NOTES RETAIL AND DISTRIBUTION MANAGEMENT
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The document discusses sales management functions and elements of physical distribution. It defines sales management as delivering a product from production to point-of-sale, including storage. The key functions of sales management are to provide distribution efficiency, salesmanship, assist with pricing, handle some physical distribution and financing, provide market intelligence, and act as change agents. The main elements of physical distribution discussed are transportation, inventory, warehousing, and order processing. Conventional distribution systems involve independent producers, wholesalers and retailers, while vertical systems involve unified, contract-based cooperation between these parties.
NOTES RETAIL AND DISTRIBUTION MANAGEMENT
- 1. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Q.1. What do you mean by function of Sales Management? Discuss its elements of physical distribution? Ans. Meaning of sales management:-The sales management is the processes used to deliver of a product from a production location to the point-of-sale, including storage at warehousing locations or delivery to retail distribution points. Distribution management also includes determination of optimal quantities of a product for delivery to particular warehouses or points-of-sale in order to achieve the most efficient delivery to customers. Functions of Distribution management: Provide Distribution Efficiency Provide Salesmanship Help in Price Mechanism Look After a Part of Physical Distribution and Financing Provide Market Intelligence Assist in Merchandising Provide Market Intelligence Act as Change Agents and Generate Demand 1. Provide Distribution Efficiency: In the first place, the channels bring together the manufacturer and the user in an economic manner and thereby provide distribution efficiency to the manufacturer. Minimize the number of contacts needed for reaching consumers: In most cases, it will be impractical for a manufacturing firm to sell its entire production directly to the consumers. Resource constraint is the first hurdle in this regard. Even assuming that the required resources can be found, the question arises whether it will be advantageous for the firm to sell its products directly and all by itself, totally avoiding external. Marketing channels analysis shows that in most cases, using external marketing channels / inter -mediaries is more advantageous to the firm than performing the distribution function all by its. When channels are dispensed with, the numbers of contacts a manufacturer will have to establish for reaching out to the consumers are far too many; Channels minimise the number of contacts. Break the bulk and cater to tiny requirements: Channels break the bulk and meet the small size needs of individual consumers. Supply products in suitable assortments: Channels also combine products and components manufactured by different firms and offer them in assortments that are convenient to users. The users normally need an assortment of items. They will shop at only those outlets, which supply such assortments. But, a manufacturer cannot meet the need for such assortments, since it will not be feasible for him to take up distribution of other products required by the customers. The channels thus render the vital service of assembling the products of different manufacturers and offering them to customers in suitable assortments. In other words, the channels help in „matching segments of supply with segments of demand‟. 2. Provide Salesmanship: - Marketing channels also provide salesmanship. In particular, they help in introducing and establishing new products in the market. In many cases, buyers go by the recommendations of the dealers. The dealers establish the products in the market through their persuasive selling and person-to-person communication. They also provide pre-sale and after-sale service to the buyers. SYLLABUS UNIT I- Distribution Management: An Overview, Meaning, concept and elements of Distribution; Growing importance of distribution for strategic advantage; Value chain and marketing intermediaries; Various marketing intermediaries and their roles in value addition; Conventional distribution systems for various product categories; Multiple Channel Systems; Designing channel structure and strategy
- 2. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD 3. Help in Price Mechanism: - In many cases, the channels also help implement the price mechanism. They conduct price negotiations with buyers on behalf of the principals and assist in arriving at the right price the price that is acceptable to the maker as well as the user. This is vital for the consummation of the marketing process. The manufacturer would find it difficult to complete this step without the help of the channels. 