Introduction to distribution

management
Definition
• The management of all the activities which facilitates movement and
coordination of supply and demand in the creation of time and place
utility in goods.
• The art and science of determining requirements, acquiring them,
distributing them and finally maintaining them in an operationally
ready condition for their entire lives.
• Efficient movement of finished products from the end of production
line to the consumer and in some cases in also include the movement
of raw material from the source of supply to the beginning of
production line.
Discrepancies and Distribution Channels
Takes care of the following ‘discrepancies’ or provides following utilities
• Spatial or Place –Help reduces distance between producer and consumer
• Temporal or Time - Time difference b/w the production point and the time at which the
product may be bought/consumed. Also speed at which the product is delivered.
• Breaking bulk or Form- Reduces large quantities into acceptable lot sizes for the consumers
• Assortment - Provide variety to consumers to choose from.
• Financial Support – Help fund the activities of the product to the consumers
Distribution Level Strategy
• Defining customer service levels – what the customer is interested in
• Defining distribution objectives to achieve these service levels.
• Outlining the steps/ activities required to achieve distribution channel objectives.
• Deciding the structure of network to implement these activities to achieve the
distribution objectives – using inside resources sales personnel and outside
resources – C&FA, distributors, etc.
• Policy & procedures for the network to carry out its daily activities to achieve the
objectives.
• Key Performance indicators(KPIs)
• Critical Issue Factors (CSFs)
Distribution Channel - Definition
• A group of people and firms involved in the transfer of title or
ownership as the product moves from the producer to ultimate
consumer.
• Structure of intra-company organization units and extra-company
agents, dealers, wholesalers and retailers through which a
commodity, product or service is marketed. (American Marketing
Association)
 Channel Functions
• Information gathering
• Consumer motivation
• Negotiating with suppliers
• Placing orders
• Financing
• Inventory management
• Risk bearing
• After sales support
Channel Functions…….
• Physical reach
• Customer contact
• Building relationships
• Market feedback
• Understand market trends and keep principals informed
• Handle price risks
• Finance market credit and inventory holdings
• Provide after sales service
Role of Intermediaries

Company 1 Company 2 Company 3

Intermediary

Large number of CONSUMERS

Evolution of Marketing Channels

• Started with distribution of farm outputs – selling within limits of

physical reach
• Industrial revolution changed the method of looking at ‘reach’.
Movement of raw materials for production brought in traders to
provide assortment.
• Focus on ‘selling’ brought in independent intermediaries like
wholesalers and retailers.
• Development of the automobile and highways changed the way
of distribution.
Evolution of Marketing Channels

• Early 1950s – focus on customer needs meant the ‘pull’ system

came into effect. Gathering and using customer information
became important.
• Next stage was in terms of ‘relationship’ marketing.
Sophisticated databases and interactive technologies supported
distribution.
Direct Distribution
• Company to consumers without use of intermediaries. Also
includes reaching Institutional buyers.
• Selling on the Internet
• If products are technically complex, this system is normally
preferred
• Cost is a major consideration to adopt this mode
 Direct Distribution - Examples
• Banking services
• Credit cards
• Petrol / diesel – company own outlets
• Land line phone connections
• Health services
• Utilities – electricity, water
• Subsidized ration
• Education
Indirect Distribution
• Goods may move through a set of intermediaries
• Most FMCG companies follow this route
• The intermediary has a far better reach than the company
• The cost of operations of an intermediary like a wholesaler / retailer is shared with many
businesses.
Indirect Distribution - Examples
• All FMCG, consumer durables and pharmaceutical
• Petrol / diesel / cooking gas - franchisees
• Insurance
• Mobile phones
• All kinds of passenger transport (Indian railways are an
exception)
Marketing Channel Systems
• Vertical:
• Corporate
• Administered
• Contractual
• Horizontal
• Multi-channel
 Vertical Marketing System
• Various parties like producers, wholesalers and retailers act as a unified
system to avoid conflicts
• Improves operating efficiency and marketing effectiveness
• 3 types:
• Corporate
• Administered
• Contractual
 Corporate VMS
• Combines successive stages of production and distribution under
single ownership
• Examples:
• Bata, Bombay Dyeing, Raymond
• Sears, Goodyear
• Suppliers of food items could be also their own supplying firms
- like Nilgiris
Administered VMS
• Co-ordinates distribution activities
• Gains market power by dominating a channel
• Usually true of dominant brands like GE, Kodak, Pepsi, Gillette, Coke
and HUL in certain locations
• Command high level of co-operation in shelf space, co-operation
from resellers, displays, pricing policies and promotion strategies
 Contractual VMS
• Independent producers, wholesalers and retailers operate on a
contract
• Could take the forms of:
• Wholesaler sponsored voluntary chains
• Retailer co-operatives
• Manufacturer sponsored retail or wholesale franchise
• Franchise organizations
• Service firm sponsored retail franchise
 Horizontal MS
• Two or more unrelated companies join together to pool resources and
exploit an emerging market opportunity
• In-store banking in hotels, big stores
• Retail outlets in petrol bunks
• Coffee Day outlets in airports
 Multi-channel Distribution

