DISTRIBUTION

Distribution is one of the four elements of the marketing mix, the other three
being product, pricing and promotion. This marketing mix is also referred to
as the four Ps of marketing; distribution is here called physical distribution or
place. Simply put, distribution is the process of delivering the products
manufactured or service provided by a firm to the end user. Various
intermediaries are involved in this process. This chain of intermediaries
which helps in transferring the product from one intermediary to the next
before it reaches the end user is called the Distribution Chain or Distribution
Channel. Each intermediary has a specific role and need which the marketer
caters to.

Distribution channels are not limited to products only even the services
provided by a producer may pass through this channel and reach the
customer. Both direct and indirect channels come into use in this case. For
instance, the hotel industry provides facility for lodging to its customers,
which is a non-physical commodity or a service. The hotel may provide
rooms on direct booking as well as through indirect channels like tour
operators, travel agents, airlines etc. Distribution chain has seen several
improvements in the form of franchising. Also there has been link ups
between two service sectors like travel and tourism which has made services
available more accessible to the customer. For instance hotels also provide
cars on rent.

FUNCTIONS OF A DISTRIBUTION CHANNEL

• The primary function of a distribution channel is to bridge the gap

between production and consumption.

• A close study of the market is extremely essential. A sound marketing

plan depends upon thorough market study.
 • The distribution channel is also responsible for promoting the product.
Awareness regarding products and other offers should be created
among the consumers.

• Creating contacts or prospective buyers and maintaining liaison with

existing ones.

• Understanding the customer's needs and adjusting the offer

accordingly.

• Negotiate price and other offers related to the product as per the
customer demand.
• Storage and distribution of goods

• Catering to the financial requirements for the smooth working of the

distribution chain.

• Risk taking for example by stock holding

Three Levels of the Distribution Channel

In level (1) there are no intermediaries involved, the manufacturer is selling
directly to the customer. This is called the ‘direct-marketing' channel.
Examples of direct marketing channel can be seen at factory outlet stores.
Various hotels prefer direct-marketing, they market their services directly to
their customers without taking the help of any retail intermediary (travel
agent).

Levels (2) and (3) are examples of 'indirect-marketing' channels. In level (2)
one intermediary or retailer is used. A Retailer sells goods/services directly to
the end users. Retailer buys products from manufacturers.

In level (3) along with retailer a second member is added to the distribution
chain. He is the wholesaler. A wholesaler buys and stores products in bulk
from manufacturers. He sells these products in smaller quantities to retailers.
Why should a producer not indulge in selling his product directly to the
consumer?
The reason is that the intermediaries manage the distribution costs
efficiently. They are experienced and have potential contacts which add to
their productiveness. Their scale of operation is large as compared to the
manufacturer alone which means the scale of sales reached would be higher.
While there are various organizations which operate their own distribution
channel or do not take any help from channel members, there are others
who are in need of some level of channel partnership.

LEVEL OF DISTRIBUTION COVERAGE

A marketer needs to consider various factors before he decides upon the
right level of distribution coverage. It is well understood that distribution
always increases company costs. A part of this cost is covered by the
customer for instance shipping costs but the rest cannot be passed on to the
customer. The marketer can determine the right level of distribution by
comparing the profit made (example, more sales) with the cost incurred in
achieving the profit. There are three levels of distribution coverage:
1. Mass Coverage
Mass coverage is also known as intensive distribution. As the name
suggests in this level of distribution coverage the product is distributed
to nearly all the locations where that type of product is sold. Mass
coverage is suitable for low priced products with huge consumer
demand. An example of such a product is Coca Cola. The product is
available at all kind of stores, grocery stores, convenience stores,
vending machines, hotels and more. The distribution cost for such
products is very high however huge sales volume keeps the profits
running high for the marketer.

2. Selective Coverage
 In selective coverage the product distribution is limited to certain
selected locations. This is the case with products with a smaller market
size. As the market size is small the number of locations needed to
support the distribution of the product is also smaller.

3. Exclusive Coverage
Exclusive coverage is ideal for products that target relatively smaller
markets, for instance high-end products have small customer size.
These products are more than often purchased by customers who
satisfy most of their needs with high quality, expensive products
(example- cars) Efficient and well-trained customer service is essential
for satisfying and helping such customers. Due to these characteristics
of the product as well as its buyers the marketer sells his products at
select stores or exclusive group of resellers. Another kind of product
which gets exclusive coverage is the one found only in company
owned outlets. These may not be high-end products or very expensive
but since they are found only in select outlets they are distributed
exclusively.
With the advent of internet the effectiveness of these three levels of
distribution coverage has been severely challenged. This is so because
all products sold on internet are distributed by mass coverage.
Therefore these three distribution levels are best options for
distribution of products that are physically purchased by a customer.