4. Look after a Part of Physical Distribution and Financing:- Channels also look after a part of the physical distribution functions like transportation, handling, warehousing, sub distribution, order processing and inventory management. Channels also share the financial burden of the manufacturer by financing the goods flowing through the marketing pipeline. Often, they pay cash and lift the products; in the process, the manufacturer gets his money long before the products reach the ultimate users. In some cases, the channels provide substantive deposits to the principals. In several cases, the channels also extend credit to the subordinate levels in the channel and to the consumers. This also relieves the principals‟ financial strain to an extent. More than everything else, the channels place the products close to potential consumers and thereby enhance the chance of its sale. 5. Look after a Part of Physical Distribution and Financing:- Channels also look after a part of the physical distribution functions like transportation, handling, warehousing, sub distribution, order processing and inventory management. Channels also share the financial burden of the manufacturer by financing the goods flowing through the marketing pipeline. Often, they pay cash and lift the products; in the process, the manufacturer gets his money long before the products reach the ultimate users. In some cases, the channels provide substantive deposits to the principals. In several cases, the channels also extend credit to the subordinate levels in the channel and to the consumers. This also relieves the principals‟ financial strain to an extent. More than everything else, the channels place the products close to potential consumers and thereby enhance the chance of its sale. 6. Provide Market Intelligence:- Channels provide market intelligence and feedback to the principal. In the nature of things, channels are in a good position to perform this task, since they are in constant and direct contact with the customers. They feel the pulse of the market all the time. 7. Act as Change Agents and Generate Demand: - In certain cases, the marketing task involves diffusion of some innovation among consumers. In such cases, the channels go much beyond the conventional functions of distribution aid act as „change agents‟ among consumers and generate demand for the product. Important Elements of Physical Distribution of Products Important elements or decisions in physical distribution of products are as follows: Fig: Elements of Distribution. Elements of Physical Distribution Transportation Inventory Warehousing Order Processing
- 3. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD 1. Transportation: Transportation is that activity through which products are moved from one place to another. By making the products reach a desirable place can increase the importance and value of those products. For example: Himachal Pradesh and Kashmir grow apples in large quantities and their demand is throughout the country. These apples are moved to their desired places by means of transportation. Many means of transportation are available, like road, railway, air, water, pipeline etc. While choosing the means of transportation, the following elements should be kept in consideration: (i) Cost, (ii) Speed, (iii) Dependability, (iv) Frequency, (v) Power, (vi) Safety. Examples: For FMCG goods or Perishable Goods high speed transport system should be used. For Gas and Petroleum the use of Pipeline is advisable. 2. Inventory: By inventory we mean the stock of raw material, semi-finished goods and finished goods held in anticipation of sales or use. How much inventory should be kept for various items? This is an important decision in Physical Distribution. The main reason as to why this decision is important is that if the inventory is either more or less than required, both the situations have their advantages and limitations. Like: Low quantity of Stock: If the quantity of inventory is kept low, then less amount of money is blocked and as a result of this investment is small. On the other hand, with the slight increase in demand because of the scarcity of inventory the consumers will turn to the rival companies. Excessive Quantity of Stock: If the stock is available in excessive quantity, then any demand can be met. So the risk that consumers will desert drops to zero. On the other hand, investing more in inventory will block the money unnecessarily and investments will increase. In short, after analysing the pros and cons of both the situations the decision about the adequate quantity of stock should be taken. 3. Warehousing: Often it is noticed that it takes sometime between purchasing/manufacturing and selling. For this time period material has to be kept in stock. Under warehousing activity the following decisions regarding the inventory of material are taken: Which is a better option? (To own or to rent a warehouse) Which is the right location for a warehouse? (Nearer the factory or nearer the market). Which decision is more appropriate? (To locate the warehouse at one place or at different places) by taking warehousing facility at different places, the advantage of meeting the demand of material expeditiously is gained. Here the thing to be kept in mind is that warehousing requires investment. So after analysing its advantages and usefulness desirable decision should be taken. 4. Order Processing: Order Processing means the process which is followed to fulfill the material order of the customer. Different steps of an order processing are as follows: Orders placed by consumers to salesperson. Transmission of order by salesperson to the company. Entry of order in the Company Office. Evaluating the reputation of the customer. Checking inventory and preparing schedule. Shipment of material in accordance to the order. Receiving Payment The customer service level is judged from the fact as to how expeditiously the shipment reaches the consumer. Customer satisfaction and speed of shipment are directly inter-related. Hence, faster the pace of shipment, higher the rate of customer satisfaction will be. Keeping this thing into consideration companies are nowadays using system based on Information Technology so that by delivering shipment expeditiously customer service level can be improved.
