Transcript 3-Distribution Management

Distribution
Management
Prepared by:
Ma. Anna Corina G. Kagaoan
Instructor
College of Business and Accountancy
Objectives
This chapter will enable you:
• To understand the role of distribution management in
the marketing mix;
• To understand why distribution channels are required
at all;
• To study how distribution channels add value to the
marketing mix; and
• To get a brief introduction to distribution channel
strategy.
Preview
• Marketing – identifying customer’s needs and
satisfying them while generating profit.
• Marketer analyzes the market, segments it,
selects a target market and positions his
products to offer differential advantage to the
customers.
• Marketers satisfy the needs of the target market in a
better way (in other words they position the
products to offer differential advantage) through a
proper mix of Product, Price, Promotion and Place –
called Marketing mix or 4Ps of Marketing.
Preview
• Product – A Good, Service or an Idea that is
provided to satisfy the need and all the activities
required to plan the product.
• Price – Money (or something of utility) required
to exchange the product .
• Promotion – All activities required to inform and
persuade the customers.
• Place – All activities required to make the
product available where they are needed.
Distribution Management
• Distribution management deals with the Place
part of the marketing mix.
• One major aspect of the distribution
management process is the role and relevance
of distribution channels in helping the “place”
aspect of the marketing mix, which provides
place, time and possession utility to the
customer.
Distribution Management
Distribution management ensures that:
• a product is made available to a consumer at a retail
shop close to his residence, thus, providing the
“place” utility;
• a product is available at the retail counter at a
chosen time of the consumer, thus, providing the
“time” quality;
• a consumer can pay for a product and take it home
whereby he becomes the owner of it, thus, the
“possession” utility has also been provided for.
Major Role of an
Intermediary
Place
Utility
Time
Utility
Possession
Utility
Fig. 1. Major Role of an Intermediary
Distribution Management
Definition
• Management of all activities which facilitates movement
and co-ordination of supply and demand in creation of
time and place utility in goods.
• Art and science of determining requirements, acquiring
them, distributing them and finally maintaining them in
an operationally ready condition for their entire lives.
• Broad range of activities concerned with the efficient
movement of finished products from the end of the
production line to the consumer and it also includes the
movement of raw materials from the source of supply to
the beginning of the production line.
Need for
Distribution Management
A company could reach the ultimate consumer
by several routes:
• Direct from the company if it runs a house-tohouse campaign;
• Direct from the company if it has put up a stall
in a consumer product exhibition to promote its
products;
Need for
Distribution Management
• The company deliver the product in bulk to a
Carrying and Forwarding Agent (C&FA) or a
distribution center, which breaks bulk and gives it
to distributors. The distributor sells convenient lot
sizes to the retailers from where the consumer
buys it; and
• The distributor could sell the product to a
wholesaler who then sells it to the retailer from
where the consumer buys it.
Need for
Distribution Management
• The channels or set of intermediaries help the process
of “exchange” of the product or service at a certain
margin to themselves.
• Intermediaries help in the smooth flow of goods and
services.
• Intervention is necessary as there is a difference
between the assortment of goods and services
generated by the producer and the assortment
demanded by the consumer. Consumers usually desire
only a limited quantity of a wide variety of goods.
Need for
Distribution Management
• Distribution channels are required as the companies by
themselves cannot directly reach and sell the products
to their millions of consumers.
• Marketing channel decisions play an important role of
long-term importance of ensuring the presence and
success of a company in the marketplace.
• Presence ensures that the product gets wide
distribution and it reaches out to the maximum number
of customers and prospects.
Functions of Intermediaries
• To accumulate the right kind of goods, aggregating
and sorting to meet consumer needs at the point of
purchase;
• To believe in routine and simplified transactions and
work with a large number of products (at the
wholesaler and retailer level), so that distribution costs
could get minimized;
• To provide information both to the sellers and the
buyers to help them manage their business better.
Functions of Intermediaries
• To buy a large variety of goods and can compare costs
and prices and make the right recommendations to
their customers;
• To be aware of the environment in which they operate
and hence isolate the companies from the direct
impact of these local conditions; and
• To reduce the number of touch points. The company
will not be able to meet the demands of thousands of
its consumers directly and hence needs intermediation.
Role of an Intermediary
Company 1
Company 2
Intermediary
Large number of Consumers
Fig. 2. Role of an Intermediary
Company 3
Are Intermediaries Necessary?
• Not always, as sometimes the commitment of the
intermediary and his need for an excellent distribution
effort may not be of the same intensity as that of the
company.
• In case of technically complicated products, the company
may want to handle the distribution themselves.
• Cost is a major consideration for a company wanting to
handle the distribution function by itself.
• Distribution is a specialized function best left to experts—
wholesalers and retailers.
• Cost efficiency and effectiveness of indirect distribution is
higher than in the case of direct distribution.
A Combination Works Better
Most companies use a combination of direct and indirect
distribution. Choice of combination and contribution of each
set is determined by:
• Nature of the company and its products;
• Nature and dispersal of company customers;
• Business goals of the company;
• Market expectation of credit;
• Company’s capabilities and strength;
• Speed with which a company wants to increase its sales
and coverage of the market;
• Nature of competition and how it operates; and
• Company’s market shares. Small companies may not get
the interest of channel members.
Discrepancy and
Distribution Channels
Table 1. Role of Distribution Channels
Discrepancy Spatial
Character
Helps
reduce the
distance
between
the
producer
and the
consumer
Temporal
Break bulk Assortment Financial
support
Helps
speed up in
the
meeting
the
requiremen
t of the
consumer
Reduces the
large
quantities
into
acceptable
lot sizes for
the
consumer
Provides
variety to
the
consumer to
choose from
Helps fund
the
activities of
reaching
the product
to the
consumer
How Distribution Adds Value
• The distribution function using the network of the channel
partners add value to the selling function by providing time,
place, and possession utility to the consumer.
