CHANNEL

STRATEGY
Learning Objectives
 Learning Objectives
The internal and external factors affecting the decision of marketer to opt
distributors
 Learning Objectives
The internal and external factors affecting the decision of marketer to opt
distributors
The services required of distributors
 Learning Objectives
The internal and external factors affecting the decision of marketer to opt
distributors
The services required of distributors
Circumstances that dictate the marketer to use manufacturers’ agent in
place of own sales force
 Learning Objectives
The internal and external factors affecting the decision of marketer to opt
distributors
The services required of distributors
Circumstances that dictate the marketer to use manufacturers’ agent in
place of own sales force
Steps an industrial marketer should adopt to ensure effectiveness of
indirect channels
Distribution Channel

Direct Channel (Short)

Indirect Channel (Long)

 Distribution Channel

Distribution is the process of moving goods from producer to ultimate

customer

Direct Channel (Short)

Indirect Channel (Long)

 Distribution Channel

Distribution is the process of moving goods from producer to ultimate

customer
Distribution Channel is sequence of marketing institutions, including
intermediaries, that facilitates transactions between producers and final
users
Direct Channel (Short)

Indirect Channel (Long)

 Distribution Channel

Distribution is the process of moving goods from producer to ultimate

customer
Distribution Channel is sequence of marketing institutions, including
intermediaries, that facilitates transactions between producers and final
users
Direct Channel (Short)
There are two types of Channels

Indirect Channel (Long)

A Short Direct Channel
 A Short Direct Channel

Manufacturer

Direct Sale

Business Buyer
 A Short Direct Channel
Maintaining Inventory

Delivering Goods
Manufacturer
Providing information to customers

Direct Sale Promotion

Credit
Business Buyer
A Longer, More Indirect Channel
A Longer, More Indirect Channel
Manufacturer

Manufacturer’s Agent

Industrial Distributor

Business Buyer
A Longer, More Indirect Channel
Manufacturer

Manufacturer’s Agent
Maintaining Inventory

Delivering Goods
Industrial Distributor
Providing information to customers

Credit
Business Buyer
CHANNELS
 CHANNELS

Catering to several segments requires different distribution channel for

each segment
 CHANNELS

Catering to several segments requires different distribution channel for

each segment
Ex.: VARs - Value Added Resellers by IBM for small customers while
handling its own channel for large business houses
 CHANNELS

Catering to several segments requires different distribution channel for

each segment
Ex.: VARs - Value Added Resellers by IBM for small customers while
handling its own channel for large business houses
Channel Audit - Reappraisal of the existing approach to distribution. Ex.:
Ingersoll-Rand shifted from Direct Selling to Distributors after auditing
WHY USE DISTRIBUTORS?
WHY USE DISTRIBUTORS?
TRANSACTION COSTS - When a company has lot of small orders the
transaction costs (contact costs, orde-filling costs, expediting costs) can
increase significantly. By having distributor who can buy in large quantities,
manufacturer can reduce transaction costs per sales rupee.
WHY USE DISTRIBUTORS?
TRANSACTION COSTS - When a company has lot of small orders the
transaction costs (contact costs, orde-filling costs, expediting costs) can
increase significantly. By having distributor who can buy in large quantities,
manufacturer can reduce transaction costs per sales rupee.
INVENTORY COSTS - These are property taxes, insurance, storage
costs, interest on capital invested. These costs can be reduced by dumping
into distributor’s place.
WHY USE DISTRIBUTORS?
TRANSACTION COSTS - When a company has lot of small orders the
transaction costs (contact costs, orde-filling costs, expediting costs) can
increase significantly. By having distributor who can buy in large quantities,
manufacturer can reduce transaction costs per sales rupee.
INVENTORY COSTS - These are property taxes, insurance, storage
costs, interest on capital invested. These costs can be reduced by dumping
into distributor’s place.
LIMITED FINANCES - Even large corporations struggle to fund the
nation-wide network. Companies opt for own network when the product
is highly advanced and technical by nature which would be risky if
responsibility is passed on to distributor
NARROW PRODUCT LINE: In case of a narrow product line, Direct
selling would not give high return per sales call. The smarter way is to
have Distributor who has broader range of products to get higher returns
per sales call.
NARROW PRODUCT LINE: In case of a narrow product line, Direct
selling would not give high return per sales call. The smarter way is to
have Distributor who has broader range of products to get higher returns
per sales call.
PROXIMITY: Distributors/intermediaries offer local representation.
Distributors are in position to understand customer needs and wants,
credit rating, offer faster delivery, service and individual attention.
NARROW PRODUCT LINE: In case of a narrow product line, Direct
selling would not give high return per sales call. The smarter way is to
have Distributor who has broader range of products to get higher returns
per sales call.
PROXIMITY: Distributors/intermediaries offer local representation.
Distributors are in position to understand customer needs and wants,
credit rating, offer faster delivery, service and individual attention.
OPPORTUNITY COSTS: Incremental gain forgone by not pursuing a
higher yielding alternative.
TYPES OF INTERMEDIARIES

