Session11

• • •

CAUSES OF CHANNEL CONFLICT Role incongruities
– – – Set of prescription defining what the position member should be Frequently the manufacturer may decide to keep some higher volume retailers Manufacturer perceives POP display material as valuable promotional tool, retailer may think it’s junk Channel member makes a forecast on a decision taken by manufacturer takes action based on predicted outcome. Eg. Extended warranties

Resource scarcities Perceptual difference

Expectational difference

• Decision domain disagreements
– Eg. McDonald’s provides detailed manual specifying the allocation of decision making responsibilities

CAUSES OF CHANNEL CONFLICT

• Goal incompabilities
– Member of marketing channel have their own goals,

• Communication difficulties
– Manufacturers making changes in policies do not inform channel members

CHANNEL EFFICIENCY
“Degree to which the total investments in the various inputs necessary to achieve a given objective can be optimized in terms of output”

Eg. Suppose a manufacturer sets a distribution objective of getting 80% of its wholesalers to carry a new product line and in the process encounters strong resistance in persuading a wholesaler in carrying the stock as they are having too much inventory. The resulting conflict could cause the manufacturer to direct its sales force to spend an extraordinary amount of time and effort to convince the reluctant wholesaler to carry the new line and the extra input (time & effort of sales people) can be measured in terms

NEGATIVE EFFECT- REDUCING EFFICIEMCY carries similar Wholesaler (W)
Channel efficienc y
product from two manufacturers (M1 & M2) •M1 purchases ↓ •M1 has to regain previous volumes from W •Level of input M1 uses will determine channel efficiency •M1 learns M2 purchases are↑ •M1 gets angry and cuts of other products which W finds profitable •W reduces M1 purchases further & concentrates on M2 more

0

Conflict level RB-11

NO EFFECT- EFFICIENCY REMAINS CONSTANT
Channel efficienc y

Characterized by high level of dependency and commitment amongst channel members 0 Conflict level RB-11

POSITIVE EFFECT- EFFICIENCY INCREASED
Channel efficienc y

Wholesaler (W) very profitable relationship with manufacturers (M) •M bypasses W for certain products and sells directly to retailer •First reaction is anger •W realises previous level of sales effort not high as it should be and M’s decision was justified •W attempts to to put more effort

0

Conflict level RB-11

CONFLICT AND CHANNEL EFFICIENCY – GENERAL CURVE
Channel efficienc y

0

C1

C2

Conflict level RB-11

• Conflict is an inherent behavioral dimension in the marketing channel • Given the numerous causes from which conflict may stem, it is a pervasive phenomenon in marketing channel • Conflict can effect channel efficiency • Various level of conflict may have both positive and negative effects on channel efficiency, or possibly no effect

MANAGING CHANNEL CONFLICT

• Establish channel committee for periodic evaluation of emerging problems • Joint goal setting by the committee which takes into account the goal and special capacities of the various channel members, the needs of consumers and environmental constraints • Create position of distribution executive for each major firm in the channel who will be responsible for exploring the firm’s distribution related problems

RESOLVING CHANNEL CONFLICT

CONFLICT RESOLUTION
High Cooperativeness
ACCOMODATION •More focused on other’s goals than one’s own- keeping peace • Encourages reciprocation COOPERATIVENESS •Compromising repeatedly •Concern for the other party’s outcome •Suited for minor Compromi conflicts se Collaborati on or Problem solving •Win-win approach

Low Assertiveness
AVOIDANCE •Passive channel member or in a weak position •Wanting to save time & unpleasantness

High Assertiveness
ASSERTIVENES S •Concern for one’s own outcomes Coughlan •Aggravates

