distribution management - chapter 4
TRANSCRIPT
Distribution Management
Session - 6
Today’s session:
•Physical Distribution Channels•Types of Flows•Channel Management•Why distribute through intermediaries•Channel Structure•Channel Design models
Channels of distribution
Physical Distribution Channel:
•The method by which•a product is physically transferred•from the point of production•to the point where they are•available to the customer for purchase
Retailer Factory Customer’s Home
Physical distribution channels
Manufacturer Manufacturer Manufacturer Manufacturer
Consumer Consumer Consumer Consumer
Retailer Retailer Retailer
Wholesaler Wholesaler
Agent/ Broker
Physical Ownership of Goods
Physical distribution channels
Factory
Consumer
Retailer
Wholesaler
DC
RDC
Manufacturer/ Company
External organizations
Transfer of ownership of product
Not just physical product flow – other flows as well
Distribution channels
Five different types of flows
Manufacturer
Consumer
Retailer
Transporter
WS/ Distr.
Transporter
PHYSICAL NEGOTIATION OWNERSHIP INFORMATION PROMOTION
Manufacturer
Consumer
Retailer
WS/ Distr.
Manufacturer
Consumer
Retailer
WS/ Distr.
Manufacturer
Consumer
Retailer
Transporter
WS/ Distr.
Transporter
Manufacturer
Consumer
Retailer
WS/ Distr.
Agencies
Distribution channels – Types of Flows
Physical product flow:•Actual physical movement of product•From manufacturer to consumer•Includes all those who take physical possession of the product.
Manufacturer
Consumer
Retailer
Transporter
WS/ Distr.
Transporter
PHYSICAL
Distribution channels – Types of Flows
Negotiation flow:•This flow represents the discussions between the buying and selling functions of the channel members.•This discussion is associated with the transfer of title.•Transportation firm is not included in this flow – No participation in negotiation•Arrows point in both directions – mutual exchange between buyers & sellers at all levels
NEGOTIATION
Manufacturer
Consumer
Retailer
WS/ Distr.
Distribution channels – Types of Flows
Ownership flow:•Movement of title refers to the flow of the title to the product – from manufacturers to consumers•Transportation firm again not included – does not take transfer of title.
OWNERSHIP
Manufacturer
Consumer
Retailer
WS/ Distr.
Distribution channels – Types of Flows
Information flow:•All parties involved in movement of information•Information moves in both direction – bi-directional arrows•Some information may by-pass the transporter – not of importance to the transport role.
INFORMATION
Manufacturer
Consumer
Retailer
Transporter
WS/ Distr.
Transporter
Distribution channels – Types of Flows
Promotion flow:•Movement of persuasive communication like advertising, personal selling, sales promotions, publicity.•A new type of firm – agency may be involved.•Agency involved in providing and maintaining the promotion flow.•Informational exchange between manufacturer and agency bi-directional•All other information flows in one direction only.
PROMOTION
Manufacturer
Consumer
Retailer
WS/ Distr.
Agency
Channel Management v/s Physical distribution management
Manufacturer
Consumer
Retailer
Transporter
WS/ Distr.
Transporter
PHYSICAL NEGOTIATION OWNERSHIP INFORMATION PROMOTION
Manufacturer
Consumer
Retailer
WS/ Distr.
Manufacturer
Consumer
Retailer
WS/ Distr.
Manufacturer
Consumer
Retailer
Transporter
WS/ Distr.
Transporter
Manufacturer
Consumer
Retailer
WS/ Distr.
Agencies
Physical distribution management - only concerned with movement of the physical productChannel management - concerned with not just movement of the physical product but all other flows. Broader concept.
Channel Management
Channel management much broader than the management of just the physical product flow
It involves management of :•Physical product flow•Ownership flow•Negotiation flow•Information flow &•Promotion flowto achieve the firm’s distribution objectives
Why distribute through intermediaries?
1. Specialization & Division of Labour:
M
C
R
W/ D
Why not reach the product directly from Manufacturer to Consumer
Adam Smith – The father of Modern Economics
Pin Factory example – The Wealth of Nations - Specialization of labour
What holds true for manufacturing holds true for the complex task of distribution•Break down complex task into smaller tasks•Each task less complex than the whole task•Allocate these small tasks to parties who will specialize at doing these tasks•Greater efficieny can thus be achieved
Why distribute through intermediaries?2. Improve efficiency in the exchange process
Barter Exchange Economy:
Producer 1
Producer 2
Producer 3
Producer 4
Producer 5
Hats
Sticks
Baskets
Pots
Knives
•Each producer needs all other producer’s products•Total of ten exchanges needed to satisfy all.
•With a distributor only five exchanges needed.
DISTR
Without distributor With distributor
No of transactions:= n(n-1)/2
n-No. of producers
No of transactions:= n
n-No. of producers
Efficiency created in distri-bution due to use of an intermediary = 10/5 = 2
In general:Efficiency created
(n(n-1)/2)/n=(n-1)/2
Why distribute through intermediaries?
2. Improve efficiency in the exchange process
A distribution channel with intermediaries reduces the number of transactions needed – brings in efficiencies
Why distribute through intermediaries?
3. Lack of resources to reach all consumers directly
Consider this:•Maruti has 800+ dealerships•Cost of setting up a dealership (not counting stocks) – 15 cr•12000 cr needed to set up these dealerships•Even Maruti will find it difficult to invest that kind of money
Why distribute through intermediaries?
4. Perform Specific Distribution Tasks
•Collect output of various producers•Manufacturer – Production in bulk – Break-Bulk role•Hold product till customer needs it•Disperse the product to places where customers can buy it
Creating Form, Place, Possession & Time utilities
Why distribute through intermediaries?
