aftermath • resolution or suppression of the conflict

Managing Channel Conflict

Detectingconflict

Appraising theeffect of conflict

Resolvingconflict

ManagingConflict

Detecting Channel Conflict

Regularly survey other members’perceptions of firm’s performance

Perform marketing channel audit

Form distributors’ advisory councilsor channel members’ committees

OR

OR

Appraising the Effect of Conflict

Subjective process that relies onmanager’s judgment

Resolving Conflict

Creative action on the part of some partyto the conflict is needed if the conflict is to

be successfully resolved.

Conversely, if conflict is simply “left alone,”it is not likely to be successfully resolved

and may get worse.

Conflict Resolution Styles

Low Assertiveness High Assertiveness

Low Cooperativeness

High Cooperativeness

Avoidance

Compromise

Collaboration or

Problem Solving

Competition Or

Aggression

Accommodation

Assertiveness: Concern for one’s own outcome

Cooperativeness: Concern for the other party’s outcome

Colgate Palmolive India Ltd.: (A)

To be discussed in class …

Case Facts • CPIL

– Product – Market– Competition

• HLL – Better positioning, appealing to youth, distribution strength

and advertising/promotions

– Promotion• Endorsement from experts (Dentists)• Awareness Programs

– Conventions and School visits etc. – Operation Jagruti

Case Facts

• Supply Chain– ERP – Central Planning and Logistics

• Production, planning, inventory control, warehousing, outbound transportation

– DC/Warehouses • National Distribution Centre

– Bhiwandi

• 22 Warehouses – Pull Based Replenishment System

Case Facts

• Sales and Distribution – Participants

• Sales organization, C&FA, Stockists, Retailers

– Stockist Investments and Other Terms/Conditions• Paid Up stocks with stockists

– No credit– Payment against invoices generated by C&FA through pre-

signed cheques of stockists • Investment in Promotional Schemes

– Credit notes from company• Credit facility to some retailers • Expenses

– Van expenses, salaries, establishment, interest and depreciation

Case Facts

• Sales and Distribution – Non competing dealership at stockist level– Visibility at POS

• Visual Merchandiser• Rented display space for CPIL products

– Agreed and organized by area sales executives– Payment through stockist

– Policy of Replenishment based sales system• 60% sales in last week of month• 20% on the last day of the month

Case Facts

• Sales and Distribution – ROI

• Promised an ROI of at least twice the bank deposit rate

– 30% ROI expectation to stockist

• Case Backdrop– ROI expectations not met – Stockist refused to place any more orders

Causes of Conflict

– Expectation on ROI

– Push based sales system– High pressure selling – Pull based system not practiced by sales team

– Competing Stockist more aggressive with parent company’s support

– Delivery– Display space – Credit facility

Causes of Conflict

• Non competing product dealership

• Mainly oral care products vis-à-vis HLL’s wide range of FMCG products

– Cross subsidization

• Leading to higher cost of operations

What went wrong?

• Conflict was not resolved at a functional stage – Conflict as State vs. Process

• Snapshot vs. a temporal process

– Detection and resolution • Earlier the better: Easier and functional

Stages of conflict

• Latent• condition of contention but lack of awareness

• Perceived • Cognitive

• Affective • Emotional

• Behavioral • Manifest conflict

ROI

– Unmet ROI expectation • Excess Stock

– Sales of 15-18 lakhs p.m. – Stock of 18 lakhs

» More than a months stock » As against the agreed stock level of 21 days

• Credit to Retailer• Payment for schemes • Payment for rental displays at retail level• Operating expenses

– Apportioning of the costs » Unrelated product categories

Sales Target

• Actual sales – 15-18 lakh

• Sales Target– 20 lakhs

• Twice the previous year’s 10 lakh

• Undue pressure of sales – Might be a cause of decreased profitability

Conflict Unattended

• Concerns raised by the stockist were not attended at the earlier stage

– Leading to a manifest conflict • Denial to place an order at a critical time

– How can this situation be handled?• Negotiations

– Understanding each others problems and constraints – Weighing alternatives and implications for both sides – Arriving at short term and long term solutions of the problem, if

possible

Short Term Solutions

• What can be offered as temporary solution ?