ISSUES IN ESTABLISHING DISTRIBUTION CHANNELS

A manufacturer must conduct a thorough market research before deciding

upon the distributive method he wants to employ. Like all marketing
decisions this too requires lot of thought and study. There are various factors
which determine his choice of a distribution system. These factors can be
grouped into two. Factors can be either related to marketing decisions which
determine a distribution channel or the kind of relationship that exists
between channel members.

1. Marketing Decision Issues

2. Channel Relationship Issues

MARKETING DECISION ISSUES

Various marketing decisions regarding the product help in establishing its
distribution channel. For instance the following factors:

A. Product Issues

The nature of the product often determines the distribution option.

Various products which need to be distributed are very delicate and
fragile for instance flowers. Here the marketer will choose an
appropriate channel on the other hand a marketer selling tough or
durable products like steel beams will have other kinds of distribution
channels in mind.

B. Promotional Issues

Apart from issues like whether a product needs special handling or not
the marketer also needs to keep in mind how the product needs to be
promoted before he chooses a distribution channel for it. Certain
products need extensive salesperson-to-customer contact for instance
automobile purchase. On the other hand a product like bread will need
a different distribution channel as its buyers require no help from
salesmen.

C. Pricing Issues

The price at which the marketer wants to sell his product is another
factor to be kept in mind before choosing a distribution system. The
 number of resellers involved in the distribution channel affects the final
price of the product. This is so because each channel member tries to
make some profit for their contribution to the sale of the product.
Therefore more the number of channel members the marketer has to
increase the product price to maintain his profit and the distribution
channel.

D. Target Market Issues

The primary motive of utilizing a distribution channel is to ensure the

products reach the end user. The nature of the target market is
another important point to consider while deciding upon the
distribution channel. In this regard it is beneficial to determine the
level of distribution coverage needed to effectively meet
customer’s needs. Distribution coverage is measured in terms of
the intensity by which the product is made available to the end user.

CHANNEL RELATIONSHIP ISSUES

Apart from marketing decisions the marketer must consider the quality of
relationship that exists between distribution channel members. Relationship
between channel members just like marketing decisions has the potential to
effect product sales.
Relationship issues can be broadly studied under the following three heads:

A. Channel Power

A distribution channel usually has several members, each having a set

of duties to perform and each add on to the value of the product.
Among these members some may hold a stronger position than the
others. This phenomenon is known as channel power. This member/s
tries to influence the rest of the distribution chain. In such a situation
they start demanding for terms and conditions more favorable to them.
 Like, they would buy more products only if the prices are lowered, will
sell only if the prices are higher. Or would demand other members for
instance to do more marketing to customers etc.
Channel power can be exerted in the following ways:
• Backend or Product Power
Backend or product power usually lies in the hand of manufacturers
whose products enjoy high consumer demand. The rest of the channel
members have to carry forward the product in the chain or else they
are at the risk of losing their customers.

• Middle or Wholesale Power

Here the power lies in the hands of the wholesaler who is in the
commanding position in the distribution chain. Often a wholesaler
distributes products among several smaller retailers and he himself
obtains products from various manufacturers. The small retailers
cannot buy products in bulk or variety because of cost constraints
therefore is dependent on the wholesaler who can exert channel power
in this situation.

• Front or Retail Power

Front or retail power as the name suggests stays in the hands of the
retailers. This state is reached when the retailer generates a high
percentage of sales and therefore the rest of the channel members are
dependent on them.

DISTRIBUTION CHANNEL ARRANGEMENTS

A distribution channel is made up of various channel members like retailers

and wholesalers. For a smooth working of this channel the relationship
between the members must be strong. Trust and understanding between the
members go a long way into successful working of the chain.
A retailer often buys products from a wholesaler and expects him to deliver
products on time so that the retailer can meet the consumer demands.
Similarly the wholesaler expects the retailer to buy products on a regular
basis and make payments on time.

