UNIT III-PURCHASING

DEFINITION
Purchasing, a branch of Logistics is a business term meaning buying raw
materials and other necessary commodities for manufacturing products. Purchasing
loosely refers to the department of procurement, which carries out the task of releasing
purchase orders for goods. In India, purchasing is directly linked up with supply chain
management, transportation and distribution, manufacturing and production and
procurement. India as a developing nation thrives on effective business.
Purchasing is the "process of buying". Many assume purchasing is solely the
responcibility of the purchasing department. However, the function is much broader and,
if it is carried out efficiently, all departments in the company are invloved. Obtaining the
right material, in the right quantities, with the right delivery (time and place), right
quality, from the right source, and at the right price are all purchasing functions.
Choosing the right material requires input from the marketing, engineering,
manufacturing, and purchasing departments. Quantities and delivery of finished goods
are established by the needs of the marketplace. However, manufacturing planning and
control (MPC) must decide when to order which raw materials so that marketplace
demands can be satisfied. Purchasing is then responsible for placing the orders and for
ensuring that the goods arrive on time.
Its major objectives are to (1) maintain the quality and value the firm's products,
(2) minimize cash tied-up in inventory, (3) maintain the flow of inputs to maintain the
flow of outputs, and (4) strengthen the firm's competitive position. Purchasing may also
involve (a) development and review of the product specifications, (b) receipt and
processing of requisitions, (c) advertising for bids, (d) bid evaluation, (e) award of supply
contracts, (f) inspection of good received, and (g) their appropriate storage and release.
Clearly, the purchasing function involves more than obtaining the best price. It also
involves buying the best value, which means buying:
 The right quantity and quality
 At the best price
 From suppliers who are reliable and provide good service
 One way to obtain the best value on a purchase is to set purchasing objectives and
carefully follow the procurement cycle. This is explained later in this section.
PURCHASING OBJECTIVES
It is often helpful to state the goals of purchasing for your business. In this way,
you will never lose sight of the purpose of the purchasing function and will be able to
make more intelligent purchasing decisions.
Here is a sample list of purchasing objectives:
 To provide an uninterrupted flaw of materials and services for company
operations
 To find reliable alternative sources of supply
 To buy at the most economic order quantities
 To buy the best value: a combination of right quality at the best price with the best
supplier service
 To maintain good relations with vendors
PROCUREMENT CYCLE
Effective procurement consists of a series of steps which form a cycle. The steps
in the cycle can be described as follows:
1. Determine needs:
Before you buy anything, it is necessary to know what you need to buy and how
much. It is important to remember that determining what you need involves not only
quantity, but quality decisions as well. Determining and specifying appropriate quality
requirements, in some situations, is a more difficult task than deciding what quantity to
buy.
2. Select the supplier(s):
When there are many suppliers to choose from, it is not simple to choose those
who will give the best value - not only in price but in service, and consistent quality as
well. Selection of suppliers may also mean finding more than one acceptable vendor if
the purchased product is so important that you would suffer substantial losses if it were
not available. In such a situation, in case the primary supplier cannot meet your needs as
a result of a heavy workload, strike, unavailability of raw materials, etc.
When deciding to use more than one supplier, you have to weigh these advantages
against the possible disadvantages of higher price and poorer service when you buy
smaller quantities from two vendors rather than larger quantities from a single, reliable
one.
3. Negotiate the purchase:
In addition to specifying quantities and obtaining agreement on price, this can
involve guarantees, method of payment, containers and packaging, delivery dates and
other details of the purchase. Proper documentation of the purchase agreement is part of
negotiation and assures that any questions or disputes that may arise will be settled in line
with your expectations.
4. Follow-up:
Here you look at the quality of product and service as well as the accuracy of
quantities to determine what improvements, if any, are needed for the future.
IDENTIFYING AND SELECTING SUPPLIERS
1. Qualifying Suppliers
Having selected target-countries, and in order to identify prospective suppliers,
you need to define the traits of candidates according to your objectives. That profile will
help you identify, short-list and screen prospective suppliers.
2. Research, Evaluate, Interview, and Select Suppliers
Then, contact all listed companies through air mail, fax or email. Clearly state your
business proposition, your objectives and the procedure of supplier selection. Once
prospective suppliers have indicated their interest in your offer, it is important to
determine their legitimacy and financial soundness. The financial condition of
prospective suppliers should figure heavily when determining the appropriate working
relationship. Some of the respondents will certainly not pass this stage of the selection
process.
The survivors of this first screening should undergo further research based mostly on
their past performance. After the financial test, past performance should be an important
part of your supplier qualifications process. Find out how the supplier’s performance
ratings compare with average satisfaction scores for its industry and with our own goals.
 Contact randomly selected customers of your prospective supplier and asks them to
rate that supplier on key performance measurements, such as:
o Delivery timeliness
o Problem responsiveness
o Product quality
o Total cost
o Technical support
o Quantities delivered
o Personnel attitude
Calculate an overall satisfaction rating from ratings in the key performance
measurement categories. Then, illustrate the supplier’s performance ratings compared to
each other and identify each supplier’s weaknesses and strengths. Finally, rank your
prospective suppliers to create a list of preferred suppliers based, this time, on acceptable
risk and your internal standards. The following, and most important, step will be to
establish relationships with the preferred prospective suppliers. This should involve face-
to-face meetings with the principals. In addition, you need to negotiate the appropriate
legal agreement with the counterpart firm selected.
PURCHASING CYCLE
The Purchasing cycle consists of the following steps:
1. Receiving and analyzing purchase requisitions.
2. Selecting suppliers, finding potential suppliers, issuing requests for quotations,
receiving and analyzing quotations, and selecting the right supplier.
3. Determining the right price.
4. Issuing Purchase Orders.
5. Following up to assure delivery dates are met.
6. Receiving and accepting goods.
7. Approving supplier's invoice for payment.
PRODUCTION
Production means application of processes (Technology) to the raw material to
add the use and economic values to arrive at desired product by the best method, with out
sacrificing the desired quality. We have three ways of Production, they are:
(i) Production by Disintegration
By separating the contents of Crude oil or a mixture the desired products are
produced. For example the crude oil is disintegrated into various fuel oils. Similarly salt
