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Distribution Channels are a set of interdependent firms who facilitate in the process of Distributing / Selling / Promoting products to end


Distribution activities are specialized and have a learning curve. Activities like transportation, warehousing and even a neighborhood kirana store are specialized activities.

It is a strategic choice between cost of distribution and control over distribution.

Technically complex products or short life cycle products need higher control.

The choice between control and costs depends on:

Nature, scope and economics of distribution activities Objectives of the firm
Market penetration, market share, financial strength etc

Capabilities of the firm Industry norms and competition practices Future trends

Production function gives FORM utility distribution function gives TIME, PLACE and POSSESSION utility.

Time utility -customer buys the product at the time of need Possession utility customer takes possession of product through payment Place utility customer buys the product at a convenient place

Having the best designed or manufactured product is not enough. Sometimes distribution channel creates more value than these three utilities e.g. Maruti suzukis channels provide after sale service utility which is a key reason for Maruti to be the market leader in India

List all the service outputs that the channel needs to offer and decide the service levels:
Bulk breaking Spatial convenience Waiting time Assortment Installation support After sales support Consumer financing

Conceive the activities that will be performed to fulfill these objectives Calculate cost incurred and the options available

Design the ideal channel structure that can meet all the objectives at the least cost Look at available channels and identify those closest to the ideal channel. Assess the various channel options w.r.t specific criterion Develop the channel plan and implement it

It is the process where goods that are manufactured in large volumes are broken into smaller units at different locations, which are consumed by end customers. Necessary functions performed buy the channel:
Providing storage space Transaction management of ordering and payment

Smaller the lot size means higher convenience for the customer but also means higher cost for the channel Indian rural markets need smaller lot size and higher geographic spread - thereby greatly increasing the cost of distribution.

The extent of convenience offered in terms of distance the customer has to travel before availing the services of the channel it is also called intensity of distribution. Higher intensity of distribution means more costs due to:
More transportation More storage More personnel More monitoring and control

Industrial products and high value products offer higher spatial convenience. Higher the competition, higher the spatial convenience.

Waiting time is the time the customer has to spend before availing the services of the channel.
Waiting time is low for low value & low involvement products and vice versa. Waiting time is low for impulse buys

Waiting time also depends on tolerance levels of consumers, competitive practices and brand loyalty.

Assortment is the service which involves making available at one place products that are normally bought together. It is difficult to predict the adequate level of assortment. High end brands normally go for exclusivity and low value items are sold at multi brand stores. Having said that, high value brands normally locate themselves in clusters to offer spatial convenience. Data from super markets are great store houses for figuring out the assortment behavior of the consumers

Physical possession this involves transportation and storage of the product as it moves from manufacturing location to end use location. Several channel members contribute to this flow. Ownership flow taking title of the product as it flows through the channel. Promotion flow promoting the product to the customers as the product moves through the channel. Negotiation flow finalizing the terms of trade at every level of channel flow. Financing flow managing the working capital requirements of the channel

Risk taking flow underwriting the risks associated with possession /ownership including warranties and after sales service Ordering flow receiving and consolidating of orders and passing it upstream Payment flow receiving, recording and passing the payment upstream


Channel Flow Physical possession Ownership Promotion

Cost Represented Storage and delivery costs Inventory carrying costs Personal selling, advertising, sales promotion, publicity, public relations costs Time and legal costs Credit terms, terms and conditions of sale Price guarantees, warranties, insurance, repair, and after-sale service costs Order-processing costs Collections, bad debt costs

Negotiation Financing Risking

Ordering Payment

Effectiveness -whether the key objectives can be achieved Efficiency - the cost incurred for meeting the objectives Equity whether every channel member gets remunerated to the extent of the criticality their of activities. Scalability the extent to which the channel can take the surge in demand Flexibility how well the channel will adjust to changes in products, consumer behavior, technology changes etc.