Relationship between channel members is a function of the arrangement

that occurs between the channel members. Channel arrangements are of
two types:

1. Independent Channel Arrangements

2. Dependent channel arrangements

Independent Channel Arrangements

In this kind of arrangement the channel members prioritize their own

objectives and are not concerned about the chain as a whole. It is a more
conventional form of arrangement where the members are free to take
decisions which are in their own interest. As a result the chain suffers as a
whole as its objectives are not achieved. There is no binding or unity in the
group as each member functions selfishly. The members in this kind of
arrangement enjoy the freedom of moving away from a relationship they feel
is not advantageous.

Dependent Channel Arrangements

In this kind of arrangement the channel members feel they are bound
together and working together towards a similar goal. There is more unity.
They form a more stable distribution channel. This form of arrangement is
also called the "vertical marketing system". In this system a single member
cannot make changes in the way the product is distributed in the channel.
The dependent channel arrangement can be further divided into three
categories:

1. Corporate

In this form of arrangement the supplier maintains his own distribution

channel. This arrangement is commonly seen in the retail industry. For
instance Starbucks operates a chain of retail stores. Starbucks sells
coffee by first importing it. It is then processed by them and sold under
their brand name in their retail stores. It should be mentioned that
Starbucks uses a multi-channel approach to market its product. For
instance coffee is also distributed through grocery stores and mail
orders.

2. Contractual

In this kind of arrangement the supplier provides a legal document to

his distributors who are supposed to stick to its contents. The legal
document clearly mentions which member of the chain is permitted to
perform what and what not. This arrangement can be

a. Wholesaler-sponsored: where a wholesaler brings together and is

responsible for the working of several independent retail stores.
The retailers here are supposed to use the same name as well.
b. Retail-sponsored: here again several independent retail stores
come together but the retailers are themselves responsible for
managing the channel.
c. Franchised: In this arrangement there exists a central
organization which is responsible for controlling the activities of
all channel members.
3. Administrative
 In this arrangement a single member controls the activities of all
channel members. This is possible when a single channel member
attains a very powerful position. This channel member may be the
manufacturer who has attained this position as his products are
enjoying high consumer demand. Or it may be the retailer because of
his size and market coverage.

ADVANTAGES OF A DISTRIBUTION CHANNEL

When a customer is considering buying a product he tries to access its value

by looking at various factors which surround it. Factors like its delivery,
availability etc which are directly influenced by channel members. Similarly,
a marketer too while choosing his distribution members must access what
value is this member adding to the product. He must compare the benefits
received to the amount paid for using the services of this intermediary.
These benefits can be the following:

• Cost Saving

The members of distribution channel are specialized in what they do

and perform at much lower costs than companies trying to run the
entire distribution channel all by itself.

• Time Saving

Along with costs, time of delivery is also reduced due to efficiency and
experience of the channel members. For example if a grocery store
were to receive direct delivery of goods from every manufacturer the
result would have been a chaos. Everyday hundreds of trucks would
line up outside the store to deliver products. The store may not have
enough space for storing all their products and this would add to the
chaos. If a grocery wholesaler is included in the distribution chain then
the problem is almost solved. This wholesaler will have a warehouse
 where he can store bulk shipments. The grocery store now receives
deliveries from the wholesaler in amounts required and at a suitable
time and often in a single truck. In this way cost as well as time is
saved.

• Customer Convenience

Including members in the distribution chain provides customer with a

lot of convenience in their shopping. If every manufacturer owned its
own grocery store then customers would have to visit multiple grocery
stores to complete their shopping list. This would be extremely time-
consuming as well as taxing for the customer. Thus channel
distribution provides accumulating and assorting services, which
means they purchase from many suppliers the various goods that a
customer may demand. Secondly, channel distribution is time saving
as the customers can find all that they need in one retail store and the
retailer

• Customers can buy in small quantities

Retailers buy in bulk quantities from the manufacturer or wholesaler.

This is more cost effective than buying in small quantities. However
they resell in smaller quantities to their customers. This phenomenon
of breaking bulk quantities and selling them in smaller quantities is
known as bulk breaking. The customers therefore have the benefit of
buying in smaller quantities and they also get a share of the profit the
retailer makes when he buys in bulk from the supplier.

• Resellers help in boosting sales

Resellers often use persuasive techniques to persuade customers into

buying a product thereby increasing sales for that product. They often
 make use of various promotional offers and special product displays to
entice customers into buying certain products.

• Customers receive financial support

Resellers offer financial programs to their customers which makes

payment easier for the customer. Customers can buy on credit, buy
using a payment plan etc.