production is also an example for product produced by disintegrated. We can use
Mechanical or Chemical or both technologies to get the desired product, so that it will
have desired use value.
(ii) Production by Integration
In this type of Production various Components of the products are assembled
together to get the desired product. In this process, Physical and Chemical Properties of
the materials used may change. The examples are: Assembly of Two wheelers, four
wheelers and so on.
(iii) Production by Service
Here the Chemical and Mechanical Properties of materials are improved without
any physical change. The example for this is Heat Treatment of metals. In real world, a
combination of above methods is used. In general production is the use of any process or
procedure designed to transform a set of input elements into a set of output elements,
which have use value and economic value.
DEFINITIONS OF PRODUCTION MANAGEMENT
It may be defined as the performance of the management activities with regards to
selecting, designing, operating, Controlling and updating production system.
It is the processes of effectively planning, coordinating and controlling the
production that is the operations of that part of an enterprise, it means to say that
production and operations Management is responsible for the actual transformation of
raw materials into finished products.
OBJECTIVE OF PRODUCTION MANAGEMENT
The objective of Production Management is to produce the desired product or
specified product by specified methods so that the optimal utilization of available
resources is met with. Hence the production management is responsible to produce the
desired product, which has marketability at the cheapest price by proper planning, the
manpower, material and processes.
Here it is better to distinguish between product, Service and Project, so as
to help the reader to know on which particular aspect of Production Management to put
much emphasis, in managing a service organization or a project.
(i) Product: Manufacturing system often produces standardized products in large
volumes. The plant and machinery have a finite capacity. The facilities constitute fixed
costs, which are allocated to the products produced. Variable costs are consisted labour
cost and materials costs. While manufacturing the product use value and economic values
are added to the product. Hence the product is a store of values added during
manufacture. Because the input costs and output costs are measurable, the productivity
can be measured with certain degree of accuracy. Product can be transported to the
markets and stored physically until it is sold.
(ii) Service: Service system present more uncertainty with respect to capacity and costs.
Services are produced and consumed in the presence of the customer. We cannot store
the service physically. Because of this the service organizations, such as Hotels,
Hospitals, Transport Organizations and many other service organizations the capacity
must be sufficiently or consciously managed to accommodate a highly variable demand.
(iii) Project: Project system does not produce standardized products. The Plant,
Machinery, Men and Materials are often brought to project site and the project is
completed. The project is of big size and remains in the site itself after completion. As the
costs can be calculated and allocated to the project with considerable accuracy,
Productivity can be measured. Once the project is completed, all the resources are
removed from site.
FUNCTIONS OF PRODUCTION MANAGEMENT DEPARTMENT
The functions of Production Management depend upon the size of the firm. In
small firms the production Manager may have to look after production planning and
control along with Personnel, Marketing, Finance and Purchase functions. In medium
sized firms, there may be separate managers for Personnel, marketing and Finance
functions. But the production planning and control and Purchase and stores may be under
the control of Production management department. In large sized firms the activities of
Production Management is confined to the management of production activities only. As
such, there are no hard and fast rule or guidelines to specify the function of Production
Management, but in the academic interest we can mention some of the functions, which
are looked after by the Production Management department. They are:
(i) Materials: The selection of materials for the product. Production manager must have
sound Knowledge of materials and their properties, so that he can select appropriate
materials for his product. Research on materials is necessary to find alternatives to satisfy
the changing needs of the design in the product and availability of material resumes.
(ii) Methods: Finding the best method for the process, to search for the methods to suit
the available resources, identifying the sequence of process are some of the activities of
Production Management.
(iii) Machines and Equipment: Selection of suitable machinery for the process desired,
designing the maintenance policy and design of layout of machines are taken care of by
the Production Management department.
(iv) Estimating: To fix up the Production targets and delivery dates and to keep the
production costs at minimum, production management department does a thorough
estimation of Production times and production costs. In competitive situation this will
help the management to decide what should be done in arresting the costs at desired level.
(v) Loading and Scheduling: The Production Management department has to draw the
time table for various production activities, specifying when to start and when to finish
the process required. It also has to draw the timings of materials movement and plan the
activities of manpower. The scheduling is to be done keeping in mind the loads on hand
and capacities of facilities available.
(vi) Routing: This is the most important function of Production Management department.
The Routing consists of fixing the flow lines for various raw materials, components etc.,
from the stores to the packing of finished product, so that all concerned knows what
exactly is happening on the shop floor.
(vii) Dispatching: The Production Management department has to prepare various
documents such as Job Cards, Route sheets, Move Cards, Inspection Cards for each and
every component of the product. These are prepared in a set of five copies. These
documents are to be released from Production Management department to give green
signal for starting the production. The activities of the shop floor will follow the
instructions given in these documents. Activity of releasing the document is known as
dispatching.
(viii) Expediting or Follow up: Once the documents are dispatched, the management
wants to know whether the activities are being carried out as per the plans or not.
Expediting engineers go round the production floor along with the plans, compare the
actual with the plan and feed back the progress of the work to the management. This will
help the management to evaluate the plans.
(ix) Inspection: Here inspection is generally concerned with the inspection activities
during production, but a separate quality control department does the quality inspection,
which is not under the control of Production Management. This is true because, if the
quality inspection is given to production Management, then there is a chance of
qualifying the defective products also.
(x) Evaluation: The Production department must evaluate itself and its contribution in
fulfilling the corporate objectives and the departmental objectives. This is necessary for
setting up the standards for future. What ever may be the size of the firm; Production
management department alone must do Routing, Scheduling, Loading, Dispatching and
expediting. This is because this department knows very well regarding materials,
Methods, and available resources etc.