• For providing the possession utility, the channels simplify
the transactions by maintaining contacts with their
upstream partners (C&FA or company)—closer to the
producer.
• Downstream channels involved are the distributors,
wholesalers and retailers—closer to the consumers.
• Downstream channel partners do transactions like order
taking, order communication, order processing, delivery of
goods, and collection of payments.
• Service associated with products are done by channels.
Distribution Channel Strategy
Corporate Strategy
Marketing Strategy
Distribution Strategy
Fig. 3. Evolution of a Distribution Strategy
Distribution Channel Strategy
• Corporate Strategy. Spells out the overall strategy and
direction.
• Marketing Strategy. Part of the overall business plan of the
company and corporate strategy. Outlines how the overall
strategy is achieved using company products and its
distribution network.
• Distribution Strategy. Forms a critical part of the
strategy which cannot be frequently changed as
building a network based on sound, and
relationships. Part of it involves organizing and
the distribution function.
marketing
it requires
long-term
managing
Distribution Strategy Factors
• Defining customer service levels. What the customer is most
interested in and hence requires extra care in defining.
• Defining the distribution objectives to achieve these service
levels.
• Outlining the steps or activities required to achieve the
distribution channel objectives.
• Deciding on the structure of the network to implement these
activities to achieve the distribution objectives.
• Clearly defines policy and procedure for the network to carry
out its daily activities to achieve the objectives.
• Stating the key performance indicators (KPIs). To check if the
strategy is working well.
• Understanding the critical success factors (CSFs) to make the
distribution strategy effective.
Customer Service Levels
• Nature of the industry in which the company is operating,
its products and services, its market share and the nature
of competition help define the level of customer service the
firm can promise its customers.
• Affordability also dictates service level.
• Companies could even think of categorizing their customer
into A, B and C (Pareto’s Law) to decide different levels of
service.
• Extent of competition could also decide level of service to
be provided—number of distributors servicing the market,
frequency of visits to the customers both by the channel
partners and the company sales personnel, ready
availability of stocks to service the market, etc.
Setting Distribution Objectives
• Distribution objectives clearly spell out what is
expected out of the network in ensuring the desired
level of customer service to meet the expectations of
its customers.
• Expectations could only be in terms of the time, place,
and possession utilities as well as the period of credit
which the company may be willing to offer its
customers.
Set of Activities
• Defines the manner in which the company and its channel
partners go about taking into action the customer service
objectives.
• Performed by the company sales personnel and channel
partners. Some steps could be:
 Periodic sales forecasts by geography.
 Arranging for dispatch of the products from the plants or C&Fas
to a point closest to the market.
 Developing beat plans for market coverage.
 Developing journey and beat plans for service engineers.
 Market visits to sell products.
 Collection of sales proceeds.
 Carrying out promotional activities.
 Calling regularly on A category customers to build long-term
relationships.
The Distribution Organization
• Determines who will do what. Helps define structure to
support the entire strategy. Decision points are:
 Extent of in-company (own sales team) and outsourcing
(use of channel partners). Inventory planning, dispatches,
credit management and collection are done by the
salespeople and logistics of the company.
 Affordability factors—own sales team functioning may
mean higher fixed costs whereas a bigger outsourced
network may mean higher variable costs if the volume
goes up. Channel partners are compensated based on
percentage of sales value. It indirectly affects the margins
of the company.
The Distribution Organization
• More decision points:
 Selecting the channel partners including C&Fas and
distributors, stockists or agents. Channel that cannot
easily be changed.
 Setting clear objectives for each channel partners and
systems to monitor activities and measure performance.
 Ensuring the correct and agreed level of financial
investments by channel partners in the company
business—size of warehouse distributors should have,
number of vans to cover market, number of sales and
back office people he has to employ, beat plans, and
amount of credit he is expected to give in the market.
Policy and Procedure
• Company sales personnel and channel partners should
understand what is expected of them and discharge roles
and responsibilities faithfully.
• Operating manuals are very important to clearly define policy
and implementation guidelines. It is an important tool to
manage the distribution organization. It may also include:
 System for redressal of complaints from channel partners;
 System for settling disputes;
 Additional payments or incentives to channel members—difficult
territories or for covering rural areas; and
 Coverage of institutional business and service levels to be
extended.
Key Performance Indicators (KPIs)
• Agreed on measurement criteria with channel partners. Some
popular KPIs include:
 Consistent achievement of targets by product groups, period,
and territories;
 Achievement of market shares;
 Achievement of profitability;
 Zero complaints from customers;
 No stock returns;
 Ability to handle emergencies and sudden spurs in demand;
 Balanced sales achievements rather than period sales skews;
 Market coverage with ready stocks;
 Excellent management of accounts receivables;
 Minimize sales losses on account of stock-outs; and
 Minimize damage to products.
Critical Success Factors (CSFs)
• Top management should be involved in formulating of
strategies. Some CSFs are:
 Clear, transparent and unambiguous policy and procedure;
 Serious commitment of the channel partners;
 Fair dealing of the company with all its partners;
 Clearly defined customer service policy;
 High levels of integrity to be demonstrated by channel
members;
 Equitable distribution in case of shortage of product; and
 Compensation to channel partners on special promotional
activity should be prompt and not delayed.
Scope of Distribution Management
Channels of
Distribution
Retailing
Wholesaling and
Physical Distribution