- 4. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Q 2. Define marketing channel. Explain various marketing intermediaries and their roles in value addition. Ans. Marketing channel: A marketing channel is a set of interdependent organizations involved in the process of making a product or service available for use or consumption. The definition bears some explication. It first points out that a marketing channel is a “set of interdependent organizations.” That is, a marketing channel is not just one firm doing its best in the market -whether that firm is a manufacturer, wholesaler, or retailer. Rather, many entities are typically involved in the business of channel marketing. Each channel member depends on the others to do their jobs. What are their jobs? The definition makes clear that running a marketing channel is a “process.” It is not an event. Distribution frequently takes time to accomplish, and even when a sale is finally made, the relationship with the end-user is usually not over. For example, think about an end user purchasing a microwave oven and it demands for post-sale service. Finally, what is the purpose of this process? The definition claims that it is “making a product or service available for use or consumption.” That is, the purpose of channel marketing is to satisfy the end-users in the market, be they consumers or final business buyers. Their goal is the use or consumption of the product or service being sold. A manufacturer who sells through distributors to retailers, who serve final consumers, may be tempted to think that it has generated “sales” and developed “happy customers” when its sales force successfully places a product in the distributors‟ warehouses. This definition argues otherwise. It is of critical importance that all channel members focus their attention on the end-user. The Nature of marketing channels 1. A marketing channel (also called a channel of distribution) is a group of individuals and organizations that directs the flow of products from producers to consumers. The major role of marketing channels is to make products available at the right time at the right place in the right quantities. 2. Some marketing channels are direct–from producer straight to customer–but most channels have marketing intermediaries that link producers to other middlemen or to ultimate consumers through contractual arrangements or through the purchase and reselling of products. Wholesalers buy and resell products to other wholesalers, to retailers, and to industrial customers. Retailers purchase products and resell them to ultimate consumers. 3. Although distribution decisions need not precede other marketing decisions, they are a powerful influence on the rest of the marketing mix. Channel decisions are critical because they determine a product‟s market presence and buyers‟ accessibility to the product. Channel decisions have additional strategic significance because they entail long-term commitments. It is usually easier to change prices or promotion than to change marketing channels. Types of marketing Intermediaries The different types of marketing intermediaries differ significantly in their roles, capabilities, territories, level and size of operations, cost of operations, remunerations and amenability for control by the principal. Let us see the main characteristics of each of them. Channel Intermediaries Retailer A channel intermediary that sell mainly to customers. Merchant Wholesaler An institutions that buy goods from manufacturers, takes title to goods, stores them, and resells and ships them. Agents and Brokers Wholesaling intermediaries who facilitate the sales of a product by representing channel member.
- 5. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Sole-Selling Agent/Marketer: When a manufacturer prefers to stay out of the marketing and distribution task, he appoints a suitable agency as his sole selling agent/marketer and entrusts the marketing job with him. A „sole-selling agent‟ or a „marketer‟ is usually a large marketing intermediary with large resources and extensive territory of operation. He will be having his own network of distributors /stockiest / wholesalers, semi-wholesalers and retailers. He takes care of most of the marketing and distribution functions on behalf of the manufacturer. Obviously; a sole-selling agent/ marketer will earn a large margin/commission compared to other types of intermediaries. A manufacturer can have one or more marketers; but when he opts for a sole selling agent, he appoints just one agency as the sole-selling agent. Wholesaler/Stockiest/Distributor: A „wholesaler‟ or „stockiest‟ or „distributor‟ is also a large operator but not on a level comparable with a marketer or sole selling agent, in size, resources, and territory of operation. The wholesaler/stockiest/distributor operates under the marketer sole selling agent, where such an arrangement is used by the manufacturer. Semi Wholesaler: Semi-wholesalers are intermediaries who buy products either from producers wholesalers, bulk, break the bulk and resell the goods (mostly) to retailers in assortments needed by the Like the wholesalers, semi-wholesalers too perform the various wholesaling functions that part of the distribution process. In some cases, they may also perform the retailing function their strength is „specialization by region „. They assist the producer in reaching a large number of retailers efficiently. They spread the distribution cost over the products of several producers, as they usually handle the products of a number of producers. Retailer Dealer: Retailers sell to the household/ultimate consumers. They are at the bottom of the distributor‟s hierarchy, working under wholesalers/ stockiest/ distributors/semi-wholesalers, as the case may be. In cases where the company operates a single-tier distribution system, they operate directly under the company. The retailers are also sometimes referred to as dealers or authorized representatives. They operate in a relatively smaller territory or at a specific location; they not normally perform stock- holding and sub-distribution functions. The stocks they keep operational stocks necessary for immediate sale at the retail outlet. Figure: Typical channel of distribution, showing the different physical and trading routes to the consumer.