Managing the Manufacturing Process

Manufacturing process: -
♦ Physical flow is quite universal
♦ Specific differences between firms must be taken into account
Differences:
Production process – vast differences among different types of production
processes
Four broad classes are job shop, batch production, mass production, and
continuous
Flow process
Job shop
Wide range products are manufactured (quantity usually small)
Parts are routed to work centers depending on the production steps required
Manufacture customized product
Job shops are typically inefficient and have long lead times, large work-in-
process inventory, and high costs
Major performance criterion is utilization of equipments
 Eg:- Special purpose machine tools, Commercial printer, Boilers, etc
Batch production
Involves the manufacture of medium-size lots of the same item or product
The lots may be produced only once or they may be produced at regular
intervals
Lot sizes and the frequency of production of a single item are tied up with the
Inventory control policies adopted by marketing
Product demand characteristics may lead to different kind of production
management especially production control
Usually the products produced in a batch production have somewhat-
continuous Demand
But the production rate is usually higher than the demand rate and hence batch
Production method is traditionally adopted
The items that go into the final products generally standardized
Such production of standardized items on a continuous basis is called

Repetitive Production
For repetitive production, demand does not have to be large, just stable enough so
that final assembly schedule can be smoothed (ie, have relatively level daily
Production output)
Combining production of different products is feasible as long as product
Differences are add-on features or options and not differences in fundamental
Design, major components or production processes
Grouping different items usually resulted in a particular way of configuring the
system for achieving the better operational efficiency and control
Such configuration is called cellular manufacturing or group layout

Mass production
Continuous specialized manufacture of identical products
One or a few products travel through a set of fabrication activities specially arranged
for the particular products (The entire plant is designed and operated for manufacture of a
single product type)
The equipment is dedicated to the manufacture of a single product type such as
Automobile, light bulbs, appliances
A very high fixed investment is required for one-of-a-kind specialization of
Production facilities, such as fixed transfer lines, dedicated conveyors, buffers, etc
Each piece of equipment is optimized in terms of cost and time for the operation it
performs and material movement is automated
Continuous flow process
Continuous dedicated production of large amounts of bulk product
Product types are few and volumes are high
Continuous flow material through a serious of sequential operations
Eg:- chemical plants, oil refineries, plastics, iron and steel, and textile industries
MARKETING

Introduction
Business is an economic activity which involves production of goods and services for
the purpose of their distribution among customers with the objective of making profit.
Thus the basic activities of business are Production of goods and services and their sale.
You must have visited markets in your area and purchased various goods. You may have
also observed that normally after using these goods some of your needs are fulfilled and
you feel satisfied.

Meaning and role of marketing

The term marketing may be interpreted in the traditional sense and the Modern sense. Let
us examine each one.

Traditional concept of marketing

According to this concept, marketing consists of those activities which are concerned
with the transfer of ownership of goods from producers to consumers. Thus, marketing
means selling of goods and services. In Other words, it is the process by which goods are
made available to Ultimate consumers from their place of origin. The traditional concept
of marketing corresponds to the general notion Of marketing, this means selling goods
and services after they have Been produced. The emphasis of marketing is on sale of
goods and Services. Consumer satisfaction is not given adequate emphasis. Viewed in
this way, marketing is regarded as production/sales oriented.

