Chapter 20

Managing the Distribution Function

 Chapter 19

Managing the Distribution Function

….Marketers realize that if they were to make

the brands available in the right size, at the
right time and at the right price, the Indian
consumer can be motivated to buy it and
consume it…..
 Role of Middlemen or Intermediaries

a) Provide information about the market to the

manufacturer

b) Maintain price stability in the market

c) Promotion of the products in his territory

d) Financing by providing the necessary working capital in

the form of advance payments for goods and services

e) Middlemen also take the title of the goods and services

and trade in their own name

20.3
 Physical Flow:
Transporters and
Suppliers of Transporter and C & F Agents of
Manufacturer
Inputs Warehouses Company
Warehouses

Customers Retailers Transporters Wholesalers

20.4
 Title Flow:

Input Wholesalers/
Manufacturer Retailers Customers
Suppliers Dealers

20.5
 Payment Flow:

Wholesaler/
Suppliers Bank Manufacturer Retailers Customers
Dealers

20.6
 Information Flow:

Transporter Transporter Transporter

Suppliers
and Manu- and Wholesalers and
of
Warehouse facturer Warehouse /Dealers Warehouse
Inputs
and Banks and Banks and Banks

Customers Retailers

20.7
 Promotion Flow:

Supplier Advertising Manu- Advertising

Trade Customer
of Input Agency facturer Agency

20.8
Type and Nature of Middlemen

Merchant Middlemen
intermediaries who take title to the goods and services
and resell them

Agents
help in identifying potential customers and help in
negotiations

Facilitators
independent business units that facilitate the flow of
goods and services

20.9
 Channel Level

Decisions that a firm must take regarding the number of

channel levels appropriate to serve a given market
From zero-directly from the manufacturer to the
customer- to as high as 4 to 5 levels involved in
distribution.

Zero level in industrial product marketing, project

marketing

20.10
Channel level:

Firm adopts a one channel level when:

a) Number of customers is high
b) Customers in specific geographical area
c) Order lot size not uniform
d) Firm sells goods to wholesaler or a large dealer

2, 3 or even 4 levels in case of:

a) Consumer products
b) Customers spread across the country
c) Market is large

20.11
Factors determining the length of the Channel

a) Size of the market-larger it is more economical it is

to serve it directly

b) Order lot size-if it is small, better to have longer

channel

c) Service requirements-if higher level of service is required,

then it is better to have a shorter level

d) Product variety-if customers shop for product assortment,

a wider channel of distribution is required

20.12
 (a) (b)
Zero Level One Level

Manufacturer Manufacturer

Wholesaler/
Dealer
Customer

Customer

Length of channel distribution

20.13
 (c) (d)

Two Level Three Level

Manufacturer Manufacturer

Wholesaler/ Distributor
Dealer

Wholesaler
Retailer

Retailer
Customer

Customer

Length of channel distribution

20.14
 Width of channel of distribution

Manufacturer

Market 1

Dealer Dealer Dealer Dealer Dealer Dealer Dealer

A B C D E F G

Retailers

Customers Customers Customers

20.15
 Market Market Retail spokes-restaurants,
soft drink kiosks, panwalsa,
sweetmarts
Market Market Market
Market
Market
Market
Market Market Market
Market
Market Market Market
Market Market
Market Dealer/wholesaler
Dealer Hub

Market Market Market

Market
Market Market
Market Market
Market Market Franchise
Market Major Hub of
Parent Company
Market
Market
Market
Market Market Market
Market

Hub and spoke pattern of distribution of a soft drink firm 20.16

 Factors Influencing Distribution Decisions

Market Characteristics

Company Characteristics

Product Characteristics

Middlemen Characteristics

Intensity of Competition

Environmental Characteristics

20.17
 Identifying Major Distribution Alternatives

Intensive Distribution
involves all possible outlets that can be used to
distribute the product

Selective Distribution
firm selects some outlets to distribute its products

Exclusive Distribution
firm distributes its brand through just one or two
major outlets in the market
20.18
 Terms and Responsibilities of Intermediaries

a) Price policy-the middlemen have to ensure that everyone

involved gets a fair and equitable deal

b) Payment terms-the manufacturing firm stipulates the

mode and terms of payment

c) Returns policy-this indicates the warranty that the

manufacturer extends to the intermediary

d) Territorial rights-the territorial jurisdiction should be

spelt spelt out to avoid territory jumping

e) Mutual services and responsibilities-should be spelt

out,particularly in case of franchised and exclusive
agency channels 20.19
 Criteria for Evaluating Channel Alternatives

Evolution of Channels

High
Growth Mature
Dedicated stores: Department Stores like
Computer point Akbarallys
Market Shopper’s stop
Growth
Rate
Introductory Decline
Specialist Channels like Discount Store
boutiques in fashion/ Low cost alternatives like
designer wear ‘Discount Sales’
Low

