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Distribution Channels Management

Physical Distribution, Supply Chains, and Logistics Management


Order processing Includes order entry in which the order is actually entered into a companys information system; Order handling, which involves locating, assembling, and moving products into distribution; and order delivery Warehousing Warehouses are used to store goods until they are sold Distribution centers are designed to efficiently receive goods from suppliers.
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Physical Distribution, Supply Chains, and Logistics Management


Inventory management - Ensures that a company neither runs out of manufacturing components or finished goods nor incurs the expense and risk of carrying excessive stocks of these items Transportation - The method or mode a company should utilize when moving products through domestic and global channels; the most common modes of transportation are rail, truck, air, and water.

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Physical Distribution, Supply Chains, and Logistics Management


Transportation Companies. Transportation companies are classified into four basic types: common carriers, contract carriers, private carriers, and freight forwarders. A common carrier offers to perform services within a particular line of business for the general public. One example is a truck line operating in an area where general merchandise is handled. The truck line is available to serve all the people in the area who offer it general merchandise to haul. However, it may decline to handle such items as liquid petroleum gas or aviation gas. Examples of common carriers are United Airlines and Consolidated Freightways.

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Physical Distribution, Supply Chains, and Logistics Management


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Contract carriers transport goods for hire by individual contract or agreement. They do not offer to perform services for the general public; instead, they usually offer services that meet the special needs of their customers. .

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Physical Distribution, Supply Chains, and Logistics Management


. carriers transport their own property or deliver their services in Private
their own vehicles. Amoco has its own fleet of oceangoing crude oil carriers. Hon Industries, a manufacturer of office furniture and products, maintains its own fleet of trucks to provide customers with fast delivery and reduce product damage. The Hon trucks, painted with the company name and logo, also serve as advertisements. Federal Express has a ground fleet of more than 17,000 vehicles and 145 airplanes to ensure fast, on-time delivery for its package service.

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MODES
Mode Cost Speed Slow Accessibility Capability Reliability Ease of tracing Low Low High Moderate Pipeline Low

Water
Truck Rail Air

Low
Varies Average High

Slow
Fast Average Fast

Low
High Average Low

High
High High

Low
High Average

Low
High Low High High

Moderate High Low High

Internet Low

Mod-fast Increasing

Building Distribution Infra-Structure


Number of retail outlets in one day Frequency weekly Total no of outlets in a week To cover 100K outlets no of vans Operational cost per van Total cost of serve 100K outlets 40

240 416 20,000 Rs.8.3M

Turnover Calculation Example Cost of Running Van/Other expenses Rs.20,000 p/month Distributors Margin 5% Break-Even (Turnover) Rs.400K Distributors Profit 5% Sales ???
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Trade Margin
Profit margin of the total trade chain involving distributors, wholesalers, retailer is termed as trade margin Stated trade margin vs. Actual trade margin, must be monitored by the company otherwise there will be issue of profit to trade becoming a reason for conflict Depends upon speed of turnover and companys brand franchise Gathering of market information Monitor Distributors ROI to ensure profit to trade High margin to wholesales are not recommended as they start under-cutting

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Total ROI to Distributors Example of A Class Customer:


Average T/O per year Investments Credit to the Market Rs.2.0M Stocks Rs.1.0M Total Investment = Rs.30M * 3.5% = 1.05M 3.0M Rs.30M

Rs.3.0M Rs.1.05M

Yearly Profit

ROI

35%

Ensure Optimum Return to Customers


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Sharing of Operational Cost

1. 2. 3. 4.

No Compensation 100% Compensation Percent of Sales Percent of Sales plus fixed amount

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Reasons for Price Under-Cutting


1. 2. 3. 4. 5. 6.

Mismatch of Demand & Supply Conversion of long term credit into Cash & Investing the fund in some more profitable items Sales Promotion Scheme Large Wholesalers buying in Bulk at lower price then distributing the market at later stage Overpowering companys distribution network by large/investor type of wholesaler/dealer Not keeping track of their profitability Rolling of money by traders Low cost operation selling at lower cost Year-end incentive selling at lower price in anticipation of target incentives Selling the main product at cost or below cost to be competitive in the market & earning through accessories

7. 8.

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Parameters For Monitoring Distributors


No of Outlets per distributor No of A Category outlets Optimum distance for van coverage per day Ideal location of distributors warehouse Optimum No of outlets per van per day Ideal productivity per van Optimum van visit frequency Optimum monthly turnover of distributors on the basis of per outlet purchase per visit Optimum distributors investment No of vans required to cover outlets Ideal credit extension in market on the basis of monthly turnover
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Parameters For Monitoring Distributors


Ideal stock cover with distributor on the basis of monthly turnover Ideal distributors monthly profit including annual incentive/ Cash Discount etc (if any) Distributors ideal ROI Ideal sales per outlet per visit

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Conflict
Conflict exists when a member of marketing channel perceives another members actions to be impeding of his goal Object of each others frustration Examples Pushing the inventory during lean period Extra discount (underhand) policy to push the sales Price Under-cutting Causes of Channel Conflict Role Incongruities A Role is a set of prescriptions defining what the behavior of position members should be

1.

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Conflict
Each member of channel is expected to fulfill certain role Manufacturers Demand generation, distributors Coverage / Shelf Share If any one of them deviates from the given role a conflict situation may result. Resource Scarcities Disagreement over allocation of some valuable resources to achieve goals E.G. Allocation of retailers Direct Selling to institutions

2.

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Conflict
3.

4.

Perceptual Differences Different perception of the same stimuli & attaching different interpretations E.G. Pop Materials Expectation Difference Expectations about the behavior of other channel member Predictions/forecasts concerning the future behavior of other channel These forecasts may turn to be inaccurate

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Conflict
5.

6.

Decision domain disagreements Channel members explicitly or implicitly carve out for themselves an area of decision making that they feel is exclusively theirs E.G. Pricing Decisions (Manufacturers Control VS Wholesalers domain) Goal Incompatibilities Each members has his own goals Incompatibility leads to conflict Conflicting Goals on shelf share in a particular shops Conflicting Goals on Coverage

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Conflict
7.

Communications Difficulties A foul-up or breakdown in communications can quickly turn a co-operative relationship into a conflicting one Feedback on market development program Channel Conflict & Efficiency Mostly - Negative Impact No Effect Higher level of dependency / commitment Positive Effect Conflict might serve as an impetus to reappraise their respective policies

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Conflict
Managing Channel Conflict
1.

2.

3.

Detect After the fact approach Negative Effect Early warning system Surveys/Visit/Actions M.C. Audit A periodic/regular evaluation of key areas of relationship Customer focus group meetings Distributors advisory councils/committees Regular meeting to detect conflicts Make conscious efforts to detect & solve conflict

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Conflict
Channel Conflict
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Pushing stock during lean period Extra discount (underhand) policy to push the sales Price under-cutting/cross flows Lack of consumer pull-demand generation activity by the manufacturers Lack of optimization of coverage/shelf share Allocation of retailers Allocation of towns/cities Re-organization of distribution set-up New Products Distribution Direct selling to institutions Effective use of P.O.S materials

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Conflict
11 12 13 14 15 16 17 18 19 20 21 22 Predictions / Forecasts of Sales Pricing decisions (Manufacturers Control VS Distributors/Wholesalers Domain) Conflicting goals on shelf share/coverage Communication difficulties Feedback on business/market development program Expectation on year-end profitability Profits to the trade Relations with top management Range availability Selling of competition products to increase profits Payment on time VS delivery of stores Priority of stock allocation at time of shortage

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