MERCHANT AGENT
INTERMEDIARIES INTERMEDIARIES
FULL-SERVICE
WHOLESALERS

STOCKING DELIVERY
CREDIT PROMOTION
TYPES OF INTERMEDIARIES

MERCHANT
INTERMEDIARIES
TYPES OF INTERMEDIARIES
SINGLE - LINE WHOLESALERS

SPECIALITY WHOLESALERS

LIMITED-FUNCTION WHOLESALERS

MERCHANT CASH-AND-CARRY WHOLESALERS

INTERMEDIARIES
DROP SHIPPER OR DESK JOBBER

TRUCK JOBBER

MAIL ORDER DISTRIBUTOR

CO-OPERATIVES
TYPES OF INTERMEDIARIES
Industrial fasteners
SINGLE - LINE WHOLESALERS
or chemicals

SPECIALITY WHOLESALERS

LIMITED-FUNCTION WHOLESALERS

MERCHANT CASH-AND-CARRY WHOLESALERS

INTERMEDIARIES
DROP SHIPPER OR DESK JOBBER

TRUCK JOBBER

MAIL ORDER DISTRIBUTOR

CO-OPERATIVES
TYPES OF INTERMEDIARIES
Industrial fasteners
SINGLE - LINE WHOLESALERS
or chemicals

SPECIALITY WHOLESALERS Industrial Paints

LIMITED-FUNCTION WHOLESALERS

MERCHANT CASH-AND-CARRY WHOLESALERS

INTERMEDIARIES
DROP SHIPPER OR DESK JOBBER

TRUCK JOBBER

MAIL ORDER DISTRIBUTOR

CO-OPERATIVES
TYPES OF INTERMEDIARIES

AGENT
INTERMEDIARIES
TYPES OF INTERMEDIARIES

COMMISSION AGENTS -
Commodities
MANUFACTURERS’ AGENTS - Sales
AGENT force
INTERMEDIARIES
BROKERS - Used Machinery

AUCTION COMPANIES
SIZE OF THE DISTRIBUTOR
Top 50 Others

Average sales/firm (millions) $157.5 $2.1

No. of locations per firm 15 2

Employees/firm 400 13

Employees/location 27 6.5

Percent of total sales 31.1% 68.9%

Sales per employee (thousands) $384.2 $165.1

Sales per location $10.8 $1.8

 MAJOR CHANNELS
Industrial Product Manufacturer

20.4% 18.2%

Manufacturer’s Agent 48.7% Manufacturer’s Sales Branch

3.6% 16.8% 8.6% 9.6%

Industrial Distributor
12.7%
74.1%

End Customers
INDUSTRIAL DISTRIBUTORS
 INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing

of products, repair service, credit, assortment area
 INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing

of products, repair service, credit, assortment area
They take title (ownership) so can set their own prices, maintain adequate
stocks and can carry competing brands too
 INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing

of products, repair service, credit, assortment area
They take title (ownership) so can set their own prices, maintain adequate
stocks and can carry competing brands too
Distributor’s outside salespeople are called “Order Getters”
 INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing

of products, repair service, credit, assortment area
They take title (ownership) so can set their own prices, maintain adequate
stocks and can carry competing brands too
Distributor’s outside salespeople are called “Order Getters”
Distributor’s inside salespeople are called “Order Takers”
 INDUSTRIAL DISTRIBUTORS

They contact customers, provide delivery, may do assembling or finishing

of products, repair service, credit, assortment area
They take title (ownership) so can set their own prices, maintain adequate
stocks and can carry competing brands too
Distributor’s outside salespeople are called “Order Getters”
Distributor’s inside salespeople are called “Order Takers”
Distributors stock usually MROs like Mechanics’ tools, accessories, cutting
tools, abrasives, bearings, power equipment etc...
 INDUSTRIAL DISTRIBUTORS

Mill Supply Houses or

General Line Distributors
Supermarkets of industry

Specialists abrasives, cutting tools

etc.