- 6. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Q.3. What do you understand by Conventional distribution systems and deferent type of channel for various product type? Explain the value chain in production and distribution. Ans. Conventional distribution systems: The conventional distribution channel is the most common distribution channel. It comprises of a producer, wholesalers and retailers, all acting independently. Hence, having coordination between these three becomes the major challenge for such a system. Also, channel conflicts are very common, leading to disruptions in distribution. Due to this, companies are now going towards developing integrated channels (vertical marketing systems or horizontal marketing systems). Historically, distribution channels have been loose collections of independent companies, each showing little concern for overall channel performance. These conventional distribution channels have lacked strong leadership and have been troubled by damaging conflict and poor performance. Conventional Marketing Channel One of the most important recent channel developments has been the vertical marketing systems which have emerged to challenge conventional marketing channels. Conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximise its own profits, even at the expense of profits for the system as a whole. No channel member has much control over the other members, and no formal means exist for assigning roles and resolving channel conflict. Vertical distribution channel: By contrast, a vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system. Either one channel member owns the others, has contracts with them, or wields so much power that they all cooperate. The vertical marketing system can be dominated by the producer, wholesaler, or retailer. VMS‟s came into being in order to control channel behaviour and manage channel conflict. They achieve economies through size, bargaining power, and elimination of duplicated services. VMS‟s have become dominant in consumer marketing, serving as much as 64 percent of the total market. Franchise organizations: A channel member called a franchiser links several stages in the production- distribution process. Franchising has been the fastest-growing retailing form in recent years. Almost every kind of business can be franchised – from motels and fast-food restaurants to dentists and dating services, from wedding consultants and maid services to funeral homes and tub and tile refinishers. Horizontal marketing system: Another channel of development is horizontal marketing systems, in which two or more companies at one level join together to follow a new marketing opportunity. By working together, companies can combine their capital, production capabilities, or marketing resources to accomplish more than any company working alone. Companies might join forces with competitors or non-competitors. They might work with each other on a temporary or permanent basis, or they may create a separate company. Manufacturer Wholesaler Retailers Consumer
- 7. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Type of Channel design: A firm can design any number of channels they require. Channels are classified by the number of intermediaries between producer and consumer. A level zero channel has no intermediaries. This is typical of direct marketing. A level one channel has a single intermediary. This flow is typically from manufacturer to retailer to consumer. Type of Channel design Category Definition Intensive distribution The producer's products are stocked in the majority of outlets. This strategy is common for basic supplies, snack foods, magazines and soft drink beverages. Selective distribution Means that the producer relies on a few intermediaries to carry their product. This strategy is commonly observed for more specialised goods that are carried through specialist dealers, for example, brands of craft tools, or large appliances. Exclusive distribution Means that the producer selects only very few intermediaries. Exclusive distribution is often characterised by exclusive dealing where the reseller carries only that producer's products to the exclusion of all others. This strategy is typical of luxury goods retailers such as Gucci. The Value Chain To better understand the activities through which a firm develops a competitive advantage and creates shareholder value, it is useful to separate the business system into a series of value-generating activities referred to as the value chain. In his 1985 book Competitive Advantage, Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. Porter identified primary and support activities as shown in the following diagram: Fig: Porter Generic Value Chain Model.
