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A distribution channel consists of a set of people and firms involved in the transfer of title to a product as the product moves from producer to consumer. Thus, a distribution channel is primarily concerned with the movement of goods from the point of production to the point of consumption, which involves a variety of functions. The main participants in the distribution system are:
(1) the manufacturers,
(2) the intermediaries,
(3) the facilitating agencies, and
(4) the consumers.
Manufacturers produce the goods. This is the starting point in the distribution system. The second category of participants i.e., intermediaries, are involved in direct negotiation between buyers and sellers whether or not they take title to goods.
These intermediaries locate the manufacturers who produce various products, identify the needs of the consumers and distribute the goods. In the process, they perform various functions like buying, selling, assembling, standardization and grading, packing and packaging, risk bearing, etc.
Facilitating agencies are the independent business organisations other than intermediaries. These agencies facilitate the smooth distribution of goods from producers, through intermediaries, to consumers.
The major facilitating agencies are banking institutions, insurance companies, transportation agencies and warehousing companies. The fourth category of participants in the distribution system i.e., consumers, are the final destination for goods in the distribution system.
The channel of distribution is a network of institutions that perform a variety of interrelated and coordinated functions in the movement of goods from producers to consumers.
A distribution channel creates place, time, form and possession utilities to the products by prompt and efficient performance of the function of physical distribution. In modem societies the production of goods takes place on a large scale in factories concentrated in few localities while the consumers are scattered throughout the country.
For instance, textile mills are concentrated at few places like Bombay, Ahmedabad, Coimbatore, etc., while the cloth is used by all the people in the country.
A distribution channel helps in the movement of goods from producer to consumer and, thus, creates place utility to the product.
A distribution channel makes it possible for the consumers to get the products in a convenient shape, unit size, style and package.
Thus, it creates convenience value. Distribution channel also makes it possible for the consumer to obtain goods at a price he is willing to pay and under conditions which bring him satisfaction and pride of ownership.
Thus, it creates possession utility. Thus, it is the distribution system which moves the goods from the place of production and makes them available to the consumers at the right place, time and form.
Meeting Customer Service Requirements:
Marketing strategy aims at satisfying customers' needs and wants. Physical distribution is invisible to most consumers. They pay attention to it only when something goes wrong and it may be too late for the company to cheer them. It is not unusual in India, particularly for service providers failing to meet customer service delivery expectations.
Minimising Total Distribution Costs:
Companies strive to minimise their distribution costs associated with order processing, inventory management, materials handling, warehousing, and transportation. However, decreasing costs in one area often increases them in another. The company has to develop an economical system without compromising the minimum guaranteed service delivery level and to achieve this trade-offs between service level and costs becomes unavoidable. Taking a systems approach to distribution, the focus from lowering costs of individual activities shifts to minimising overall distribution costs.
Time-cycle refers to the time it takes to complete a process. It is an important objective of physical distribution to reduce time-cycle to reduce costs and increase customer service. Many businesses such as overnight delivery companies, and major news media strive to slash time-cycle to gain competitive advantage. For example, FedEx overnight delivery service conducts research and employs new techniques and procedures to be the fastest overnight delivery service. FedEx offers its customers package-tracking software so that they can track the progress of their package. In such situations, speed is important than costs.
In specific terms, distribution channel perform the following functions:
Facilitate selling by being physically close to customers
Provide distributional efficiency by bridging the manufacturer with the user efficiently and economically
Break the bulk and cater to the small requirements of buyers
Assemble products into assortments to meet buyer's needs;
Look after a part of physical distribution1 marketing logistics Share the financial burden of the principal; provide deposits; finance the stocks till they are sold to the ultimate consumers; extend credit to the retailers1 consumers. Provide salesmanship and after-sale service
Assist in sales promotion Assist in merchandising
Assist in introducing new products
Assist in implementing the price mechanism:
assist in price negotiations
Assist in developing sales forecasts
sales plans for the territory
Provide market intelligence and feedback
The searching out of buyers and sellers (contacting).
Matching goods to the requirements of market. (merchandising).
Offering products in the form of assortments or packages of items useable or acceptable by the consumers.
Persuading and influencing the prospective buyers to favour a certain product and its maker ( personal selling/sales promotion)
Implementing pricing strategies in such a manner that will be acceptable to the buyers and ensure effective distribution.
Looking after all physical distribution function.
Participating actively in the creation and establishment of the market for a new product.