• Better promotional schemes, more sales support, clearance of pending credit notes or payments for display spaces etc

• Promise of lower sales target for next month and adjustment the inventory levels by efforts to increase sales above target

• Probably a longer credit period for a particular lot or passing on extra margin by way of special schemes

Longer Term Solution

• ROI Improvements

• Practice pull based replenishment at stockist and retail levels

• Offer to help in getting dealership of other companies offering similar non competing products

• Sales target– To be more practical – More support in increasing sales

Other Issues

• Operation Jagruti– Can it be used for rural reach and availability also

• Not just for promotion and trials

• Acquisition of Oral Care Business of Cibaca– Access to economy segment – What about its distribution channel ?

Power

Power in the Marketing Channel

The capacity of a particular channelmember to control or influence the

behavior of another channel member

Keys to understanding Power• Power Bases• Use of Power Bases

Bases of Power for Channel Control

Reward Power

Coercive Power

Legitimate Power

Referent Power

Expert Power

Using Power in the Marketing Channel

1. Identify available power basesBases are a function of :

• size of producer or manufacturer• organization of channel• particular set of circumstances

2. Select and Use appropriate power basesto better or worsen channel relationships

• Which are more effective bases of power?

Expert and referent power in conventional channels may be more effective than direct monetary incentives or threats in inducing

channel members to accept controls.

Key Points

• Power must be exercised to influence member behavior.

• Effectiveness of power bases to influence members is situation-specific.

• The exercise of power and how it is used affects the degree of cooperation, conflict, and satisfaction among channel members.

• The use of coercive power promotes conflict and dissatisfaction to a greater degree than the other power bases.

• The use of coercive power can reduce channel’s stability and viability.

Channel Management

Motivation, Evaluation and Control

Case: XYZ Consumer Durables Ltd

Channel Management versus DesignChannel Management versus Design

“Setting up”the channel

Channel Design Channel Management

“Running”the channel

Channel Management Channel Management

The administration of existing channels to secure the cooperation of channel members in achieving

the firm’s distribution objectives

Channel Motivation

The actions taken by the focal firm to foster channel member cooperation in implementing its distribution objectives

Motivating Channel Members

1. Find out the needs and problems of channel members

2. Offer support to the channel members that is consistent with their needs and problems

3. Provide leadership through the effective use of power

Needs & Problems

• Methods to identify needs and problems

– Research studies of channel members

– Research studies by outside parties

– Marketing channel audits

– Distributor advisory councils

Research Studies

• Manufacturer-initiated research can be useful because certain types of needs or problems may not be at all obvious

– A very low percentage of manufacturers’ research budgets is spent on channel member research

Research Studies by Outside Parties

Why use outside parties to conduct research?

They provide a higher assurance of objectivity

They provide a level of expertise that the manufacturer may notpossess

Marketing Channel Audits

• Focus of channel manager’s approach

– Gather data on how channel members perceive the manufacturer’s marketing program and its component parts

– Locate the strengths and weaknesses in the relationships.

– Learn what is expected of manufacturers to make the channel relationship viable and optimal

Marketing Channel Audits

How to make audits effective

It should identify and define in detail the issues relevant to the manufacturer-wholesaler and/or manufacturer-retailer relationship

It must be conducted periodically so as to capture trends & patterns

Distributor Advisory Councils

Who is involved?

Top management representatives from the manufacturer and from the channel members

What are the benefits?

• Provides recognition for the channel members• Provides a vehicle for identifying and discussing

mutual needs and problems• Results in an overall improvement of channel

communications

Supporting Channel Members

3 Types of

Programs

Partnership orstrategic alliance

Cooperative

Distributionprogramming

Cooperative Arrangements

• Found in conventional loosely aligned channels

•Common means of motivating channel members

• Example of Typical types of cooperative programs provided by Manufacturers to channel members

– Cooperative advertising allowances– Payments for interior displays– Contests for buyers, salespeople, etc.– Allowances for warehousing functions– Payments for window display space– Detail men who check inventory– Demonstrators– Coupon-handling allowance– Free goods

Cooperative Arrangements

Focuses on channel member needs & problems

Simple & straightforward

Conveys a clear sense of mutual benefit

Partnerships & Strategic Alliances

Focus on a continuing and mutually supportive

relationship between the manufacturer and its

channel members in an effort to provide a more

highly motivated team, network, or alliance of

channel members

Partnerships & Strategic Alliances

• Manufacturer should make explicit statement of policies in areas such as product availability, technical support, pricing, etc.