Modern concept of marketing

According to the modern concept, marketing is concerned with creation Of customers.
Creation of customers means identification of consumer Needs and organizing business
to satisfy these needs. Marketing in the modern sense involves decisions regarding the
following
Matters
1. Products to be produced
2. Prices to be charged from customers
3. Promotional techniques to be adapted to contact and influence
Existing and potential customers.
4. Selection of middlemen to be used to distribute goods & services.
Modern concept of marketing requires all the above decisions to be
Taken after due consideration of consumer needs and their satisfaction.

Role of marketing in business

Marketing plays an important role in business. It is an important factor in the success of

business. Those firms which have ignored theImportances of marketing have suffered in
the long run.
Marketing involves ascertaining the needs and requirements of customers. This
enables the firms to produce goods and services accordingly. Demand for goods and
services are created through the techniques of Advertising and personal selling. Goods
and services are distributed among consumers to meet the demand. Prices are fixed at a
level which customers can afford to pay. Goods are distributed at the place
And time convenient to customers. All these activities have to be
Performed systematically to let business earn profits.
The role of marketing in business success has become vital because of
The following reasons.
1. Technological changes are taking place at fast pace.
2. Competition has become intense in the market.
3. Consumer tastes and preferences are changing very fast.
4. Production is organized on a large scale.
A business firm is required to remain familiar with market development
And adjust its activities according to changing conditions, due to the
Reasons mentioned above. Marketing plays an important role in making
These adjustments.
Objectives of marketing
Marketing activities are organized to achieve the following objectives:

1. Consumer satisfaction: Marketing activities are organized with the

objective of ensuring that consumers get maximum satisfaction from the use of the
product. Consumer satisfaction ensures steady and growing demand for firm’s products.

2. Product development: This objective aims at developing new and better

products, which may provide greater satisfaction to consumers. Product development is
necessary for the survival and growth of the firm.

3. Sustaining Customer loyalty : If customers continue to make repeated

purchases of goods and services, it is possible to sustain the demand for the products of
the firm.

4. Earning profits : Business must earn sufficient profit. Marketing activities are
organized with the objective of earning adequate profits for the firm.

5. To secure competitive advantage : This objective of marketing

ensures that a firm’s products are preferred over competitor’s product. Competitive
advantage is achieved through cost efficiency and quality improvements of the products.

6. Growth in Sales: Marketing aims at increasing the sale of firm’s products.

This is necessary to maintain or increase the market share of the firm. Market share
means percentage demand satisfied by the firm for a particular product. Growth in sales
ensures survival of the firm in the long run.

7. Creation of goodwill: This objective of marketing ensures that a business

firm is regarded as a useful part of society engaged in satisfying consumer needs. This
help business firms to survive and grow.

Marketing mix
The term marketing mix refers to the four major areas of decision making in the
marketing process that are blended to obtain the results desired by the organization. The
four elements of the marketing mix are sometimes referred to the four Ps of marketing.
The marketing mix shapes the role of marketing within all types of organizations, both
profit and nonprofit. Each element in the marketing mix—product, price, promotion, and
place—consists of numerous sub elements. Marketing managers make numerous
decisions based on the various sub elements of the marketing mix, all in an attempt to
satisfy the needs and wants of consumers.
Product

The first element in the marketing mix is the product. A product is any combination of
goods and services offered to satisfy the needs and wants of consumers. Thus, a product
is anything tangible or intangible that can be offered for purchase or use by consumers. A
tangible product is one that consumers can actually touch, such as a computer. An
intangible product is a service that cannot be touched, such as computer repair, income
tax preparation, or an office call. Other examples of products include places and ideas.
For example, the state tourism department in New Hampshire might promote New
Hampshire as a great place to visit and by doing so stimulate the economy. Cities also
promote themselves as great places to live and work. For example, the slogan touted by
the Chamber of Commerce in San Bernardino, California, is "It's a great day in San
Bernardino." The idea of wearing seat belts has been promoted as a way of saving lives,
as has the idea of recycling to help reduce the amount of garbage placed in landfills.

Typically, a product is divided into three basic levels. The first level is often called the
core product, what the consumer actually buys in terms of benefits. For example,
consumers don't just buy trucks. Rather, consumers buy the benefit that trucks offer, like
being able to get around in deep snow in the winter. Next is the second level, or actual
product, that is built around the core product. The actual product consists of the brand
name, features, packaging, parts, and styling. These components provided the benefits to
consumers that they seek at the first level. The final, or third, level of the product is the
augmented component. The augmented component includes additional services and
benefits that surround the first two levels of the product. Examples of augmented product
components are technical assistance in operating the product and service agreements.

Products are classified by how long they can be used—durability—and their tangibility.
Products that can be used repeatedly over a long period of time are called durable goods.
Examples of durable goods include automobiles, furniture, and houses. By contrast,
goods that are normally used or consumed quickly are called nondurable goods. Some
examples of nondurable goods are food, soap, and soft drinks. In addition, services are
activities and benefits that are also involved in the exchange process but are intangible
because they cannot be held or touched. Examples of intangible services included eye
exams and automobile repair.