• Resellers provide valuable information

Manufacturers who include resellers for selling their products rely on

them to provide information which will help in improving the product or
in increasing its sale. High-level channel members often provide sales
data. On all other occasions the manufacturer can always rely on the
reseller to provide him with customer feedback.

DISTRIBUTION SYSTEMS

Before settling for a distribution system the marketer has too keep in mind
various factors affecting distribution system (like marketing decision and
relationship issues).
The following distribution designs are available to the marketer for his
distribution system:

1. Direct Distribution Systems

In direct distribution system the marketer reaches the target consumer

directly without the use of any intermediary. The distribution chain is
small and no other party can take ownership of the product being
distributed. The direct distribution system can be further sub-divided
on the basis of the methods of communication that takes place during
sale between marketer and consumer. These methods are:
• Direct Marketing Systems

In this system the consumer buys the product based on

information gained from impersonal contact with the marketer
like by visiting the marketer's website or ordering from the
marketer's catalog. Or he buys based on information gathered
through some personal communication with a customer service
personnel who is not a salesperson and can be reached through
a toll-free number.

• Direct Retail System

In this type of system the marketer operates his own retail

stores. A perfect example of this system is Starbucks.

• Personal Selling Systems

In this system the distribution of the product is carried forward

by people whose main responsibility is creating and managing
sales (for instance a salesperson). He persuades the buyers into
placing an order. This order may not be handled by the
salesperson but through websites or toll-free telephone numbers.
The sales person plays a vital role here in generating sales.

• Assisted Marketing System

In this form of distribution system the marketer handles the

distribution of his product and helps it reach directly to the end
user. However he needs assistance from others to spread
awareness about his product among the customers. An example
of assisted marketing system is e-bay, here the buyers and
sellers are brought together for a fee. Agents and brokers can
also be included in this category.
2. Indirect Distribution System

In indirect distribution system the marketer includes intermediaries or

other members in his distribution chain. These resellers make sure the
product reaches the end user, while performing their duties they take
complete ownership of the product. However the reseller may sell
products on a consignment basis wherein the reseller pays for the
product only when the product is sold. The resellers may be expected
to take up a few responsibilities to help boost the sales of the product.

Indirect methods include the following:

• Single-Party Selling System

In this system the marketer involves another party to sell and

distribute his product to the end user. An example of single-party
selling can be when the product is sold through large store-based
retail chains or through online retailers. In this case the
distribution system is also referred to as trade selling system.

• Multiple-Party Selling System

In multiple-party selling system the distributor involves two or

more reseller in the distribution process before the product
reaches the end user. This is most likely to happen when a
wholesaler buys the product from the manufacturer and then
sells it to the retailer.

3. Multi-Channel (Hybrid) Distribution System

 A marketer is said to be using a multi-channel or hybrid distribution
system when he utilizes more than one distribution design. As we have
studied earlier in the example of Starbucks, multiple distribution
designs are put to use in the distribution of its product. It uses a direct
retail system when it sells its products in company-owned stores, a
direct marketing system by selling via direct mail and single party
selling system is put to use when its products are sold through grocery
stores. Apart from these other distribution systems are also put to use.
Multi-Channel distribution system is advantageous as it expands the
distribution system and more customers can be reached. The possible
disadvantage again is channel conflict of which the marketer should
always be cautious.

Imported cars
Vehicles are either,
(1) Directly imported from the overseas manufacturers (official import)
(2) Imported through overseas dealers (parallel import). The official import is
only for new cars, but parallel import is for both new and used cars.

ISSUES:
Criteria in selecting channel members. Typically, the most important
consideration whether to include a potential channel member is the cost at
which he or she can perform the required functions at the needed level of
service. For example, it will be much less expensive for a specialty foods
manufacturer to have a wholesaler get its products to the retailer. On the
other hand, it would not be cost effective for Procter & Gamble and Wal-Mart
to involve a third party to move their merchandise—Wal-Mart has been able
to develop, based on its information systems and huge demand volumes, a
more efficient distribution system.
A manufacturer enlists another manufacturer that already has a channel to a
desired customer base, to pick up products into an existing channel.
Parallel Distribution. Most manufacturers find it useful to go through at
least one wholesaler in order to reach the retailer, and it is simply not
efficient for Colgate to sell directly to pathetic little "mom and pop"
neighborhood stores. However, large retail chains such as K-Mart and Ralph’s
buy toothpaste and other Colgate products in such large volumes that it may
be efficient to sell directly to those chains. Thus, we have a "parallel"
distribution network whereby some retailers buy through a distributor and
others do not. Note that we may also be tempted to add a direct channel—
e.g., many clothing manufacturers have factory outlet stores. However, note
that the full service retailers will likely object to being "undercut" in this
manner and may decide to drop or give less emphasis to the brand. It may
be possible to minimize this contract by precautions such as (1) having
outlet stores located in vacation areas not within easy access of most
people, (2) presenting the merchandise as being slightly irregular, and/or (3)
emphasizing discontinued brands and merchandise not sold in regular
stores.

