Marketing Channel

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: Suppliers of Inputs

Customers

Transporter and Warehouses

Retailers

Manufacturer

Transporters

Transporters and C & F Agents of Company Warehouses

Wholesalers

20.4

Title Flow:

Input Suppliers

Manufacturer

Wholesalers/ Dealers

Retailers

Customers

20.5

Payment Flow:

Suppliers

Bank

Manufacturer

Wholesaler/ Dealers

Retailers

Customers

20.6

Information Flow:

Suppliers of Inputs

Transporter and Warehouse and Banks

Manufacturer

Transporter and Warehouse and Banks

Customers

Wholesalers /Dealers

Transporter and Warehouse and Banks

Retailers

20.7

Promotion Flow:

Supplier of Input

Advertising Agency

Manufacturer

Advertising Agency

Trade

Customer

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

(b)

(a) 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/ Dealer

Distributor

Retailer

Wholesaler Retailer

Customer Customer Length of channel distribution 20.14

Width of channel of distribution Manufacturer Market 1

Dealer Dealer A B

Dealer C

Dealer D

Dealer E

Dealer Dealer F G

Retailers Customers

Customers

Customers

20.15

Market

Market Market

Market

Retail spokes-restaurants, soft drink kiosks, panwalsa, sweetmarts

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 Market

Market

Market Market Market

Franchise Major Hub of Parent Company

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 20.19 agency channels

Criteria for Evaluating Channel Alternatives Evolution of Channels High

Market Growth Rate

Low

Growth Dedicated stores: Computer point Shopper’s stop

Introductory Specialist Channels like boutiques in fashion/ designer wear

Mature Department Stores like Akbarallys

Decline Discount Store Low cost alternatives like ‘Discount Sales’

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 SystemsThis reflects the readiness or willingness of two or more nonrelated companies to put together resources to exploit an emerging market opportunity Multichannel Marketing SystemsThe firm uses two or more channels to reach one or more market segments Managing the ChannelTo 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. 2. 3. 4. 5. 6. 7.

Know what the customers want Decide on the outlet Determine the costs Bound the ‘ideal’ Compare the alternatives Review assumptions in the list of research Confront the gap between the ideal and the actual distribution system 8. Implement changes in the system, if required 20.26

Element

Traditional Approach

Inventory management approach Independent efforts Total cost approach Minimize firm costs Time horizon Short-term Amount of information sharing and Limited to needs of current monitoring transaction Amount of coordination of multiple Single contact for the levels in the channel transaction between channel pans Joint Planning Transaction-based Compatibility of corporate Not relevant philosophies Large to increase comBreadth of supplier base petition and spread risk Not needed Channel leadership Each on its own Amount of sharing of risks and "Warehouse'‘ orientation rewards (storage, safety stock) interrupted by barriers to flows; Speed of operations, information Localized to channel pairs and inventory flows

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. 2. 3.

Diversified, or those who handle all product types Product specific 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