Another way to categorize products is by their users. Products are classified as either
consumer or industrial goods. Consumer goods are purchased by final consumers for
their personal consumption. Final consumers are sometimes called end users. The
shopping patterns of consumers are also used to classify products. Products sold to the
final consumer are arranged as follows: convenience, shopping, specialty, and unsought
goods. Convenience goods are products and services that consumers buy frequently and
with little effort. Most convenience goods are easily obtainable and low-priced, items
such as bread, candy, milk, and shampoo. Convenience goods can be further divided into
staple, impulse, and emergency goods. Staple goods are products, such as bread and milk,
that consumers buy on a consistent basis. Impulse goods like candy and magazines are
products that require little planning or search effort because they are normally available
in many places. Emergency goods are bought when consumers have a pressing need. An
example of an emergency good would be a shovel during the first snowstorm of the
winter.

Shopping goods are those products that consumers compare during the selection and
purchase process. Typically, factors such as price, quality, style, and suitability are used
as bases of comparison. With shopping goods, consumers usually take considerable time
and effort in gathering information and making comparisons among products. Major
appliances such as refrigerators and televisions are typical shopping goods. Shopping
goods are further divided into uniform and no uniform categories. Uniform shopping
goods are those goods that are similar in quality but differ in price. Consumers will try to
justify price differences by focusing on product features. Non uniform goods are those
goods that differ in both quality and price.

Specialty goods are products with distinctive characteristics or brand identification for
which consumers expend exceptional buying effort. Specialty goods include specific
brands and types of products. Typically, buyers do not compare specialty goods with
other similar products because the products are unique. Unsought goods are those
products or services that consumers are not readily aware of or do not normally consider
buying. Life insurance policies and burial plots are examples of unsought goods. Often,
unsought goods require considerable promotional efforts on the part of the seller in order
to attract the interest of consumers.

Industrial goods are those products used in the production of other goods. Examples of
industrial goods include accessory equipment, component parts, installations, operating
supplies, raw materials, and services. Accessory equipment refers to movable items and
small office equipment items that never become part of a final product. Office furniture
and fax machines are examples of accessory equipment. Component parts are products
that are turned into a component of the final product that does not require further
processing. Component parts are frequently custom-made for the final product of which
they will become a part. For example, a computer chip could be produced by one
manufacturer for use in computers of other manufacturers. Installations are capital goods
that are usually very expensive but have a long useful life. Trucks, power generators, and
mainframe computers are examples of installations. Operating supplies are similar to
accessory equipment in that they do not become part of the finished product. Operating
supplies include items necessary to maintain and operate the overall firm, such as
cleaners, file folders, paper, and pens. Raw materials are goods sold in their original form
before being processed for use in other products. Crops, crude oil, iron ore, and logs are
examples of raw materials in need of further processing before being used in products.
The last category of industrial goods is services. Organizations sometimes require the use
of services, just as individuals do. Examples of services sought by organizations include
maintenance and repair and legal counsel.
Price
The second element in marketing mix is price. Price is simply the amount of money
that consumers are willing to pay for a product or service. In earlier times, the price was
determined through a barter process between sellers and purchasers. In modern times,
pricing methods and strategies have taken a number of forms.

Pricing new products and pricing existing products require the use of different strategies.
For example, when pricing a new product, businesses can use either market-penetration
pricing or a price-skimming strategy. A market-penetration pricing strategy involves
establishing a low product price to attract a large number of customers. By contrast, a
price-skimming strategy is used when a high price is established in order to recover the
cost of a new product development as quickly as possible. Manufacturers of computers,
videocassette recorders, and other technical items with high development costs frequently
use a price-skimming strategy.

Pricing objectives are established as a subset of an organization's overall objectives. As a

component of the overall business objectives, pricing objectives usually take one of four
forms: profitability, volume, meeting the competition, and prestige. Profitability pricing
objectives mean that the firm focuses mainly on maximizing its profit. Under profitability
objectives, a company increases its prices so that additional revenue equals the increase
in product production costs. Using volume pricing objectives, a company aims to
maximize sales volume within a given specific profit margin. The focus of volume
pricing objectives is on increasing sales rather than on an immediate increase in profits.
Meeting the price level of competitors is another pricing strategy. With a meeting-the-
competition pricing strategy, the focus is less on price and more on nonprice competition
items such as location and service. With prestige pricing, products are priced high and
consumers purchase them as status symbols.