Evaluating Channel Performance. The performance of channel members

should be periodically monitored—a channel member may have looked
attractive earlier but may not, in practice be able to live up to promises.
(This can be either because of complacency or because the channel member
simply did not realize the skills and resources needed to perform to
standards). Thus, performance level (service outputs) and costs should be
evaluated. Further, changes in technology or in the market place may make
it worthwhile to shift certain functions to another channel member (e.g., a
distributor has expanded its coverage into another region or may have
gained or lost access to certain retail chains). Finally, the extent to which
compensation is awarded in proportion to performance should be reassessed
—e.g., a distributor that ends up holding inventory longer or taking on more
returns may need additional compensation.

Internal Considerations

• do I have enough money to add another channel member ?

• is it compatible with my other businesses ?

• will any change cause more problems than solutions ?

• for example, IBM, Compaq threatened by Dell

Is it compatible with my business model e.g. Dell in China

these internal considerations have a bearing on type of channel

Legal Considerations

• a manufacturer cannot insist that they sell their own products only
(unless in case of a franchisee)

• a manufacturer cannot tie the sale of certain goods to certain

others

• “you buy 100 crates of Vanilla Coke, if you want 500 crates of
Coke”

• I am sure, though, that this is happening

• Cost and Profit Considerations

• a low profit margin, high volume company will have many channel
members

• a high profit margin, low volume member will have only a few
members

Channel Conflict

• This is defined as tension/clashes between channel members as a

result of perceived unfairness
 • vertical conflict arises when there is a clash of interests between
members at 2 different levels (like wholesaler and retailer)

• horizontal conflict is between members at the same level -

Retailer A Vs. Retailer B

• conflict can be caused by unfair manufacturer policies, a few

“rotten” apples, partisanship etc

• conflict can be potentially dangerous and can snowball

• McDonald’s franchisees for instance; if care is not taken, the

grumbles might become a roar

• however, a little conflict is good

• manufacturers must be fair

Case 1
TATA NANO
Profile:
Tata Motors Limited is India’s largest automobile company, with revenues of
Rs.35651.48 crores (USD 8.8 billion) in 2007-08. It is the leader in
commercial vehicles in each segment, and among the top three in passenger
vehicles with winning products in the compact, midsize car and utility vehicle
segments. The company is the world’s fourth largest truck manufacturer,
and the world’s second largest bus manufacturer. In March 2008, Tata
Motors acquired Ford’s UK based car brands Jaguar and Land Rover (BBC
News, 2008).
According to Ratan Naval Tata (Chairman of Tata Group), the need for an
innovation like Nano has got to do something for the people of India and
transport. Unavailability and poor quality of mass transport is a common
problem in India. In a two wheeler, father driving with elder child standing in
front and wife behind holding a baby is norm in this country. Thus, this is a
relatively an unsafe mode of transporting a family. Thus, with this in mind
Tata Nano was created as a safer form of transport.
As one of its objectives is to become an Indian business conglomerate
operating in many countries, Tata Nano will be introduced in Malaysia.

Distribution review
Just like in India, Tata Nano will be positioned as an affordable car even in
overseas markets. ‘Easy-to-assemble kits’ will be imported from Tata in
India. The car then will be assembled at pre-defined locations. The proposed
locations are Shah Alam, Selangor and Pasir Gudang, Johor Bahru. It will be
then redistributed to showrooms that will be set up based on region. 30 sales
offices will be opened throughout Malaysia.

Direct marketing channel (zero-level channel)

We perform the Tata Nano in Malaysia by selling it directly to customers.

Customers can deal directly with our dealers and make the booking for Tata
Nano by visit our sales office or at any special event/campaign. By this way
we can save more cost and maintain the cheapest purchasing price rather
than through retailers or resellers.