• Manufacturer should assess all existing distributors as to theircapabilities for fulfilling their roles

• Manufacturer should continually appraise the appropriateness of the policies guiding relationship with the channel members

Distribution Programming

A comprehensive set of policies for the promotionof a product through the channel

Developed as a joint effort between the manufacturer and the channel members

to incorporate the needs of both

Distribution Programming

Steps for developing a program

1. Manufacturer develops analysis of marketingobjectives & the kinds of levels of support neededfrom channel members• Ascertains channel members’ needs & problem areas

2. Formulate specific channel policies that offer• Price concessions to channel members• Financial advice• Some kind of protection for channel members

Relationship Differences

Cooperative Arrangements

Intermittent interactions between manufacturer& channel members

Partnerships & Strategic Alliances

Continuing & mutually supportive relationship

Distribution Programming

Deals with virtually all aspects of the channel relationship

Leadership and Power

The channel managermust exercise effective leadership on a

continuing basis to attain a well-motivatedteam of members.

Generally, referent and expertise power leads to higher motivations and coercive

type of power leads to conflict

Evaluating Channel Members

Introduction

• A business firm can be seen as a portfolio of marketing channels having different function, structure and behavior, with the objective of adding value to the process of making products and services available to business and household consumers

Introduction

• A fundamental proposition in marketing strategy – distribution channels must be aligned with customers and

competitive advantage

• Measurement plays a crucial role in strategy implementation

» Kaplan and Norton

Performance

• The sum of all processes that will lead managers to taking appropriate actions in the present that will create a performing organization in the future

• Doing today what will lead to measured value outcomes tomorrow

Channel Performance

• The importance– As important as employee evaluations within the firm

• The Difference • The channel manager works with individual firms

rather than with individual employees

• The setting is inter-organizational rather than intra-organizational

Channel Performance

• Channel performance can be measured as a function of efficiency

– focus on how well the firm minimizes costs associated with performing necessary channel functions such as transferring goods from the manufacturer to the end consumer disregarding the profits made at any point along the line

Channel performance metric paradox

• This paradox occurs– where undesirable performance trade-offs occur;

and

– when the improvement of one performance measure reduces the performance of another measure

Channel performance metric paradox

• Different systems and different channels necessitate particular measurement characteristics

• Making it impossible for a business organization to maximize concurrently, all channel performance measures

• Example

– Multiple Channels

– Conflicting Channel Objective

• Cost vs. Speed or Service

Evaluation versus Monitoring

Performance Evaluation

Day-to-DayMonitoring

Overall performancereviews that give

management a complete& objective analysis of

each distributor’soperations

Appraisals that assist management in

maintaining currentoperating control ofdistributors’ efforts

Session-8

Scope & Frequency of Evaluations

• Degree of the manufacturer’s control over channel members

• Relative importance of channel members

• Nature of the product

• Number of channel members

Degree of Control

• Strength of contractual agreements

– Channel manager can demand a great deal of information on member operations

• The focal firm can exert little control over channel members if it lacks

• strong market acceptance for its products & • strong channel control based on contractual

commitments

Importance of Channel Members

• More comprehensive evaluation

Why?When?

Firm’s success in the market is directly dependent on the channel members’performance Firms

When focal firm sells all of its output to intermediaries

• Product is more complex– broader scope of evaluation

• Products of very high unit value– The gain or loss of a single order is important to the

manufacturer

– More importance to evaluation

Nature of the Product

Number of Channel Members

Intensive Distribution

Evaluation can be cursory

Evaluation can be cursory

Selective Distribution

Evaluation iscomprehensiveEvaluation is

comprehensive

XYZ Consumer Durables

• Degree of the manufacturer’s control over channel members – No mention of contractual agreement, however, given the

nature of channel it seems to have strong contractual agreements

• Relative importance of channel members– High

• Success depend on wholesale dealers

• Nature of the product– Higher unit value and medium complexity

• Number of channel members– Selective Distribution towards exclusivity

Performance Audit

Three Phases

1. Developing criteria for measuring channel member performance

2. Periodically evaluating the channel members’performance against the criteria

3. Recommending corrective actions to reduce the number of inadequate performances

Criteria for Performance Audit

• Sales performance of channel members

• Inventory maintenance of channel members

• Selling capabilities of channel members

• Attitudes of channel members

• Competition faced by channel members

• General growth prospects of channel members

Evaluating Sales Performance

Evaluating sales data

Comparisons of currentsales to historical sales

Cross comparisons between members

Comparisons of theSales with

predetermined quotas

Evaluating Inventory Performance

• Total level of channel member’s inventory• Shelf or floor space

– devoted to inventory– provided relative to competitors’ inventory

• Condition of inventory

• Amount of old stock on hand– efforts made to move it

• Inventory control & record-keeping system– Adequacy

Evaluating Selling Capabilities

Factors to be Examined

Number of salespeople assigned

to your product line

Technical knowledge and Competence of salespeople

Salesperson interest

in products

Attitudes

Problem: Negative ones often addressed after they have

contributed to poor performance

Evaluation of Attitudes

Should be evaluated independently of sales data

Not usuallyevaluated unless

sales performanceis unsatisfactory

Competition

Types of competition

From other intermediaries

Fromother product lines

carried by the channel members

General Growth Prospects

• Evaluating channel member growth prospects– Past performance

– Overall performance

– Expansion or improvement of organization

– Level of growth and qualification in personnel Management, age, health, or succession arrangements

