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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