Physical flow:

From the diagram, can know that Tata Nano will send the paths to the
Malaysia after received the order from the sales office. After that, we will
assemble a car at the workshop. Finally, send to the customers directly.
From here, we can often provide faster delivery to customers because we
are closer to the customers.
Payment flow:

Customers can pay bills by cash or do the financing from bank. Customers
pay less by this diagram due to not need to pay extra commission to third
party such as wholesalers or retailers. Tata Motor also can collect the
payment more efficient.

Information flow:

Customers can get the information directly from Tata Motor such as new
product, price development and so on. Tata Motor can more understanding
customer's needs when receiving customers, response calls and mailings or
through internet blog. If customers have any need or complaint, we can
satisfy them immediately by deal with customers directly.
Case 2
TATA – FIAT
Profile
About Fiat
One of the pioneer companies in the automobile industry, Fiat has produced
more than 85 million passenger cars and light commercial vehicles, including
no less than 400 models, since 1899, when the company was founded in
Turin, Italy. Some of them have represented milestones in the automotive
industry. The Fiat Group’s Automobiles Sector operates world-wide with the
following brands: Fiat, celebrated for value, economy, and innovation and
whose mass produced cars are distributed over almost the entire price class
spectrum; Lancia (acquired in 1969) means prestige cars noted for their
elegant styling, and comfort; Alfa Romeo (acquired in 1986) is famous as a
maker of sport and luxury vehicles of style and distinction; Maserati
(acquired in 1992) represents a landmark in the history of the automobile;
Ferrari (acquired in 1969), well renowned for unsurpassed design,
performance, and luxury, is a legendary automobile that imparts special
cachet to its owner.
Fiat India Private Limited, with its renewed brand strategy for the Indian
market, is focused on the premium end of the B & C category in the growing
automobile sector. Fiat Adventure Sport is the latest offering targeted at the
new generation of customers who enthusiastically seek out the latest trends
in style, safety, engine and performance. Fiat’s superiority in design and
technology has been re-emphasized from the fact that its 1.3-multi jet has
been chosen as the “Engine of the Year 2005” in the 1 to 1.4 litres by the
Jury of the “International Engine of the Year” award.

About Tata Motors

Tata Motors is India’s largest automobile company, with revenues of US$ 4.7
billion. The company is a market leader in commercial vehicles in India and is
the second largest passenger car company in the domestic market. It is the
world’s fifth largest medium and heavy commercial vehicle manufacturer.
Tata Motors vehicles are being marketed in several countries in Europe,
Africa, the Middle East, South East Asia, South Asia and Australia. The
company has manufacturing operations in South Korea and Spain, and a
Technical Centre in the U.K.

Tata- Fiat Dealer Network

Tata Motors and Fiat India Private Limited today announced the
commencement of the new Tata-Fiat dealer network to sell both Tata and
Fiat branded cars, along with service and sales of spare parts, in 11 cities
across India.
The Tata-Fiat dealer network comprises 25 existing Tata Motors Passenger
Vehicles dealers and 3 existing Fiat India dealers. Starting today, the 28
Tata-Fiat dealers will sell the Fiat Palio (1.2 EL PS, 1.2 ELX, 1.6 Sports) and
the Fiat Adventure (1.6 Sports), and all Tata Motors Passenger Vehicles – the
Tata Indica, the Tata Indigo, the Tata Indigo Marina, the Tata Sumo and the
Tata Safari.
The Fiat Palio range will now be available from an attractive price of Rs.3.8
lakhs onwards (all prices ex-showroom Delhi). The 1.6 litre Adventure Sports
is now available at a new uniform price across the country at Rs.5.65 lakhs.
The 28 Tata-Fiat dealers, who together have 44 outlets, are located in 11
cities – Mumbai, Pune, Ahmedabad, NCR Delhi, Chandigarh, Ludhiana,
Bangalore, Chennai, Hyderabad, Kochi and Kolkata.
The beginning of operations of the Tata-Fiat dealer network follows the
agreement, announced by the Fiat Group and Tata Motors on January 13,
2006, to cooperate on dealer network sharing. The execution of the
distribution arrangement is the first initiative post the signature of the
Memorandum of Understanding signed between the Fiat Group and Tata
Motors in September 2005. Discussions are on to explore other areas of co-
operation, on which specific announcements can be expected once their
feasibility is established.
Commenting on the commencement of the Tata-Fiat dealer network, Mr.
Rajiv Dube, Sr. Vice-President (Manufacturing & Commercial – Passenger
Cars Business Unit), Tata Motors, said, “Tata Motors is delighted to be
partnering Fiat India in bringing a larger portfolio of products under a single
roof at our joint dealerships. Between the Tata and Fiat brands, the company
is in a position to offer one of the widest product offerings in the Indian
market with the promise of several exciting options to come.”
Mr. Giovanni de Filippis, Managing Director of Fiat India Private Limited, said,
“The coming together of Tata and Fiat through the dealer network sharing
signifies better service, after sales support and more convenience to Fiat
customers. Our customers have always been delighted with the superior
build quality of our cars. The after sales support that comes with the Tata
trust will complement this, and Fiat is confident of serving its customers
better.” Existing Fiat dealers will continue to retail the full range of Fiat
offerings, including the Fiat Petra.