In addition to the four basic pricing strategies, there are five price-adjustment strategies:
discount pricing and allowances, discriminatory pricing, geographical pricing,
promotional pricing, and psychological pricing. Discount pricing and allowances include
cash discounts, functional discounts, seasonal discounts, trade-in allowances, and
promotional allowances. Discriminatory pricing occurs when companies sell products or
services at two or more prices. These price differences may be based on variables such as
age of the customer, location of sale, organization membership, time of day, or season.
Geographical pricing is based on the location of the customers. Products may be priced
differently in distinct regions of a target area because of demand differences. Promotional
pricing happens when a company temporarily prices products below the list price or
below cost. Products priced below cost are sometimes called loss leaders. The goal of
promotional pricing is to increase short-term sales. Psychological pricing considers prices
by looking at the psychological aspects of price. For example, consumers frequently
perceive a relationship between product price and product quality.
Promotion

Promotion is the third element in the marketing mix. Promotion is a communication

process that takes place between a business and its various publics. Publics are those
individuals and organizations that have an interest in what the business produces and
offers for sale. Thus, in order to be effective, businesses need to plan promotional
activities with the communication process in mind. The elements of the communication
process are: sender, encoding, message, media, decoding, receiver, feedback, and noise.
The sender refers to the business that is sending a promotional message to a potential
customer. Encoding involves putting a message or promotional activity into some form.
Symbols are formed to represent the message. The sender transmits these symbols
through some form of media. Media are methods the sender uses to transmit the message
to the receiver. Decoding is the process by which the receiver translates the meaning of
the symbols sent by the sender into a form that can be understood. The receiver is the
intended recipient of the message. Feedback occurs when the receiver communicates
back to the sender. Noise is anything that interferes with the communication process.

There are four basic promotion tools: advertising, sales promotion, public relations, and
personal selling. Each promotion tool has its own unique characteristics and function. For
instance, advertising is described as paid, no personal communication by an organization
using various media to reach its various publics. The purpose of advertising is to inform
or persuade a targeted audience to purchase a product or service, visit a location, or adopt
an idea. Advertising is also classified as to its intended purpose. The purpose of product
advertising is to secure the purchase of the product by consumers. The purpose of
institutional advertising is to promote the image or philosophy of a company. Advertising
can be further divided into six subcategories: pioneering, competitive, comparative,
advocacy, reminder, and cooperative advertising. Pioneering advertising aims to develop
primary demand for the product or product category. Competitive advertising seeks to
develop demand for a specific product or service. Comparative advertising seeks to
contrast one product or service with another. Advocacy advertising is an organizational
approach designed to support socially responsible activities, causes, or messages such as
helping feed the homeless. Reminder advertising seeks to keep a product or company
name in the mind of consumers by its repetitive nature. Cooperative advertising occurs
when wholesalers and retailers work with product manufacturers to produce a single
advertising campaign and share the costs. Advantages of advertising include the ability to
reach a large group or audience at a relatively low cost per individual contacted. Further,
advertising allows organizations to control the message, which means the message can be
adapted to either a mass or a specific target audience. Disadvantages of advertising
include difficulty in measuring results and the inability to close sales because there is no
personal contact between the organization and consumers.

The second promotional tool is sales promotion. Sales promotions are short-term
incentives used to encourage consumers to purchase a product or service. There are three
basic categories of sales promotion: consumer, trade, and business. Consumer promotion
tools include such items as free samples, coupons, rebates, price packs, premiums,
patronage rewards, point-of-purchase coupons, contests, sweepstakes, and games. Trade-
promotion tools include discounts and allowances directed at wholesalers and retailers.
Business-promotion tools include conventions and trade shows. Sales promotion has
several advantages over other promotional tools in that it can produce a more immediate
consumer response, attract more attention and create product awareness, measure the
results, and increase short-term sales.

Public relations are the third promotional tool. An organization builds positive public
relations with various groups by obtaining favorable publicity, establishing a good
corporate image, and handling or heading off unfavorable rumors, stories, and events.
Organizations have at their disposal a variety of tools, such as press releases, product
publicity, official communications, lobbying, and counseling to develop image. Public
relations tools are effective in developing a positive attitude toward the organization and
can enhance the credibility of a product. Public relations activities have the drawback that
they may not provide an accurate measure of their influence on sales as they are not
directly involved with specific marketing goals.

The last promotional tool is personal selling. Personal selling involves an interpersonal
influence and information-exchange process. There are seven general steps in the
personal selling process: prospecting and qualifying, pre-approach, approach,
presentation and demonstration, handling objections, closing, and follow-up. Personal
selling does provide a measurement of effectiveness because a more immediate response
is received by the salesperson from the customer. Another advantage of personal selling
is that salespeople can shape the information presented to fit the needs of the customer.
Disadvantages are the high cost per contact and dependence on the ability of the
salesperson.

For a promotion to be effective, organizations should blend all four promotion tools
together in order to achieve the promotional mix. The promotional mix can be influenced
by a number of factors, including the product itself, the product life-cycle stage, and
budget. Within the promotional mix there are two promotional strategies: pull and push.
Pull strategy occurs when the manufacturer tries to establish final consumer demand and
thus pull the product through the wholesalers and retailers. Advertising and sales
promotion are most frequently used in a pulling strategy. Pushing strategy, in contrast,
occurs when a seller tries to develop demand through incentives to wholesalers and
retailers, who in turn place the product in front of consumers.