– Adaptability & overall capacity to meet market expansions

– Member’s estimates of its own medium- & long-range outlooks

Applying Performance Criteria

• Separate performance evaluations – on one or more criteria

• Combined Performance Evaluations– multiple criteria combined informally to evaluate overall

performance qualitatively – multiple criteria combined formally to arrive at a

quantitative index of overall performance

• Use of Separate Performance Evaluation

– when the number of channel members is very large

– when criteria are limited to no more than sales performance, inventory maintenance, & possible selling capabilities

Applying Performance Criteria

Applying Performance Criteria

• Multiple criteria combined informally

– Operational performance measures obtained

– Managerial judgment used to combine performance measures

– Qualitative judgment made about overall channel member performance

Applying Performance Criteria

Multiple criteria combined formally

– Criteria & associated operational measures are decided on

– Weights assigned to each of the criteria– Each member evaluated is rated on each of the criteria– Score on each criterion multiplied by weight for that

criterion– Weighted criterion ratings summed to yield overall

performance rating for each member

Recommending Corrective Actions

Channel manager should attempt tofind out why members have

performed poorly

1. Develop concrete & practical approaches to actively seek information on member needs and problems

2. Programs of member support must be congruent with member needs & problems

3. Constraints imposed by interorganizational setting of marketing channel must be understood

Physical Distribution

Logistics and Channel Management

Logistics

Logistics

Planning, implementing, and controlling thephysical flows of materials and final goods

from points of origin to points of use to meet customers’ needs at a profit.

Logistics vs. Channel Management

Logistics Management

Concerned specificallywith product flow

Channel Management

The administrationof all the majorchannel flows

Supply Chain Management

Logistical systems that emphasize close

cooperation and comprehensive

interorganizational management to

integrate the logistical operations of the

different firms in the channel

The Role of Logistics

Its Essence

The movement of the right amount ofthe right products to the right place

at the right time

Mumbai Dabbawala

What makes them Unique

• Input– 0% Fuel– 0% Investment– 0% Modern Technology– 0% Disputes and Conflict

• Leading to– 100% Customer Satisfaction

Mumbai Dabbawala

• Right product at right time to the right place

– Accuracy– Timeliness

• Social and Lifestyle changes and impact on Dabbawala services – Diminishing slowly– Where else can they be used ?

• Sample a new Drink– Coca Cola India to use them to sample its orange drink

Minute Maid

• Going High Tech– Website, SMS for ordering

• Alternatives Business Lines– Delivering groceries and daily need– Courier Services

• Combining IT and Logistical Abilities of Dabbawalas

Third-Party Logistics Providers

Specialize in performing most or all of thelogistical tasks that manufacturers

or other channel memberswould normally perform themselves

Provide service at lower cost than the firms who hire them

Currently growing rapidly into a major industry

Logistics System Components

Transportation

Materials Handling

Order Processing

Inventory Control

Warehousing

Packaging

Systems View

Interrelatedcomponents

of asystem

Warehousing

OrderProcessing

MaterialsHandling

InventoryControl

Transportation

Packaging

Total Cost Approach

SystemsConcept

Total Cost Approach

Addresses all the costs oflogistics together;

seeks to minimize thetotal cost

Transportation

Most fundamental and necessary component accounts for the highest percentage of the total cost of logistics

Overriding issue facing the firm: Choosing the optimum mode of transportation to meet

customer service demands

Materials Handling

Range of activities & equipment involved in the placement & movement of products in storage areas

Issues: 1. Minimizing the distances products are moved within the warehouse during the course of receiving, storage, & shipping2. Choosing the kinds of mechanical equipment that should be used3. Making the best use of labor when receiving, shipping, & handling products

Order Processing

Its importance in logistics lies in its relationshipwith order cycle time—the time between whenan order is placed & when it is received bythe customer.