- 8. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin. The primary value chain activities are: Inbound Logistics: the receiving and warehousing of raw materials and their distribution to manufacturing as they are required. Operations: the processes of transforming inputs into finished products and services. Outbound Logistics: the warehousing and distribution of finished goods. Marketing & Sales: the identification of customer needs and the generation of sales. Service: the support of customers after the products and services are sold to them. These primary activities are supported by: The infrastructure of the firm: organizational structure, control systems, company culture, etc. Human resource management: employee recruiting, hiring, training, development, and compensation. Technology development: technologies to support value-creating activities. Procurement: purchasing inputs such as materials, supplies, and equipment. The firm's margin or profit then depends on its effectiveness in performing these activities efficiently, so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. It is in these activities that a firm has the opportunity to generate superior value. A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows: Cost advantage: by better understanding costs and squeezing them out of the value-adding activities. Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors. Cost Advantage and the Value Chain A firm may create a cost advantage either by reducing the cost of individual value chain activities or by reconfiguring the value chain. Once the value chain is defined, a cost analysis can be performed by assigning costs to the value chain activities. The costs obtained from the accounting report may need to be modified in order to allocate them properly to the value creating activities. Porter identified 10 cost drivers related to value chain activities: Economies of scale Learning Capacity utilization Linkages among activities Interrelationships among business units Degree of vertical integration Timing of market entry Firm's policy of cost or differentiation Geographic location Institutional factors (regulation, union activity, taxes, etc.) A firm develops a cost advantage by controlling these drivers better than do the competitors. A cost advantage also can be pursued by reconfiguring the value chain. Reconfiguration means structural changes such a new production process, new distribution channels, or a different sales approach. For example, FedEx structurally redefined express freight service by acquiring its own planes and implementing a hub and spoke system.
- 9. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Differentiation and the Value Chain A differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation, as can distribution channels that offer high service levels. Differentiation stems from uniqueness. A differentiation advantage may be achieved either by changing individual value chain activities to increase uniqueness in the final product or by reconfiguring the value chain. Porter identified several drivers of uniqueness: Policies and decisions Linkages among activities Timing Location Interrelationships Learning Integration Scale (e.g. better service as a result of large scale) Institutional factors Many of these also serve as cost drivers. Differentiation often results in greater costs, resulting in tradeoffs between cost and differentiation. There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can forward integrate in order to perform functions that once were performed by its customers. It can backward integrate in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the firm may need to be creative in order to develop a novel value chain configuration that increases product differentiation. Technology and the Value Chain Because technology is employed to some degree in every value creating activity, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making possible new configurations of the value chain. Various technologies are used in both primary value activities and support activities: Inbound Logistics Technologies o Transportation o Material handling o Material storage o Communications o Testing o Information systems Operations Technologies o Process o Materials o Machine tools o Material handling o Packaging o Maintenance o Testing o Building design & operation o Information systems
- 10. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Outbound Logistics Technologies o Transportation o Material handling o Packaging o Communications o Information systems Marketing & Sales Technologies o Media o Audio/video o Communications o Information systems Service Technologies o Testing o Communications o Information systems Note that many of these technologies are used across the value chain. For example, information systems are seen in every activity. Similar technologies are used in support activities. In addition, technologies related to training, computer-aided design, and software development frequently are employed in support activities. To the extent that these technologies affect cost drivers or uniqueness, they can lead to a competitive advantage. Linkages between Value Chain Activities Value chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities. Consider the case in which the design of a product is changed in order to reduce manufacturing costs. Suppose that inadvertently the new product design results in increased service costs; the cost reduction could be less than anticipated and even worse, there could be a net cost increase. Sometimes