You will not design a channel ( 95% probability) You will deal with channels (100% probability)


Carrying and forwarding agent



Logistics is the process of planning, implementing and controlling the efficient, cost effective flow and storage of raw materials, in process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customer requirements. It involves two major operations:
Material Management Physical distribution management Inbound logistics Outbound logistics

It is divided into

In FMCG almost 40% of the final cost paid by customer is towards logistical activities In India, around 13% of GDP is estimated to be spent on logistics.

Materials Management

Physical Distribution Management

Manufacturing and supply service

Customer service

Suppliers Raw material Subassmblies Manufacture d parts Packaging material

Inbound Produ ctions Finish ed goods

Outbound Inventory in the field Finished Goods

WIP Materials flow

Transit Depot


Customer Other equipment manufacturer End users Government

Cost reduction Capital reduction Service improvements

Cost reduction is aimed at reducing the variable cost related to storage and movement of goods without altering the service levels. It is done by
Altering the location and number of warehouses Altering the mode of transport Route optimization Optimizing the quantum of inventory

Capital reduction is aimed at reducing the level of investment in logistics. Assets that are created in this function are
Warehouses Trucks Material handling equipments IT investments for managing supply chain

Service improvements are aimed at giving better service without increase in the costs of logistics. Better service could mean
Scalability at least cost when demand goes up Increase in accuracy /speed of transaction processing through business process re - engineering.

Logistical planning addresses the issue of cost reduction, capital reduction and better service level through: FIT
Facility planning Inventory management Transportation management

Warehouses are secure, protected buildings with special facilities where inventories are accumulated, stored, allocated and according to demand Main functions of warehousing are material movement and information processing:
Receiving ( unloading, quantity verification, order matching, quality inspection) Transferring ( specific location in warehouse, adjusting inventory records) Order picking and Selection ( order receiving, picking of inventory, packing, deciding on mode of transport, adjusting inventory records) Shipping ( transportation and billing)

Main decisions in warehousing area are

Number of warehouses the considerations here are cost of lost sales, inventory carrying costs, warehouse costs and transportation costs Location of warehouses Location decisions are based minimization of transportation costs and warehousing costs leading to lower lead times and better service levels.

Logistical planning addresses the issue of cost reduction capital reduction and better service level through:
Facility planning Inventory management Transportation management

Costs associated with Inventories:

Inventory procurement costs ordering costs Inventory carrying costs capital investment on inventory, inventory service costs ( insurance), storage space costs ( rent, maintenance, manpower), other costs ( obsolescence, pilferage, shrinkage etc) Out of stock costs Order cancellation ( amount of profit lost) and back order costs (cost of management time and effort to push old orders)

Total cost of inventory = Cost of ordering + Inventory carrying cost TC - total cost D - Annual demand Q - Order quantity S Ordering cost I Inv. Carrying cost C Unit cost of inventory in Rs.

RK agency is a distributor of cycles in Karnataka. The cycles are ordered from Punjab and order fulfillment takes 4 weeks. The annual demand of cycle in around 20,000 cycles with an average price of Rs.700.the Inv carrying cost is 5%and the cost of each order processing is Rs 4000. Find out the optimum order qty and the reorder level.

RK agency is a distributor of cycles in Karnataka. The cycles are ordered from Punjab and order fulfillment takes 4 weeks. The annual demand of cycle in around 20,000 cycles with an average price of Rs.700.the Inv carrying cost is 5%and the cost of each order processing is Rs 4000. Find out the optimum order qty and the reorder level. Total demand 20000 cycles /year Ordering cost Rs 4000 per order Inventory carrying cost Rs 700 * 5% = Rs 35 per cycle Economic order quantity = sq root of (2*20000*4000/35)= 2138 Estimated demand per week 20000/52 = 384 Lead time - 4 weeks Reorder point 384*4 = 1538 cycles

Logistical planning addresses the issue of cost reduction capital reduction and better service level through:
Facility planning Inventory management Transportation management

Transportation cost is the second largest cost in logistics - largest being the inventory carrying cost In India, due to poor infrastructure, 5.4 % of the total GDP is represented by transportation Key variables where decisions are taken are:
Mode of transportation Routing and scheduling Consolidation