Issue: Developing an efficient order processing system

Inventory Control

The firm’s attempt to hold the lowest level ofinventory that will still enable it to meetcustomer demand

Issue: Keeping inventory at the lowest possible levelwhile concurrently placing orders for goodsin large quantities

Warehousing

The holding of products until they are ready to be sold

Issues: 1. The location of warehouse facilities2. The number of warehousing units3. The size of the units4. The design of the units5. The question of ownership

Warehouse and DC

• Distribution Centers

– Storing and Distributing

– What is the difference between a warehouse and distribution centre?

– Video• 1Understanding DCs_Introduction

Warehousing

• Performance Measures for DC– Effectiveness

• Order filling accuracy• Damage free handling

– Efficiency • Time taken to ship an order once received• Availability

– Percentage of items available when needed

• Throughput– No orders DC can process per day

• Cost of processing orders

Organize storage in warehouse

• Classify goods– FMG (fast moving goods) & SMG (slow moving

goods)

– What can be the composition ?

– 80/20 Thumb Rule

Packaging

Packaging & its associated costs can affectthe other components of the system

Issue Using packaging to make a significant difference in the effectiveness & efficiencyof the logistics system

The Output of a Logistics SystemThe Output of a Logistics System

Customer service is the collection of activitiesperformed in filling orders and keeping

customers happy or creating in the customer’smind the perception of an organization that is

easy to do business with.

Logistics Service Standards

1. Time from order receipt to order shipment

2. Order size & assortment constraints

3. Percentage of items out of stock

4. Percentage of orders filled accurately

5. Percentage of orders filled within a given

number of days from receipt of the order

6. Percentage of orders filled

7. Percentage of customer orders that arrive

in good condition

8. Order cycle time

9. Ease & flexibility of order placement

Heskett, Galskowsky, & Ivie

Key Elements of Customer Service

Product availability

Order cycle time

Distribution system flexibility

Distribution system information

Distribution system malfunction

Postsale product support

Key Interface Areas between Logistics & Channel ManagementKey Interface Areas between Logistics & Channel Management

Interface 1Defining of logistics service standards

Interface 2Making sure the logistics program meetschannel members’ service standards

Interface 3Selling the logistics program

Interface 4Monitoring the results of the logistics program

Lubol India Ltd – A (LILA)

How many warehouses?

• What happens when you centralize or decentralize inventory? – Reducing or increasing the number of storage locations

• Does centralization increase the level of total inventory in the system?

• Square Root Law of Inventory

How many warehouses?

• Square Root Law of Inventory • Where,

– n1 = number of existing facilities

– n2 = number of future facilities

– X1 = total inventory in existing facilities

– X2 = total inventory in future facilities

How many warehouses?

• Besides Inventory, there may be other problem with multiple warehouses

• More difficult to manage

• Costs multiply– Operating, maintaining and taxes/rents

• Handling orders and planning distribution are more complicated

• Can also complicate the addition of technology– supply chain management software or ERP systems.

Square Root Law

• Can you follow square root law in isolation– Transportation cost

– Lead Time

• Speed and service level

– Proximity to customer

– Availability of stock

Postponement & Speculation

• Delayed Differentiation

– Enables companies to reduce inventory while improving service

– How?

– Can you apply this in LIL’s context ? • Blending (Base Oil + Additive) and Filling (Pack Sizes)

Postponement & Speculation

Full Speculation

Manufacturing Postponement

Logistics Postponement

Full Postponement

Postponement & Speculation• Full Speculation

– Most FMCG companies

• Manufacturing Postponement– Final assembly, packaging or labeling near the customer point

• Example: Paint Industry : Paint in Neutral Color and Final Color on customer order; Personal Computers

• Logistics Postponement Strategy– Manufacturing based on speculation and distribution from centralized storage to

customer• Tools and Equipment/Machinery companies

• Full Postponement Strategy– Logistics and manufacturing are customer order initiated

• B&O (Bang n Olufsen) – produces high end A/V systems based on specific single customer/retailer order with unique wishes (models, features, colors, sizes etc.) and ships the final product directly to the customer/retailer.

• How can you apply these strategies in LIL’scontext, if at all ?