5. Perform the distribution tasks faster & cheaper than manufac-turers can.
•Knowledge of local requirement•Local contacts•Sharing of services for several manufacturers
Channel Structure?Channel Structure is the group of channel members to which a set of distribution tasks has been allocated
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTUREM
C
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTUREM
C
R
W/ D
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTURE M
C
R
W/ D
•Each members of the distribution channel operates independently•Each member seeks to maximize its profit.•At the expense of others•Conflicts can arise•Will reduce profit of the entire chain
•Each member of the distribution channel works in a co-operative arrangement•Maximize benefits for all members•Objective is to reduce the cost of the product or to provide greater control
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTURE
Types of VMS: 1. Corporate:•A firm may also own firms at subsequent or previous levels.•It can own the entire channel also.
Rubber Plantations - LiberiaRubber Plantations - Liberia
Retail outlets
Factories
•Stable source of supplies•Better control over quality.
•Better cost chain•Lower overheads
Advantages:Disadvantages:•Hard to be good at
running Manufaturing, Retialing, Wholesaling
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTURE
Types of VMS: 2. Contractual:•Business firms in a supply chain enter into an agreement•To cooperate with each other on a binding basis.•Reduce costs and improve efficiencies
Franchisinga. Manufacturer sponsored retail franchise:
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTURE
Types of VMS: 2. Contractual:•Business firms in a supply chain enter into an agreement•To cooperate with each other on a binding basis.•Reduce costs and improve efficiencies
2. Manufacturer sponsored wholesale franchise:
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTURE
Types of VMS: 2. Contractual:•Business firms in a supply chain enter into an agreement•To cooperate with each other on a binding basis.•Reduce costs and improve efficiencies
3. Service firm sponsored retail franchise :
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTURE
Types of VMS: 3. Administered:•The dominant brand in the channel coordinates efforts•By virtue of its market power•Guide the entire channel as ‘Channel Captain”•No formal agreement or ownership
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTURE
•Two or more unrelated busi-nesses, put together their efforts to exploit a market opp-ortunity.•A product or service is pro-moted to potential customers.•This brings benefit to both the businesses
Horizontal Marketing System?
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTURE•Different channels used to reach the same of different consumer groups
DELLDELL
Large Customers
Retail
Web
Small Customers
Customers
Channel Structure?
DIRECTDIRECT
MULTI-CHANNEL
HORIZONTAL
VERTICAL
INDIRECT
CHANNEL STRUCTURE•Different channels used to reach the same of different consumer groups
DellDell Sales Outlet
Web
Purchase
Information
Call Center Tech Support
Channel Design Model
32
Designing a suitable channel system requires defining :
1. Understand factors influencing channel design, 2. Identify Factors that will have the most impact on the design3. Create a matrix based on these key factors o understand their interaction4. Decide which type of channel is suitable
Channel Design
33
Factors that influence channel design:
Consumer Habits
Company Factors
Market Factors
Product Characteristics
•Frequency of purchase•Purchasing Effort•Rapidity of Consumption•Significance of purchase•Waiting time
Channel Design
34
Factors that influence channel design:
Consumer Habits
Company Factors
Market Factors
Product Characteristics
•Replacement rate•Gross Margin•Adjustment•Searching time•Unit Value•Product Complexity•Product life-cycle stage•Volatility of demand•Brand positioning on quality•Perishability
Channel Design
35
Factors that influence channel design:
Consumer Habits
Company Factors
Market Factors
Product Characteristics •Focus on mass market
•Rate of technological change•Intensity of competition•Geographic concentration of market
Channel Design
36
Factors that influence channel design:
Consumer Habits
Company Factors
Market Factors
Product Characteristics
•Range of Products•Order Size•Market Share•Desire of control•Retailer investment•Number of support programs•Promotion budget•Size of firm
Channel Design Model
37
Designing a suitable channel system requires defining :1. Understand factors influencing channel design, 2. Identify Factors that will have the most impact on the design3. Create a matrix based on these key factors to understand their interaction4. Decide which type of channel is suitable
Market ConcentrationAvailability of capital
Customer Service LevelAsset Specificity
Channel Design Model
38
Understanding Asset Specificity:
It is the aspect or feature of an asset (such as a specialized machine) that makes it useful for one or few specific purposes and which, therefore, cannot easily be sold off quickly.
Six main types of asset specificity: •site specificity •physical asset specificity •human asset specificity •brand names •dedicated assets •temporal specificity
Channel Design Model
39
Understanding Asset Specificity:
Questions to be asked to judge specificity: •Is it difficult for an outsider to learn how to do the sell this product. •Does the salesman need to be given elaborate training to sell this product•Does the customer have to be trained elaborately to use this product•Do the salesmen need to have some technical education to sell the product•Will a salesman's inside information on our procedures would be very helpful to our competitors. •Are specialized facilities needed to sell the this product. •Is a large investment in equipment and facilities needed to sell this product
Channel Design Model
40
Designing a suitable channel system requires defining :1. Understand factors influencing channel design, 2. Identify Factors that will have the most impact on the design3. Create a matrix based on these key factors to understand their interaction4. Decide which type of channel is suitable
Channel Design Model
41
3. Create a matrix based on these key factors to understand their interaction
Capital avl. – HighCustomer Serv. – HighMarket concen. – HighAsset Specificity - Low
Channel Design Model
42
Designing a suitable channel system requires defining :1. Understand factors influencing channel design, 2. Identify Factors that will have the most impact on the design3. Create a matrix based on these key factors to understand their interaction4. Decide which type of channel is suitable
Distribution Scope Strategy
43