Place

The fourth element of the marketing mix is place. Place refers to having the right
product, in the right location, at the right time to be purchased by consumers. This proper
placement of products is done through middle people called the channel of distribution.
The channel of distribution is comprised of interdependent manufacturers, wholesalers,
and retailers. These groups are involved with making a product or service available for
use or consumption. Each participant in the channel of distribution is concerned with
three basic utilities: time, place, and possession. Time utility refers to having a product
available at the time that will satisfy the needs of consumers. Place utility occurs when a
firm provides satisfaction by locating products where they can be easily acquired by
consumers. The last utility is possession utility, which means that wholesalers and
retailers in the channel of distribution provide services to consumers with as few
obstacles as possible.

Channels of distribution operate by one of two methods: conventional distribution or a

vertical marketing system. In the conventional distribution channel, there can be one or
more independent product manufacturers, wholesalers, and retailers in a channel. The
vertical marketing system requires that producers, wholesalers, and retailers to work
together to avoid channel conflicts.

How manufacturers store, handle, and move products to customers at the right time and at
the right place is referred to as physical distribution. In considering physical distribution,
manufacturers need to review issues such as distribution objectives, product
transportation, and product warehousing. Choosing the mode of transportation requires an
understanding of each possible method: rail, truck, water, pipeline, and air. Rail
transportation is typically used to ship farm products, minerals, sand, chemicals, and auto
mobiles. Truck transportation is most suitable for transporting clothing, food, books,
computers, and paper goods. Water transportation is good for oil, grain, sand, gravel,
metallic ores, coal, and other heavy items. Pipeline transportation is best when shipping
products such as oil or chemicals. Air transport works best when moving technical
instruments, perishable products, and important documents.

Another issue of concern to manufacturers is the level of product distribution. Normally

manufacturers select from one of three levels of distribution: intensive, selective, or
exclusive. Intensive distribution occurs when manufacturers distribute products through
all wholesalers or retailers that want to offer their products. Selective distribution occurs
when manufacturers distribute products through a limited, select number of wholesalers
and retailers. Under exclusive distribution, only a single wholesaler or retailer is allowed
to sell the product in a specific geographic area.

CHANNELS OF DISTRIBUTION

Meaning of Channels of Distribution

The main purpose of trade is to supply goods to the consumers living in far off places. As
goods and services move from producer to consumer they may have to pass through
various individuals. Thus, a channel of distribution is the route or path along which goods
move from producers to ultimate consumers.
Types of Channels

Normally goods and services pass through several hands before they come to the hands of
the consumer for use. But in some cases producers sell goods and services directly to the
consumers without involving any middlemen in between them, which can be called as
direct channel. So there are two types of channels, one direct channel and the other,
indirect channel. From the above diagram it can be found that there is just one direct
channel i.e. from producer to the consumer. There are many indirect channels like
(i) Direct Channel
In this channel, producers sell their goods and services directly to the consumers.
There is no middleman present between the producers and consumers. The producers
may sell directly to consumers through door-to-door salesmen and through their own
retail stores. For example, Bata India Ltd, HPCL, Liberty Shoes Limited has their own
retail shops to sell their products to consumers. For certain service organizations
consumers avail the service directly. Banks, consultancy firms, telephone companies,
passenger and freight transport services, etc. are examples of direct channel of
distribution of service.

(ii) Indirect Channel

If the producer is producing goods on a large scale, it may not be possible for him to
sell goods directly to consumers. As such, he sells goods through middlemen. These
middlemen may be wholesalers or retailers. A wholesaler is a person who buys goods in
large quantities from producers; where as a retailer is one who buys goods from
wholesalers and producers and sells to ultimate consumers as per their requirement. The
involvement of various middlemen in the process of distribution constitutes the indirect
channel of distribution. Let us look into some of the important indirect channels of
distribution. This is the common channel for the distribution of goods to ultimate
consumers. Selling goods through wholesaler may be suitable in case of food grains,
spices, utensils, etc. and mostly of items, which are smaller in size. Under this channel,
the producers sell to one or more retailers who in turn sell to the ultimate
Consumers. This channel is used under the following conditions –

(i) When the goods cater to a local market, for example, breads, biscuits, patties, etc.
(ii) When the retailers are big and buy in bulk but sell in smaller units, directly to the
consumers.
Departmental stores and super bazaars are examples of this channel.
Producer Wholesaler Retailer

Wholesalers and Retailers

Wholesalers and retailers are important middlemen who generally facilitate flow of goods
from the producers to the consumers. Let us study in details about them.
i. Wholesalers
Wholesalers are one of the important middlemen in the channel of distribution who deals
with the goods in bulk quantity. They buy goods in bulk from the producers and sell them
in relatively smaller quantities to the retailers. In some cases they also sell goods directly
to the consumers if the quantity to be purchased is more. They usually deal with a limited
variety of items and also in a specific line of product, like iron and steel, textiles, paper,
electrical appliances, etc. Let us know about the characteristics of wholesaler.