Offering pre and after sales services to the customer
Transferring new technology to the users along with the supply of products and playing the role of change agents
Providing feedback information, marketing intelligence and sales forecasting services for their regions to their suppliers Offering credit to retailers and consumers
Risk bearing with reference to stock holding / transport
This concept of "marketing" logistics borrows from the traditional concept of marketing. In other words, identify your customers, identify their needs, and combine the firm's resources to meet those needs. However, the concept of logistics marketing goes a little further. The purpose of this paper is to introduce the concept of the 5 P's and to provide the logistics executive with a framework for it's implementation
Traditional logistics services would include order fill, on-time delivery, zero damage, and accurate invoicing. These are how firms competed with one another and gained competitive advantage. This is no longer the case. Today, these logistics services can be called "reliability" services. Customers expect 100 percent conformance at all times.
An evolving logistics product is what can be called "responsiveness" services. These . would include store-built pallets, customer pick-up options, and special material handling options. These go beyond the basic logistics product and can actually increase a firm's market share if they are done well, as well as decrease market share if they are done poorly when compared to competitors. Procter & Gamble's Product Supply Group has a "toolbox" that it uses to assess customer needs and includes prescriptive solution tools to develop responsiveness programs for customers. These tailored logistics programs have helped Procter & Gamble differentiate itself in a competitive market.
Logistics is involved in price decisions, both internal and external to the firm. The price of providing logistics service will have a direct impact on a product's price and profitability. Also, the price of logistics investments will have an impact on the revenue and profitability of the firm.
Because of the importance of price in decision making, the logistics executive must understand logistics "price drivers." These cause changes in the cost of providing logistics service, thereby changing the price of logistics service to the firm. Customer profile, product profile and order profile are examples of logistics price drivers.
Changes in these are usually not under the control of the logistics executive but require some type of logistics reaction. If logistics price increases because of a change in a logistics price driver, the logistics executive must be able to explain and justify this increase to senior management.
First, the timing of logistics promotional efforts is important. There is a time to sell/ promote ideas that is more than likely to result in a positive reaction.
Conversely, even a good idea will be turned away if the timing isn't right. Second, create the opportunity to sell/promote logistics by making logistics visible to other departments. This can be done by making the initial contact with another department or by attending company/industry functions. In other words, be visible and be a spokesperson for your team-let others/' know what logistics is all about.
Finally, be proactive. The methods employed by Unisys, Becton Dickinson, and Nabisco all focus on proactive logistics solutions and investments rather than on reactive ones. These firms have grasped the opportunity to tell their customers that logistics can add value for them and help them achieve their goals. Additionally, these firms have been able to meet or exceed the promises they have made to their customers in a consistent manner. This can very well be the most effective promotional technique for the logistics executive: flawless execution.
In the traditional 4 P's of the marketing mix, place refers to logistics. In the context of logistics marketing, however, place takes on another meaning. The role of place in the 5 P's is to facilitate the transaction between the logistics organization and its customers. In other words, the logistics organization should be easy to do business with. This "hassle free" service has four dimensions.
People will strive harder to accomplish goals that excite them. The logistics executive must develop the organization" to understand that logistics supports a business; knowledge of this business will allow the logistics organization to perform its service more effectively
Logistics and marketing management are concerned with the effective flow of products and services in the economy and pertain to the distribution of both consumer and industrial goods. Marketing is considered to be a vital part of an economy and there is a need for an efficient marketing system which can ensure that ail marketing activities are carried out in accordance with the predefined goals of the business.
Wholesalers, manufacturers, business firms and retailers are facing the urgent need to formulate implement policies pertaining to marketing.
This can be done by the execution and development of executive marketing programs and strategies.
The logistics executives and managers are primarily concerned with expansion of product line and product development, choice of the channels of distribution and are also concerned with the overall development of promotional programs and establishment of pricing methods and policies.
Logistics is a mixture of several professional disciplines, such as:
6. Warehousing and transportation
7. Facility location
8. Inventory management
As per the Council of Logistics Management, logistics has been defined as the part of the process of supply chain that plan, control and implement an effective and efficient flow for the purpose of storage of goods and services and other related information from the point of commencement to the point of final consumption with a aim to satisfy the requirements of its' existing and prospective customers.
In 1958, J. Forrester wrote a learned article in the Harvard Business Review regarding system dynamics and its impact on the firm's performance. What he wrote has ultimately resulted in changing the traditional way of thinking about the supply function.