Combination House
SALES AGENTS
 SALES AGENTS
They do not take title (ownership) so they cannot set price
 SALES AGENTS
They do not take title (ownership) so they cannot set price
Several Advantages of using sales agents
 SALES AGENTS
They do not take title (ownership) so they cannot set price
Several Advantages of using sales agents
• Predictable,
stable sales cost - Straight commission of 3% - 20%
depending on the type of product complexity (technically)
 SALES AGENTS
They do not take title (ownership) so they cannot set price
Several Advantages of using sales agents
• Predictable,
stable sales cost - Straight commission of 3% - 20%
depending on the type of product complexity (technically)
• More aggressive representation
 SALES AGENTS
They do not take title (ownership) so they cannot set price
Several Advantages of using sales agents
• Predictable,
stable sales cost - Straight commission of 3% - 20%
depending on the type of product complexity (technically)
• More aggressive representation
• Synergy in complementary lines
 SALES AGENTS
They do not take title (ownership) so they cannot set price
Several Advantages of using sales agents
• Predictable,
stable sales cost - Straight commission of 3% - 20%
depending on the type of product complexity (technically)
• More aggressive representation
• Synergy in complementary lines
• Minimal training
 SALES AGENTS
They do not take title (ownership) so they cannot set price
Several Advantages of using sales agents
• Predictable,
stable sales cost - Straight commission of 3% - 20%
depending on the type of product complexity (technically)
• More aggressive representation
• Synergy in complementary lines
• Minimal training
• Instant Marketing
SALES AGENTS
 SALES AGENTS

Several Disadvantages of using sales agents

 SALES AGENTS

Several Disadvantages of using sales agents

• Loss of control
 SALES AGENTS

Several Disadvantages of using sales agents

• Loss of control
• Partial attention
 SALES AGENTS

Several Disadvantages of using sales agents

• Loss of control
• Partial attention
• Circumventing the agent
 LOGISTICS
LOGISTICS

MATERIALS PHYSICAL
MANAGEMENT DISTRIBUTION
 LOGISTICS SYSTEM
Materials Management Physical Distribution

SUPPLIERS CUSTOMERS

Finished • OEM
• Raw materials Work in
Goods & Inventory
• Components Progress • Distributors &
Parts Agents
• Sub-assemblies
• MRO Supplies • End Users
• Government

Manufacturing Supply Service Customer Service

TOTAL COST APPROACH
 TOTAL COST APPROACH
Logistics cost involves cost of
 TOTAL COST APPROACH
Logistics cost involves cost of
• planning the logistics system
 TOTAL COST APPROACH
Logistics cost involves cost of
• planning the logistics system
• transporting the materials
 TOTAL COST APPROACH
Logistics cost involves cost of
• planning the logistics system
• transporting the materials
• receiving, inspection, storage of supplies
 TOTAL COST APPROACH
Logistics cost involves cost of
• planning the logistics system
• transporting the materials
• receiving, inspection, storage of supplies
• managing inventory
 TOTAL COST APPROACH
Logistics cost involves cost of
• planning the logistics system
• transporting the materials
• receiving, inspection, storage of supplies
• managing inventory
• processing customer orders
 TOTAL COST APPROACH
Logistics cost involves cost of
• planning the logistics system
• transporting the materials
• receiving, inspection, storage of supplies
• managing inventory
• processing customer orders
• packaging
 TOTAL COST APPROACH
Logistics cost involves cost of
• planning the logistics system
• transporting the materials
• receiving, inspection, storage of supplies
• managing inventory
• processing customer orders
• packaging
• maintaining warehouses and providing customer service.
 TOTAL COST APPROACH
Logistics cost involves cost of
• planning the logistics system
• transporting the materials
• receiving, inspection, storage of supplies
• managing inventory
• processing customer orders
• packaging
• maintaining warehouses and providing customer service.
Though these cost functions cannot be directly related to final product
but consumes lot of money. Hence firms evaluate logistics systems
according to the total logistics costs expended for any given sales revenue.
Interrelationships of Logistics Functions

Order
Customer
Processing
Service

Distribution In-plant Outbound Outbound

Inventory Packaging Shipping Transportation Transportation
Planning Management Warehousing