Case 3
Toyota calls back cars

It began with two separate issues – floor mats that interfere with the
accelerator, and “sticking” accelerator pedals, causing the car to speed up or
the pedal to return too slowly to the idle position. The discovery has caused
Toyota to issue a recall on more than 7 million cars, including models of the
popular RAV4, Corolla, Camry, Highlander and Sequoia. (Toyota didn’t move
fast enough on the recalls for public taste, however. It has been suggested
that the company was forced into initiating the action by the U.S.
government. So much for the fundamentals of crisis management.)

More recently, we’ve witnessed the recall of nearly 500,000 Prius and Lexus
models worldwide for a braking problem which stems from the software that
runs the control system. Assuming Toyota isn’t sitting on more bad news, the
combined effect of those flaws could be devastating enough to the world’s
number-one automaker. IHS says Toyota is likely to lose sales of some
10,000 units for both January and February. D&B’s Lawton quotes an
estimate by investment banker UBS that the event will cost the company
$155m a week to fix. And that doesn’t even allow for the long-term effects
from this blow to Toyota’s carefully burnished image.

There’s an extra twist to this story. Industry experts are always telling
companies about the importance of focusing on major suppliers. Yet the
smaller ones can cause the biggest headaches. Elkhart, Ind.-based CTS Corp.
is the maker of the pedal assemblies that prompted the Jan. 21 recall. But
automotive business reportedly accounts for less than a third of the
company’s sales. And Toyota contributes about 3 percent of that. (CTS calls
Toyota “a small, but important” customer.)

Was it CTS’s fault? In a rather chilly statement on Jan. 27, the company
stated that its products “have been manufactured to Toyota’s design
specifications.” It went on to say that the two are “actively working” to
develop a new pedal that meets tougher specifications. And that’s about it.
In fact, the boilerplate “Safe Harbor” language tacked on to the end of the
CTS press release is longer than the statement itself.

Regardless of where the blame ultimately falls, there appears to have been
too little communication between Toyota and CTS. The lapse is hardly rare.
Lawton says there are numerous “natural barriers” in any corporate
environment that prevent businesses from discovering and coming clean
about product defects. Maybe the screwup can be fixed before the public
finds out, top executives might reason. Or perhaps we’d better run it by
Legal first. But the failure to act quickly and decisively often does more
damage than the original flaw. Do the words “Ford” and “Firestone” ring a
bell?

Lawton says it’s vital that companies review their suppliers on a regular
basis, to flush out problems related to financial condition or product quality.
Are your vendors working with liens against them? Have they been charged
with violations of environmental or worker-safety laws? Are there issues
related to their financial stability? Buyers and suppliers “need to create an
environment from a technology perspective where it’s easy and cost-
effective to share information,” Lawton says. The issue becomes even more
critical in tough economic times, when partners in the chain pare back
resources to an absolute minimum.

The price of failure is high. According to a report by the CFO Executive Board
(https://cfo.executiveboard.com/Public/Default.aspx), the number of supply
disruptions has been on the rise. Typical results include an 11-percent
increase in costs, 7-percent decline in sales growth and 35-percent plunge in
shareholder returns.

So we’re left with a major automaker that must accelerate from a slow start
in reassuring consumers and regulators of its commitment to safety.
Company president Akio Toyoda finally got around to apologizing to
customers at a Feb. 5 news conference (although observers have been
debating the depth of his bow), but “sorry” by itself doesn’t cut it. Real
results will come from a commitment to better supplier relationships within
the Toyota organization. Meanwhile, costs continue to mount. Says Lawton:
“The clock is ticking.”