He wrote: 'Management is on the verge of a major breakthrough in understanding how industrial company success depends on the interactions between the flows of information, materials, money, manpower, and capital equipment. The way these five flow systems interlock to amplify one another and to cause change and fluctuation will form the basis of anticipating the effects of decisions, policies, organizational forms, and investment choices'
The 'Forrester Effect', is now popularly called the 'bullwhip effect ' and shows how information gets distorted as it moves along the network and results in excess inventory at times and inventory shortage at other times. With each stage having very different estimates of what demand looks like, it results in the lead-lag effect and a change in amplitude in the inventory which, in turn, creates two possible situations:
• Too Much Stock that results in increase in costs, e.g., storage and handling, insurance, interest etc.; loss of productivity due to existing inventory; high opportunity cost; and stockpiling of unsold stock, etc.
• Too Little Stock that results in the firm's inability to cope with demand which results in loss of customers; delays often halt production, which leads to idle labor and machinery; and loss of discounts for bulk buying, etc.
It took some time for industry to absorb the implications of the effect noticed by Forrester, but it ultimately led to the concept of the supply chain in the 1990s. The supply chain is based on two core concepts: A. The first; practically every product that reaches an end user represents the cumulative effort of multiple organizations, These organizations are referred to collectively as the supply chain.
A supply chain consists of multiple firms, both upstream (suppliers) and downstream (distribution)
B. The second; organizations have to minimize conflicts in objectives outside their "four walls" and manage the entire chain of activities that ultimately delivers products to the final customer in order that each stage of the supply chain and all its constituents can maximize profits.
The supply chain is about information use and it is about product movement. There are three key areas of focus:
(a) Proper information use,
(b) Proper product movement, and
(c) Proper relationship management.
A typical supply chain may involve a variety of stages. These supply chain stages include: • Customers • Retailers
• Component/Raw material suppliers
The Institute for Supply Management describes supply chain management as "the design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer. The development and integration of people and technological resources are critical to successful supply chain integration."
SCM is involved with integrating three key flows, between the different stages, across the boundaries of the companies:
• Product/ Materials:
This is the most obvious and visible part of the supply chain. Physically, the flow manifests itself in the form of goods and services. This is also called the 'value flow'. Goods and service flows follow a similar sequence. For example, goods flows constitute raw materials (including material being transported), work in process, finished goods, and spares, and reverse flows due to returns, rework or recycling of the goods. The vendor side of these flows is called 'upstream' and the flows towards the customer are referred to as 'downstream'.
• Flow of information:
Information flows allow the various supply chain partners to coordinate their long-term plans, and to control the day-to-day flow of goods and material to the supply chain. It consists of flows both from vendor to the customer and from the customer to the vendor, The downstream flow of information has important components like capacity estimates for plans, stocks available, dispatch advices, stock transfer notes, quality assurance reports, warranties, etc. The upstream components of information flow are inputs for forecasts, marketing plans, dispatch plans, production plans and procurement quantities and timing, orders from customers and dealers, quality feedback, and warranties.
This is the commercial part of the supply chain, and runs counter to the direction of the value flow. If reflects the money paid with respect to the transfer of title and/or service delivery in the supply chain. Other features of cash flow are credit periods/ advances for payments from customers/dealers, and to vendors. The cash flow determines how the value flow is financed by the various actors in the supply chain.
The traditional marketing channels we discussed include members who are independent entities and no party has complete control over others in the channel system. Each seeks to maximise its own profit goals without much concern for others in the same system. Some recent changes in channel systems that have emerged include Vertical Marketing Systems (VMS), Horizontal Marketing Systems, and Multichannel Marketing Systems (also called hybrid channels).
Vertical marketing system refers to an arrangement in which the whole channel focuses on the same target market at the end of the channel. This includes producer, distributors, wholesalers, and retailers acting in an integrated manner. Any channel member, a manufacturer, distributor, wholesaler, or retailer can become a channel captain who helps direct the activities of the entire channel and tries to eliminate or resolve conflict. . Channel captain arranges for the necessary functions to be performed in the most effective manner. There are three types of VMS- corporate, administered, and contractual.
• Corporate VMS refers to the producer's ownership of the entire channel, right from manufacturing to wholesaling, and retailing. One may say the company is going direct. In India Vimal Fabrics, Titan watches, and Bata etc., are some examples. Manufacturer can accomplish this through vertical integration (acquiring firms at different levels of channel activity). This offers greater buying power, stable sources of supplies, better control of distribution and quality, and lower executive overheads.