however, the firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced. Through such improvements the firm has the potential to develop a competitive advantage. Analyzing Business Unit Interrelationships Interrelationships among business units form the basis for a horizontal strategy. Such business unit interrelationships can be identified by a value chain analysis. Tangible interrelationships offer direct opportunities to create a synergy among business units. For example, if multiple business units require a particular raw material, the procurement of that material can be shared among the business units. This sharing of the procurement activity can result in cost reduction. Such interrelationships may exist simultaneously in multiple value chain activities. Unfortunately, attempts to achieve synergy from the interrelationships among different business units often fall short of expectations due to unanticipated drawbacks. The cost of coordination, the cost of reduced flexibility, and organizational practicalities should be analyzed when devising a strategy to reap the benefits of the synergies. Outsourcing Value Chain Activities A firm may specialize in one or more value chain activities and outsource the rest. The extent to which a firm performs upstream and downstream activities is described by its degree of vertical integration. A thorough value chain analysis can illuminate the business system to facilitate outsourcing decisions. To decide which activities to outsource, managers must understand the firm's strengths and weaknesses in each
- 11. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD activity, both in terms of cost and ability to differentiate. Managers may consider the following when selecting activities to outsource: Whether the activity can be performed cheaper or better by suppliers. Whether the activity is one of the firm's core competencies from which stems a cost advantage or product differentiation? The risk of performing the activity in-house. If the activity relies on fast-changing technology or the product is sold in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets. Whether the outsourcing of an activity can result in business process improvements such as reduced lead time, higher flexibility, reduced inventory, etc. The Value Chain System A firm's value chain is part of a larger system that includes the value chains of upstream suppliers and downstream channels and customers. Porter calls this series of value chains the value system, shown conceptually below: Linkages exist not only in a firm's value chain, but also between value chains. While a firm exhibiting a high degree of vertical integration is poised to better coordinate upstream and downstream activities, a firm having a lesser degree of vertical integration nonetheless can forge agreements with suppliers and channel partners to achieve better coordination. For example, an auto manufacturer may have its suppliers set up facilities in close proximity in order to minimize transport costs and reduce parts inventories. Clearly, a firm's success in developing and sustaining a competitive advantage depends not only on its own value chain, but on its ability to manage the value system of which it is a part. Short Questions Q1. Define Sales Management Ans. Sales management: The sales manager is the person responsible for leading and guiding a team of salespeople. A sales manager's tasks often include assigning sales territories, setting quotas, mentoring the members of her sales team, assigning sales training, building a sales plan, and hiring and firing salespeople. In large companies, sales quotas and plans are typically established at the executive level and a manager's main responsibility is to see to it that her salespeople meet those quotas. Some sales managers were managers from other departments who transferred to sales, but the majorities are top-tier salespeople who were promoted to a management position. Because these former salespeople have little or no management training or experience, their main challenge is allowing their sales team to do the selling and offering whatever guidance the team members need. These functions are mentioned repeatedly in these summaries of sales management: Sales planning Recruiting / staffing Training Controlling / directing Evaluating Effectiveness / efficiency Compensation Supplier Value chain Firm Value Chain Channel Value Chain Buyer Value Chain
- 12. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Q2. Define the multiple Distribution Channel Systems. Ans. 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 it to 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 to consumers. 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 and indirectly 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 middlemen is 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 may sell 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 one middlemen 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 ultimate consumers. This channel relieves the manufacturer from burden of selling the goods 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 traditional channel of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. 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 needed expert 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 of distribution in which three middlemen are involved. This is used when the producer wants 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 distributes the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products.