Value Added by Channel Members

Marketing channels across product life cycle

20.20
 Vertical Marketing System

VMS are of three types

i) Corporate Vertical Marketing Systems-successive
stages from production to distribution are under single
ownership

ii) Administered VMS-seeks to control successive stages

from production to distribution not through ownership but
through the size and power of one of the channel members

iii) Contractual VMS-independent firms at different levels of

production and distribution integrating their programs on a
contractual basis to obtain larger economies of scale and,
or sales impact than they could achieve alone
20.21
Horizontal Marketing Systems-
This reflects the readiness or willingness of two or more non-
related companies to put together resources to exploit an
emerging market opportunity

Multichannel Marketing Systems-

The firm uses two or more channels to reach one or more
market segments

Managing the Channel-

To effectively manage the channel members, the marketer has
to:
a) manage channel conflict
b) motivate channel members

20.22
 Channel Conflict
Type of conflict:
i) Vertical level conflict-when the channel member at one level is
in conflict with another member at the next higher or lower level.
2) Corporate Vertical Marketing Systems
3) Administered VMS
4) Contractual VMS

ii) Horizontal level conflict-conflict at the same level between

channel members

iii) Multi channel level conflict-middlemen come in conflict with

the manufacturer, using both direct and indirect means of
distribution

20.23
 Nature or Causes of Conflict

i) Goal incompatibility-between manufacturers and

wholesalers

ii) Role ambiguity-common cause of conflict in

multichannel conflict

iii) Differences in Perceptions of the Market-may

create a conflict between manufacturer and middlemen

Magnitude of Conflict
When a conflict assumes significant magnitude, the
manufacturer must take the initiative to resolve it
20.24
 Managing The Conflict

a) Communication-have regular communication between the

manufacturers and the channel members
b) Dealer Councils-helpful in resolving conflicts at horizontal
level and vertical level
c) Super ordinate goals-through evolving a superordinate
goal of maximizing customer satisfaction
d) Arbitration and mediation-in intra-middlemen conflict
-horizontal or vertical- the manufacturer may arbitrate or
mediate

Motivating Channel Members

Achieved through financial and non-financial rewards

20.25
 Eight Steps in Designing the Market Driven
Distribution are:

1. Know what the customers want

2. Decide on the outlet
3. Determine the costs
4. Bound the ‘ideal’
5. Compare the alternatives
6. Review assumptions in the list of research
7. Confront the gap between the ideal and the actual
distribution system
8. Implement changes in the system, if required

20.26
Element
Inventory management approach Independent efforts
Total cost approach
Time horizon
Amount of information sharing and Limited to needs of current
monitoring
Amount of coordination of multiple Single contact for the
levels in the channel
Joint Planning
Compatibility of corporate
philosophies
Breadth of supplier base
Channel leadership
Amount of sharing of risks and
rewards
Speed of operations, information
and inventory flows
Traditional Approach
Minimize firm costs
Short-term
transaction
transaction between
channel pans
Transaction-based
Not relevant
Large to increase com-
petition and spread risk
Not needed
Each on its own
"Warehouse'‘ orientation
(storage, safety stock) interrupted
by barriers to flows;
Localized to channel pairs
Supply Chain Approach
Joint reduction in channel
inventories
Channel-wide cost efficiencies
Long-term
As required for planning and
Monitoring processes
Multiple contacts between levels in
firms and levels of channel
Ongoing
Compatible at least for key
relationships
Small to increase coordination
Needed for coordination focus
Risks and rewards shared over the
long-term
"Distribution Center" orientation
(inventory velocity)
interconnecting flows; JIT, Quick
Response across the channel
20.27
 Logistics Management
Involves
a) Materials Management
b) Physical Distribution Management

Represents the value chain of the firm where at the start

is the procurement function and at the end of the chain is
the customer

This requires materials planning, inventory management,

management of transportation and warehouses, and
information management

20.28
 Logistics Decisions

Transportation decisions involve:

a) Costs
b) Dependability of the mode
c) Transit loss and damage
d) Reach of the mode
e) Speed at which firm is able to reach the
market

Companies are using intermodal transportation to

reach the markets. It combines two or more
modes of transportation

20.29
 Warehousing

Whether a firm uses its own or a third party warehouse,

it has to take the following decisions:
a) Number of warehouses and their location
b) Level of customer service required to be provided to
gain competitive advantage
c) Cost of distribution
d) Technology to be deployed-automated warehousing
is now the order of the day

Inventory Management: Marketer has to maintain a

fine balance between stockouts and stockpiles. Many
companies are trying to manage this through JIT
processes.
20.30
 Third Party Logistics--An Emerging Alternative

These can be segmented in three broad categories:

1. Diversified, or those who handle all product types

2. Product specific
3. Customized to a client

Third party logistics providers add value to the distribution

channel by offering speed and consistency for just-in-time
operations, without having to move existing manufacturing,
and warehousing facilities closer to the customer.

20.31
Reasons why third party logistics is gaining importance

a) firms are able to concentrate on their core competencies

and hence there is a better focus in their operations

b) it eliminates staffing and internal system development

costs

c) reduce initial startup distribution costs

d) customize the offer to the market needs better than the

manufacturer

20.32
 In selecting a third party logistics supplier firm
needs to focus on:

a) compatibility in approach, attitude and culture

b) quality of services to be provided by the supplier
c) experience in a particular industry
d) performance track record
e) Flexibility
f) financial muscle
g) brand image

20.33