Characteristics of Wholesalers
The followings are the characteristics of wholesaler:
(i) Wholesalers buy goods directly from producers or manufacturers.
(ii) Wholesalers buy goods in large quantities and sells in relatively smaller quantities.
(iii) They sell different varieties of a particular line of product. For example, a wholesaler
who deals with paper is expected to keep all varieties of paper, cardboard, card, etc.
(iv) They may employ a number of agents or workers for distribution of products.
(v) Wholesalers need large amount of capital to be invested in his business.
(vi) They generally provide credit facility to retailers.
(vii) He also provides financial assistance to the producers or manufacturers.
Channels of Distribution
(viii) In a city or town they are normally seen to be located in one particular area of the
market. For example, you can find cloth merchants in one area, book publishers and
sellers in one area; furniture dealers in one area etc.

Functions of Wholesalers
You have well understood the meaning of wholesaler and listed their characteristics. Now
let us know about the functions of wholesalers. Following are the functions, which a
wholesaler usually performs.
(a) Collection of goods: A wholesaler collects goods from manufacturers or producers
enlarge quantities.
(b) Storage of goods: A wholesaler collects the goods and stores them safely in
warehouses, till they are sold out. Perishable goods like fruits, vegetables, etc. are stored
in cold storage.
(c) Distribution: A wholesaler sells goods to different retailers. In this way, he also
performs the function of distribution.
(d) Financing: The wholesaler provides financial support to producers and manufacturers
by sending money in advance to them. He also sells goods to the retailer on credit. Thus,
at both ends the wholesaler acts as a financier.
(e) Risk taking: The wholesaler buys finished goods from the producer and keeps them
in the
Warehouses till they are sold. Therefore, he assumes the risks arising out of changes in
Demand, rise in price, spoilage or destruction of goods.
ii. Retailers
Retailers are the traders who buy goods from wholesalers or sometimes directly from
producers and sell them to the consumers. They usually operate through a retail shop and
sell goods in small quantities. They keep a variety of items of daily use.
Characteristics of Retailers
The following are the characteristics of retailers:
(i) Retailers have a direct contact with consumers. They know the requirements of the
Consumers and keep goods accordingly in their shops.
(ii) Retailers sell goods not for resale, but for ultimate use by consumers. For example,
you buy fruits, clothes, pen, pencil etc. for your use, not for sale.
(iii) Retailers buy and sell goods in small quantities. So customers can fulfill their
requirement without storing much for the future.
(iv) Retailers require less capital to start and run the business as compared to wholesalers.
(v) Retailers generally deal with different varieties of products and they give a wide
choice to the consumers to buy the goods.

Functions of Retailers
All retailers deal with the customers of varying tastes and temperaments. Therefore, they
should be active and efficient in order to satisfy their customers and also to induce them
to buy more. Letups see what the retailers do in distribution of goods.
(i) Buying and assembling of goods: Retailers buy and assemble varieties of goods from
Different wholesalers and manufacturers. They keep goods of those brands and variety
Which are liked by the customers and the quantity in which these are in demand.

(ii) Storage of goods: To ensure ready supply of goods to the customer retailers keep
their goods in stores. Goods can be taken out of these stores and sold to the customers as
and when required. This saves consumers from botheration of buying goods in bulk and
storing them.

(iii) Credit facility: Although retailers mostly sell goods for cash, they also supply goods
on credit to their regular customers. Credit facility is also provided to those customers
who buy goods in large quantity.

(iv) Personal services: Retailers render personal services to the customers by providing
expert advice regarding quality, features and usefulness of the items. They give
suggestions considering the likes and dislikes of the customers. They also provide free
home delivery service to customers. Thus, they create place utility by making the goods
available when they are demanded.

(v) Risk bearing: The retailer has to bear many risks, such as risk of:
(a) Fire or theft of goods
(b) Deterioration in the quality of goods as long as they are not sold out.
(c) Change in fashion and taste of consumers.
Channels of Distribution
 (vi) Display of goods: Retailers display different types of goods in a very systematic and
Attractive manner. It helps to attract the attention of the customers and also facilitates
quick delivery of goods.
(vii) Supply of information: Retailers provide all information about the behavior, tastes,
fashions and demands of the customers to the producers through wholesalers. They
become a very useful source of information for marketing research.

Distinction between Wholesaler and Retailer

You have studied about wholesaler and retailer. You might have noticed that both of
them differ
in their style and function. Let us find out these differences.

Wholesaler Retailer
(i) Buys goods in large quantities. (i) Buys goods in small quantities.
(ii) Buys goods directly from producers. (ii) Generally buys goods from the
wholesalers.
(iii) Deals with limited variety of goods. (iii) Deals with wide range of products.
(iv) Requires more capital to start (iv) Requires less capital to start and run
And run the business. The business.
(v) Sell goods for resale purpose. (v) Sell goods for consumption.
(vi) No direct contact with consumers. (vi) Direct contact with consumer.
(vii) No special attention is given to (vii) In order to attract the attention of
Decoration of shop.