Session 9

Today’s Session

• Channel Participants– Wholesaling in India

• Typology of Indian FMCG Distribution Channel

• Rural Distribution

• Case Presentation

Channel Participants

Channel Members

• Manufacturers

• Intermediaries– Retailers– Wholesalers

• End-users

Major Participants in the Marketing Channel

Producers&

Manufacturers

WholesaleIntermediaries

RetailIntermediaries

Intermediaries

Consumers Industries

Final Users

Commercial Channel Target Markets

• Independent Wholesalers/Middlemen– Merchant Wholesaler– Agents, Brokers, Commission Agents

• Manufacturer Owned– Sales Branches – Offices

Major Types of Wholesalers

Merchant Wholesalers

BuyTake title toStoreHandle

Large quantities of products

Resell to

Retailers

Industrial,commercial,

orinstitutional concerns

Other Wholesalers

Merchant Wholesalers’ Distribution Tasks

• Assure product availability

• Provide customer service

• Extend credit & financial assistance

• Offer assortment convenience

• Break bulk

• Help customers with advice & technical support

Agents, Brokers, & Commission AgentsAgents, Brokers, & Commission Agents

Involved in buying & sellingwhile acting on behalf of

clients/sellers

Involved in buying & sellingwhile acting on behalf of

clients/sellers

Commissions on

sales or purchases

Commissions on

sales or purchases

Owned & operated by manufacturers

Distribute manufacturer’s

products at wholesale

Some wholesale allied & supplementary products

purchased from other manufacturers

Manufacturers’ Sales Branches & Offices

Separated from manufacturing plants

Agent Wholesalers’ Distribution Tasks

• Manufacturers Agent

– Market coverage

– Sales contacts

Retail Structure

• By Ownership of Establishment

– Company owned, government owned, individually run

• By Kind of Business (Merchandise Handled)

– Food, Apparel

• By Size of Establishment

– Department Store, Hypermarkets, Supermarkets

• By Method of Consumer Contact

– Online, Catalogue, Brick and Mortar

• By Type of Location

– High Street, Mall, Neighborhood

• By Type of Service Rendered

– Casual vs. Fine Dine

• By Management Organizations or Operational Technique

– Franchise vs. Company Outlet

Alternative Bases for Classifying Retailers

Distribution Tasks Performed by Retailers

• Offer manpower & physical facilities close to consumers’residences

• Provide personal assistance to help sell products

• Interpret and relay consumer demand

• Divide large quantities into consumer-sized lots

• Offer storage

• Remove risk by ordering in advance of the season

Facilitating Agencies in Marketing Channels

• Transportation agencies

• Storage agencies

• Advertising agencies

• Financial agencies

• Insurance companies

• Marketing research firms

Walmart India• Wholesale Supply Chain model of Walmart

• Franchise partner – Bharti

• India as a country of retailers • Indian wholesale network• Areas of Importance

– Fresh/Perishable product supply chain– Refrigerated cold chain

– Organized supply chain – Lack of demand forecasting and knowledge of consumer demand– Predominantly, a push based system

– Sourcing from India• Wholesale operation providing deeper access to smaller Indian

companies for sourcing • Quality of India suppliers

Rural Distribution

An overview of Rural Markets

• Rural Income – Growing middle class– Changing lifestyles and aspirations – Innovative ways of increasing remote rural reach

• Gramteller• Postal Network• eChoupals• SHGs

– Video• Riding the Rural Wave

• Adi Goderj in Rural Mahrashtra

• Adi Godrej in Rural India

Video: Riding the Rural Wave

• Changes in Rural India– Telecom – Customer Engagement in Rural-Regional

Markets – Insurance

• Increasing the Reach– Tie-ups with Local Cooperative Banks and PSUs– ITC eChoupal

Video: Adi Goderj in Rural Mahrashtra

• Consumer centricity initiative• Rural Immersion

• Increasing focus on rural markets– Efforts at increasing the Rural Reach and Sales– Promotion and Pricing targeted to rural consumers

• Rural India is Changing – Awareness and Availability of products – Increasing consumption and demand– Growth faster than urban markets

• Increasing discretionary income

Typology of Distribution Channels in India

Distribution Channels in India

• Fragmented markets and a plethora of channel forms– numerous street-side vendors, hawkers, and

roughly 12 million unregulated neighborhood mom-and-pop or kirana stores

– creating strong institutional forces that cannot be ignored

• Regulatory changes– affect channel structure

– intensify adaptation challenges

Distribution Channels – Rural India

• Lack of roads and viable means of transportation– firms have to navigate through a labyrinthine maze

of fragmented, impoverished, long, and inefficient channels for gaining access to rural markets

• Infrastructure bottlenecks– Led to growth of a multitude of regional

manufacturers serving a narrow geographical market

• Differentiation challenges for national firms

– The mushrooming of local production and resulting brand clutter

– Widespread production

– Marketing of copycat products / fake brands

Distribution Channels – Rural India

Distribution Channels – Urban India

• Well developed distribution channels – relatively seamless market access to firms

• Small kirana or mom and pop stores – employing fewer than four people

– selling a narrow range of products

• Customers value these outlets – convenient location within walking distance of

home or work, free home delivery, familiarity, and the provision of credit

Distribution Channels – Urban India

• Modern Retail

– Big Bazaar, Spencer and Vishal Mega Mart etc.