- 13. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Q3. Define the distribution strategy. Ans. Distribution strategy: A plan created by the management of a manufacturing business that specifies how the firm intends to transfer its products to intermediaries, retailers and end consumers. Larger companies involved in making products will usually also put together a detailed production distribution strategy to guide its entry into its intended market. Distribution intensity refers to the number of intermediaries through which a manufacturer distributes its goods. The decision about distribution intensity should ensure adequate market coverage for a product. In general, distribution intensity varies along a continuum with three general categories: intensive distribution, selective distribution, and exclusive distribution. 1. Intensive distribution: An intensive distribution strategy seeks to distribute a product through all available channels in an area. Usually, an intensive distribution strategy suits items with wide appeal across broad groups of consumers, such as convenience goods. 2. Selective distribution: Is distribution of a product through only a limited number of channels. This arrangement helps to control price cutting. By limiting the number of retailers, marketers can reduce total marketing costs while establishing strong working relationships within the channel. Moreover, selected retailers often agree to comply with the company‟s rules for advertising, pricing, and displaying its products. Where service is important, the manufacturer usually provides training and assistance to dealers it chooses. Cooperative advertising can also be utilized for mutual benefit. Selective distribution strategies are suitable for shopping products such as clothing, furniture, household appliances, computers, and electronic equipment for which consumers are willing to spend time visiting different retail outlets to compare product alternatives. Producers can choose only those wholesalers and retailers that have a good credit rating, provide good market coverage, serve customers well, and cooperate effectively. Wholesalers and retailers like selective distribution because it results in higher sales and profits than are possible with intensive distribution where sellers have to compete on price. 3. Exclusive distribution: is distribution of a product through one wholesaler or retailer in a specific geographical area. The automobile industry provides a good example of exclusive distribution. Though marketers may sacrifice some market coverage with exclusive distribution, they often develop and maintain an image of quality and prestige for the product. In addition, exclusive distribution limits marketing costs since the firm deals with a smaller number of accounts. In exclusive distribution, producers and retailers cooperate closely indecisions concerning advertising and promotion, inventory carried by the retailers, and prices. Exclusive distribution is typically used with products that are high priced, that have considerable service requirements, and when there are a limited number of buyers in any single geographic area. Exclusive distribution allows wholesalers and retailers to recoup the costs associated with long selling processes for each customer and, in some cases, extensive after-sale service. Specialty goods are usually good candidates for this kind of distribution intensity.
- 14. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD Q4. Selection process of distributors Ans: Distributor is appointed with a long term vision in a territory, in a segment and/or in a product range. Right selection of the distributor is very important to achieve the objective of achieving market leadership in the territory. Process of appointing a distributor should be rigorous and objective. Figure shows the process flow of generally accepted distributor appointment process. Fig: Process of distributor selection. Each step mentioned in the figure involves extensive detailing and field work. It also requires an experienced person for evaluation of alternative parties. Criteria for distributor selection: - Alternative parties are evaluated and judged based on following broad criteria. 1. Financial capacity: A distributor should be financially strong enough depending upon the market potential as well as your product range. Finance is most important criteria because of following reasons. Distributor is going to stock the required products in bulk quantity from the manufacturer. This requires huge shell out in terms of money. Distributor will provide credit (no. of credit days based on the requirement) to the retailer and institutions. Distributor should be able to invest in infrastructure, new products, and new initiatives of the company without expecting immediate returns. 2. Prior Experience: Prior experience of the distributor in FMCG distribution will help in followings. Distributor will take less time in understanding the functioning of various members of the channel. Less time to build good rapport with retailers/institutions. 3. Infrastructure: Infrastructure required like manpower, redistribution vehicle, go down space should be available of required quality and quantity. 4. Market reputation: Market reputation of the distributor in terms of relationship with retailers will help in efficiency of his work.
- 15. Manoj Patel Asst. Professor JHUNJHUNWALA BUSINESS SCHOOL, FAIZABAD 5. Market knowledge: Distributor‟s knowledge of the prevailing market conditions, retailers‟ attitudes, competitors‟ products etc. will help in getting good hold on the market. Also important is distributor‟s interest in knowing day-to-day information & happenings of the market. 6. Synergy: If distributor also has some other good FMCG product distribution with him, it helps in getting more retail space for your product. That brings synergy in retail penetration. 7. Technology: Use of various new technologies like SMS, computing, internet in various aspects of the distribution process will help in getting better efficiency in communication, operations etc. 8. Attitude: Distributor should possess basic managerial skills and should have a positive attitude. He should be willing to experiment with new products and take risks. 9. Social profile: Age and education level of the distributor are important. Young distributor will have many more years as active life which gives us stability for long term in that territory. Also, well educated distributor will be more adaptive to the changing environment, technology etc. 10. Future plans: As appointment of the distributor is longer term, it‟s important to know the future plans of the distributor for his business.