• Company uses different channels to reach / same or different market segments

• Most FMCG companies have separate networks for retail market and
institutions
• Most B2B firms use multi-channels for customer segments like OEMs,
Government, institutions etc
Multi-channel Distribution
• Used in situations where:
• Same product but different market segments
• Unrelated products in same market – detergents and ice creams (HUL)
• Size of buyers varies
• Geographic concentration of potential consumers varies
• Reach is difficult
• Benefits include lower cost, better market coverage and customized selling
Distribution Channels
• Take care of the following ‘discrepancies’
• Spatial
• Temporal
• Breaking bulk
• Assortment and
• Financial support
Spatial Discrepancy
• The channel system helps reduce the ‘distance’ between the
producer and the consumer of his products.
• Consumers are scattered
• Have to be reached cost effectively
• Example: companies produce products in one location even for
global needs
Temporal Discrepancy
• The channel system helps in speeding up in meeting the requirement of the
consumers

• Time when the product is made and when it is consumed is different

• Limited number of production points but hundreds of consumers

• Maruti plant in Gurgaon and Manesar– cars and spares are available when the
consumer wants
Breaking Bulk
• The channel system reduces large quantities into consumer acceptable lot
sizes
• Production has to be in large quantities to benefit from economies of scale
• Consumption is necessarily in small lot sizes
• India is the ultimate example in breaking bulk – you can buy one cigarette,
one Anacin, one toffee etc
Need for Assortment
• The channel system helps aggregate a range of products for the benefit of the consumer
– it could be made by one company or several of them.
• For the same product, it could be a variety of brands and pack sizes
• MICO makes fuel injection equipment, spark plugs etc in different plants but its dealer
will sell the entire range.
Financial Support
• The channel system provides critical working capital to its customers by extending credit.
• Some channel members like stockists and wholesalers finance the business of their
customers.
• Medical diagnostic equipment to hospitals
Channel Flows
• Forward flow – company to its customers – goods and services
• Backward flow – customers to the company – payment for the
goods. Returned goods.
• Flows both ways - information
Three Flows Recognized

FORWARD
Goods and Services

BACKWARD
Payment for goods / returns

BOTH WAYS
Information

Company Customers
The Five Channel Flows
• Physical flow of goods
• Title flow of goods (negotiation, ownership and risk sharing also)
• Payment flows (financing and payment)
• Information flow (about goods, orders placed and orders executed)
• Promotion flows
Channel Flows
• Some channel member/s have to perform them
• There is a cost associated with each flow
• If a channel member is discontinued, the flow has to be
performed by another
• All flows and transactions can be effective only with timely,
accurate and correct information
• The channel flow is ideally to be handled by the most competent
channel member who can deliver best service at the lowest cost.
Degree of Involvement
Manufacturer C&FA or Distributor, Wholesaler or
Distribution dealers retailer
Center
Physical Physical Physical Physical
Title / ownership Title Title / ownership Title / ownership
Information Information Information Information
Risk sharing Payment Payment Payment
Promotions Order Order placement Order placement
processing Negotiation Negotiation
Risk sharing Risk sharing
Promotions Promotions
Channel Formats
• Is decided by who ‘drives’ the channel system:
• Producer driven
• Seller driven
• Service driven
• Others
Producer Driven
• This is the effort of the manufacturer to reach the product to his consumers. Examples:
• Company owned retail outlets – petrol, Bata, Reliance mobiles
• Licensed outlets – KMF
• Consignment selling agents
• Franchisees
• Brokers
• Vending machines
• Company contracted distributors
Seller Driven
• Use of existing channels to reach the largest number of end users
• Existing wholesalers and retailers
• Modern retail formats
• Specialty stores – Shoppers’ Stop
• Discount stores – like the earlier Subhiksha
• Pheriwalas
Service Driven
• These are the people who facilitate the distribution
• Transporters and freight forwarders
• Providers of warehouse space
• C&F agents
• 3P Logistics service providers
• Couriers
Other formats
• Multi-level marketing systems – Amway, Modicare, Tupperware,
Herbalife
• Co-operative societies
• Telephone kiosks
• TV home shopping
• Catalogue marketing
• The internet
• Exhibitions, fairs and trade shows
• Data base marketing
 Channel Levels
• Zero level – if the product or service is provided to the end user directly by the company.
• Used mostly by companies delivering service like health, education, banking (also
known as service channels)
• One level – consists of one intermediary
• Two level – consists of two intermediaries and is the most common for FMCG products
 Service Channel
• Companies establish their own unique channels to deliver services like health,
education, banking, insurance etc
• Hundreds of bank branches to be close to prospects
• Banks may also recruit independent agents to get customers to walk in
• Consulting or IT firm uses one team for Biz Development and another for execution
• Musician or magician may use mass media, events or web sites to reach customers
Channel Levels
Manufacturer Manufacturer Manufacturer

Distributor/ wholesaler

Retailer Retailer

End User End User End User

Zero level One level Two level

 Channel Systems Costs and Margins
• Costs include capital investment (infrastructure) and working capital (credit, inventory)
and operating expenses.
• Companies assure a reasonable ROI to channel partners and not just margins.
• Different channel partners make different kinds of margins – lower for C&FAs and
increasing with distributors, wholesalers and retailers.