– Western style retailing formats

– Lately, accelerated rate of growth of western style retailing outlets

• foreign direct investment in shopping malls and warehouses

Channel Typology

Typical remote rural market Rural market with buying power

Archetypes A2 and A3

• Extension – of the basic channel A archetype

• Archetype A2. – Here, FMCG firms assess demand in low

per capita markets adjacent to urban areas and develop optimal routing schedules and journey plans for urban retail stockists

– Since the overall demand is not very high, urban stockists visit these adjacent markets relatively infrequently and supply products to retailers

Archetypes A3

– A channel form designed to serve high potential markets with relatively poor market access

– Rural wholesalers who are in close proximity to these markets

• These wholesalers solve the last mile problem by contracting with individuals who carry products using local means of transport and deliver them to distributors in nearby villages

– Challenges of developing detailed stocking and replenishment plans

• Due to lack of access to end customer

Archetype B

BangloreMysore

Typical rural market Rural market + buying power

Archetype B - BOP

• Average person in rural India earns – less than $2 per day

– Cannot afford bigger sized consumer products such as shampoo and detergents

• Introduction of LPPs (Low Priced Packets)

• Some Initiatives– Shakti, eChoupal

• Indian Postal System

The Indian Postal System

• Operates in excess of 150,000 offices – has an unrivalled presence in rural areas

• The system has grown by relying on private entrepreneurs– who offer a range of postal services from their

own premises in return for an allowance

• In rural areas, the postal channel works bi-directionally– delivering mail and accepting deposits for insurance

and mutual funds

• This channel is being strategically used by private firms – ICICI Prudential for selling life insurance policies and

mutual funds

• Such synergies can be creatively exploited by FMCG firms– market LPP’s though these channels

The Indian Postal System

Distribution challenges faced by Tata Motors

• Nano at a price of $2000+

– This car aimed primarily at the rural/lower income markets

– a main challenge facing the company is the lack of proper roads for transporting the manufactured car to end markets

• The company plans to ship the car in semi-knocked down kits that can be assembled at the rural dealerships

– Manufacturing postponement

Distribution challenges faced by Tata Motors

Session – 10

Today’s Session

• Marketing Channels for Services

• Rural Distribution – Modern Trade in Rural India

• Hariyali Kisan Bazaar – HUL Case Discussion

• Technology and Marketing Channels – E-commerce, M-commerce, Digital Revolution

Marketing Channels for Services

Distinguishing CharacteristicsDistinguishing Characteristics

• The intangibility of services

• The inseparability of services from service providers

• The difficulty of standardizing services

• The high degree of customer involvement in services

• The perishability of services

Intangibility of ServicesIntangibility of Services

Product

• Consumers have more definite impressions &

preferences about physicalproducts because of

their tangibility

Service

• Much less tangiblethan physical products

• Difficult to differentiatebrands

≠

Inseparability of ServicesInseparability of Services

Service

• Inextricably tied to provider of service

• Services produced do not exist as entities in and of themselves

Product

• An entity that exists apart from the manufacturer itself

≠

Difficulty of StandardizationDifficulty of Standardization

Service

• More difficult to standardize than products

• Variability associatedwith human element is

much more likely tocreep into the production

of services than into the production of products

Product

• High degree ofstandardization

found in advancedindustrial societies≠

Customer Involvement in ServicesCustomer Involvement in Services

Service

• Consumers are moreinvolved in the

production of services than they are in the

production of products.

Product

• Individual consumersdo not play much of arole in determining the

nature of products manufactured for them.

=Consumer is involved only

in consumption ofproduct

≠

PerishabilityPerishability of Servicesof Services

≠

Service

• Services cannot beproduced in anticipation

of customer needs & then stored in inventory

until purchased.

Product

• Products can be inventoried and stored—

even the most perishable products.

Implications of Service CharacteristicsImplications of Service Characteristics

for Channel Managementfor Channel Management

Intangibility & Channel ManagementIntangibility & Channel Management

Marketing channels provide the most direct & potent basis

for making a service more tangible.