• Administered VMS is achieved when some members because of their position, size and power in the industry are in a commanding position to secure cooperation and support from resellers at different levels. Members informally agree to cooperate with each other on matters like routine ordering, sharing inventory and sales information over networks, standardise accounting, and integrate their promotional activities. The agreement is informal and the members retain some of the flexibility of traditional distribution system. Companies with strong brands command substantial market power and are able to get cooperation from resellers at different levels of distribution. Several examples can be cited such as Hindustan Lever Ltd., Procter & Gamble, Maruti Udyog, ITC, IBM, Sony, Apple, and TELCO etc.
• Contractual VMS consists of independent businesses at different levels in the channel including production and distribution, and is most popular. Members agree to cooperate with each other by entering into contract that spells each member's' rights and obligations and gain economies of size and sales impact. Contractual VMS can be franchiser, wholesaler, or retailer sponsored, such as Coke and Pepsi have bottlers with distribution set up, some educational institutions appoint franchisees, Body Shop, Shahnaz Herbal, some retail chains, and others.
Horizontal marketing system occurs when two or more related or unrelated companies working at the same level come together to exploit marketing opportunities. By coming together they have the option to combine their capital, production capabilities, marketing strengths to gain substantial advantage than by each company working alone. This kind of joining forces is viewed as symbiotic relationship and can be between non-competitors as well as competitors.
Some companies use several marketing channels simultaneously to reach diverse target markets. This system is also called hybrid channels or multichannel. Each channel involves different group of intermediaries. Hybrid or multichannel marketing arrangement is also called by another name, dual distribution, when a company uses two or more channels to distribute same products to the same target market Hybrid channels may involve selling direct to large sized customers, use telemarketing to reach medium sized customers, direct mail selling to small customers, retailers sell to personal consumers, and company also uses online selling.
These channels are used for consumer durable goods which are directly consumed by the household. For example, TV, car, food items etc. Following levels of channel are used for this purpose.
The shortest, simplest distribution channel for consumer goods involves no middlemen. The producer may sell door to door or by mail. For instance, Southwestern Company uses college students to market its books on a door to door basis.
Many large retailers buy directly from manufacturers and agricultural producers. To the chagrin of various wholesaling middlemen, Wal-Mart has increased its direct dealings with producers.
If there is a traditional channel for consumer goods, this is it. Small retailers and manufacturers find these channels the only economically feasible choice.
Instead of using wholesalers, many producers prefer to use agent middlemen to reach the retail market, especially large scale retailers. For example, Clorox uses agent middlemen (such as Eisenhart &Associates, a food broker) to reach retailers (such as Dillon's and Schnucks, both large grocery chains), which in turn sell Clorox's cleansing products to consumers.
To reach small retailers producers often use agent middlemen, who in turn call on wholesalers that sell to large retail chains and/or small retail stores. Working as an agent on behalf of various groceries -products manufacturer, Eisenhart & Associates sells to some wholesalers (such as Super Value) that distributes a wide range of product to retailers (such as Dierberg's, a supermarket chain at St. Louis area). In turn Die bergs offer its assortment of product to final consumers.
A variety of channels are available to reach organizations that incorporate the products into their manufacturing process or use them in their operations. In the distribution of business goods, the terms industrial distributor and merchant Distribution Channels wholesaler are synonymous. The four common channels for business goods are:
The direct channel accounts for a greater dollar volume of business products than any other distribution structure. Manufacturers of large installations, such as airplanes generator, and heating plants usually sell directly to users.
Producers of operating supplies and small accessory equipment frequently use industrial distributors to reach their markets. Manufacturers of building materials and air-conditioning equipment are two examples of firms that make heavy use of industrial distributors.
Firms without their own sales department find this a desirable channel. Also a company that wants to introduce a new product or enter a new market may prefer to use agents rather than its own sales force.
This channel is similar to the preceding one. It is used when, for some reason, it is not feasible to sell through agents directly to the business user. The unit sale may be too small for the direct selling. Or decentralized inventory may be required to supply users rapidly, in which case the storage services of an industrial distributor may be required.
The intangible nature of services creates special distribution requirements. There are only two common channels for services.
Because a service is intangible, the production process and/or sales activity often require personal contact between producer and consumer. Thus a direct channel is used. Direct distribution is typical for many professional services, such as healthcare and legal and personal services, such as hair cutting and weight-loss counselling. However, other services including travel, insurance and enteitainment, may also rely on direct distribution.
While direct distribution often is necessary for a service to be performed, producer -consumer contact may not be required for distribution activities. Agents frequently assist a service producer with transfer of ownership (the sales task) or related tasks. Many services notably travel, lodging, advertising media, entertainment and insurance, are sold through
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