Receiving

Inbound
Transportation
SUB-OPTIMIZATION
 SUB-OPTIMIZATION
It is a situation where one department’s objective or function is optimized
without consider the effects on the optimization of other departments’.
 SUB-OPTIMIZATION
It is a situation where one department’s objective or function is optimized
without consider the effects on the optimization of other departments’.
Ex.: Trying to minimize the levels of inventory to optimize the inventory
costs might lead to
 SUB-OPTIMIZATION
It is a situation where one department’s objective or function is optimized
without consider the effects on the optimization of other departments’.
Ex.: Trying to minimize the levels of inventory to optimize the inventory
costs might lead to
• Stockouts
 SUB-OPTIMIZATION
It is a situation where one department’s objective or function is optimized
without consider the effects on the optimization of other departments’.
Ex.: Trying to minimize the levels of inventory to optimize the inventory
costs might lead to
• Stockouts
• Lost sales
 SUB-OPTIMIZATION
It is a situation where one department’s objective or function is optimized
without consider the effects on the optimization of other departments’.
Ex.: Trying to minimize the levels of inventory to optimize the inventory
costs might lead to
• Stockouts
• Lost sales
• Time consuming backorders
 SUB-OPTIMIZATION
It is a situation where one department’s objective or function is optimized
without consider the effects on the optimization of other departments’.
Ex.: Trying to minimize the levels of inventory to optimize the inventory
costs might lead to
• Stockouts
• Lost sales
• Time consuming backorders
• Use of expensive premium transportation medium
 SUB-OPTIMIZATION
It is a situation where one department’s objective or function is optimized
without consider the effects on the optimization of other departments’.
Ex.: Trying to minimize the levels of inventory to optimize the inventory
costs might lead to
• Stockouts
• Lost sales
• Time consuming backorders
• Use of expensive premium transportation medium
• Development of bad reputation
 SUB-OPTIMIZATION
It is a situation where one department’s objective or function is optimized
without consider the effects on the optimization of other departments’.
Ex.: Trying to minimize the levels of inventory to optimize the inventory
costs might lead to
• Stockouts
• Lost sales
• Time consuming backorders
• Use of expensive premium transportation medium
• Development of bad reputation
• Even lost customers forever
COST TRADE-OFFS
COST TRADE-OFFS
CUSTOMER SERVICE
 CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer

expects and supplier delivers in logistics. The level of customer service is
measured in terms of
 CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer

expects and supplier delivers in logistics. The level of customer service is
measured in terms of
★ Lead time (order cycle time)
 CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer

expects and supplier delivers in logistics. The level of customer service is
measured in terms of
★ Lead time (order cycle time)
★ Lead time or order cycle time consistency
 CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer

expects and supplier delivers in logistics. The level of customer service is
measured in terms of
★ Lead time (order cycle time)
★ Lead time or order cycle time consistency
★ Order accuracy
 CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer

expects and supplier delivers in logistics. The level of customer service is
measured in terms of
★ Lead time (order cycle time)
★ Lead time or order cycle time consistency
★ Order accuracy
★ Order completeness
 CUSTOMER SERVICE

• Customer service is the group of utilities or benefits the customer

expects and supplier delivers in logistics. The level of customer service is
measured in terms of
★ Lead time (order cycle time)
★ Lead time or order cycle time consistency
★ Order accuracy
★ Order completeness
★ Order condition
ASSESSING CUSTOMER SERVICE
 ASSESSING CUSTOMER SERVICE
• SEGMENTATION - Customer service elements varies according to
industry, market segments and individual customers. For some technical
advice is more important while for others discounts and after-sales service
is more important
 ASSESSING CUSTOMER SERVICE
• SEGMENTATION - Customer service elements varies according to
industry, market segments and individual customers. For some technical
advice is more important while for others discounts and after-sales service
is more important
• PATRONAGE - State of being regular customer
 ASSESSING CUSTOMER SERVICE
• SEGMENTATION - Customer service elements varies according to
industry, market segments and individual customers. For some technical
advice is more important while for others discounts and after-sales service
is more important
• PATRONAGE - State of being regular customer
• CUSTOMER PERCEPTION - Customer perception about service and not
supplier’s preconception should form the basis. For a 72 hrs lead time of a
particular item, do not send it in 48 hrs lead time.
 ASSESSING CUSTOMER SERVICE
• SEGMENTATION - Customer service elements varies according to
industry, market segments and individual customers. For some technical
advice is more important while for others discounts and after-sales service
is more important
• PATRONAGE - State of being regular customer
• CUSTOMER PERCEPTION - Customer perception about service and not
supplier’s preconception should form the basis. For a 72 hrs lead time of a
particular item, do not send it in 48 hrs lead time.
• PROFIT IMPACT - How much should be spent on improving customer
service?
 ASSESSING CUSTOMER SERVICE
• SEGMENTATION - Customer service elements varies according to
industry, market segments and individual customers. For some technical
advice is more important while for others discounts and after-sales service
is more important
• PATRONAGE - State of being regular customer
• CUSTOMER PERCEPTION - Customer perception about service and not
supplier’s preconception should form the basis. For a 72 hrs lead time of a
particular item, do not send it in 48 hrs lead time.
• PROFIT IMPACT - How much should be spent on improving customer
service?
• COMPETITIVE ADVANTAGE - Boeing and Alitalia case..
 PROFIT IMPACT
Cost for
improved
service
Sales gained from
improved
service
Dollars ($ lacs)

80% 90%
Overall Service Performance