The customer is directly exposed to and experiences the service provided by the channel.

Why?

Inseparability & Channel ManagementInseparability & Channel Management

The inseparability of services from the providermeans that the service provider does not have

the “safety net” available to the product manufacturer,whereby the product itself can make up for

poor distribution.

All aspects of the marketing channel with which the consumer comes into contact

are thus a reflection of the quality of the service.

Why?

Standardization & Channel ManagementStandardization & Channel Management

In the case of franchises, it is difficult for the channelmanager to get the franchisees to deliver a

consistent level of service.

Why?

The amount of human involvement—behavior—in providing services.

Customer Involvement & Channel ManagementCustomer Involvement & Channel Management

In a channel containing services such as barbers, fitness clubs, and tax preparation, the channel design should facilitate customer involvement.

Why?

Such services generally require input from thecustomer in order to be performed successfully.

PerishabilityPerishability & Channel Management& Channel Management

The channel must be designed so as to connectas efficiently as possible those providing the

service with those desiring to obtain it.

Why?

Because of the high degree of perishability of unsold services, design should maximize the sale of service

during its limited exposure to the target market.

• How to do this ?

– Examples • Indian Rail

– Online Reservation Service available 23 hours in a day– Multitude of reservation counters at different locations

» Reach and availability

• ATMs of Banks

ConsiderationsConsiderations

1. Shorter Channels2. Franchised Channels

3. Customization of Services4. Channel Flows

Important considerations for developing &operating marketing channels for services

Channel FlowsChannel Flows

• Flows that “carry” the service through the channel are those of information, negotiation, & promotion.

• Many can be handled electronically

Rural Distribution

Hariyali Kisaan Bazaar

• Build on 4-5 acre campus– Fueling station– Banking facility– Demo area – Parking facility– Recreation Zone

• 12000 ft of walk in space and self service racking

Hariyali Kisaan Bazaar

• Racks– Touch, feel and examine products – Unlike typical kirana/general store’s across the

counter setup

• Clear Price Labels– Transparency and choice

Hariyali Kisaan Bazaar

• Customer Base of a Hariyali Outlet

– 15-30 Km Radius– 15,000 – 20,000 Households

• 60,000-80,000 of agricultural land

– Revenue and Input Estimates for an acre of Agricultural Land

• Revenue of Rs. 14,000 per acre• Crop Inputs of around Rs. 4000 per acre

Catchment Area

Hariyali Kisaan Bazaar

• Setup Costs – Rs. 20 Million to Rs.30 Million

• Depending on – Land, size, construction, services, bans/ATMs, fuel station,

storage, evaluation study, personnel training etc.

• Business Model– Facilitating both the input and output side of the

value chain

HUL HUL

Project ShaktiProject Shakti

HUL’s Bharat Darshan

• Article in Forbes India– September 22, 2010

– The new consumers in India’s Villages are ambitious and demanding like their urban counterparts. And Hindustan Unilever is responding to the change with a distribution overhaul.

HUL’s Distribution Coverage

Direct ProgramIDC ProgramStreamline Program

Retail Stockist Program

Project ShaktiFocus Area

Scalability and Viability

• How can you make it viable and scalable ?

• What are the key areas of concern in this regard?

• “If you want to deliver a top benefit at an affordable cost you need really world beating technology”

• Direct to consumer channel– Similar to Amway and Avon ??

Aravind Eye Hospital - Reaching the BoP

• Every third blind person in the world is in India

– Aravind Eye Hospital’s model offers a unique resolution to a conflicting scenario in a country which daily attracts medical tourists from around the world but where the rural poor have no access to very treatable health problems

Aravind Eye Hospital - Reaching the BoP

• This model is not only economically viable but also profitable and hence sustainable

– Average ROI is around 40%

– For rural Tamil Nadu, Hospital’s broadband network and 23 vision centers connected through this network have changed the economics of eye care for more than a million people (at BoP) without changing the economics for the provider

Aravind Eye Hospital - Reaching the BoP

• Aravind Eye Hospital– Eye checkup camps could provide eye care

services to only 7% of the people who needed it

– Need for a permanent access mode

– Telemedicine Centres• Aravind Vision Centres connected to Aravind Eye

Hospital in Madurai

Reaching the BoP

• Shankar Netralaya

– Uses mobile Vans with video conferencing facility

– The reports can be uploaded and patients can have a video consultation with a certified ophthalmologist in Chennai hospital

Session – 11… post mid term