Competitio n or Aggressio n

Low Cooperativeness

Recognize need for •Existing product at anew target market •Major change in the marketing mix (Wheel) channel design •Starting new firm from scratch decision •Opening up new geographic market (2) •Environmental change Set and coordinate •Occurrence of conflict distribution objectives •Reviewing & evaluating (in sync with objectives & strategies of the firm) (7) (3) Select the channel Specify the distribution member tasks (Warranty/ service/ (6) credit) (4) Choose the best channel Develop alternative structure (calculate exact channel structure (no. payoff associated with each of levels/ intensive/ alternative) selective/ exclusive) (5) Evaluate the relevant variables RB-12 (market/ product/ co./

A FLOW CHART OF CHANNEL DESIGN DECISION •Developing a new product / product line (1)

ZERO BASED CHANNEL
A. B. Meets the target market segment’s demand for service outputs At minimum cost of performing the necessary channel flows that produce those service outputs
– Spending too little will result in insufficiently low provision of service outputs. Competition may take advantage of the hole in the service output provision by offering a superior combination of product plus service outputs – Spending too much will produce a higher level service outputs than the target market value and will unnecessarily increase the cost thus reducing profitability – Achieving the right balance is a continuously demanding task.

Coughlan

LINKAGE BETWEEN CHANNEL DESIGN & CHANNEL OBJECTIVE
CHANNEL OBJECTIVE • Concentrate on urban market to fall in line with segmentation/ positioning strategy • Proximity to customers • Maintain an edge over competition by competing on quality, service image & value
• • • • CHANNEL DESIGN Establish outlets close to target buyers Go for large white goods dealers and large format stores Go for shop-in –shop in super stores Have a 3 – tier system to cater to smaller white goods dealers other retailers

REALATIONSHIP BETWEEN CHANNEL CLOSENESS AND DISTRIBUTION INTENSITY
Very close Close Degree of closen ess

Medium

Loose Distribution intensity Intensive Selecti ve Exclusive RB-181

Very loose

Manufactur er Manufactur er Manufactur er Manufactur er 4- LEVEL Manufact urer Manufact urer Manufact urer Manufact urer

CUSTOMER MARKETING CHANNEL
2- LEVEL 3- LEVEL

1- LEVEL

RETAILER RETAILER RETAILER

CONSUME R CONSUME R CONSUME R CONSUME R Industrial Customer

BUSINESS MARKETING CHANNEL

WHOLESAL ER WHOLESA JOBBER LER
1- LEVEL

2- LEVEL

Industrial Distributor

Industrial Customer Industrial Customer

Manufactur er’s representat ive of sales branch Manufactur er’s representat

Industrial Distributor

Industrial Customer

THE SALES PROCESS
• • • • • • • Price Tax Schemes Payment Terms Credit check Minimum Order Billing MIS Report Generatio n Payment Customer Order Collection

Production
•Fans •Appliances •Sewing M/c

Ware-house

Sales Office

Customer (Wholesaler) Retailer Direct Sales Consumer

• Delivery/Despatch • Freight

• Account Statement • Credit Notes • Account Block

Sales/ Defective Returns

KEY CRITERIA TO CONSIDER WHEN SELECTING CHANNEL MEMBERS
Size Credit & financi als Sales stren gth Produ ct lines

Attitu de

Mgmt . abilit y Mgmt. success ion

Prospecti ve channel member

Reput a-tion

Sales perfor mance

Mark et coveage

RB-13

DISTRIBUTION COST APPROACH
1 125 Sales Man @ Rs.10,000 2. 1 Field Manager per 10 sales men @ Rs.12,000 3. 5 Branch managers @ Rs. 15,000 4. Warehouse & office help, inventory, interest on inventory and buildings Rs.1,250,000 156,000 75,000 2,000,000

5. Total selling cost for direct selling (1- Rs.3,481,000 level) 6. 30% Gross Margin on sales would require in sales to cover this cost Rs.3,481,000/ 0.3 = Rs.11,600,000

Suppose retailers (2- level) were used with following different margins allowed on the level of sales 7. If 15%, then 11,600,000 x 0.15 Rs.1,740,000 RB- 224

DIRECT VERSUS RETAILERS COST COMPARISON
15% 10% 5% Margin Margin Margin Assumptio Assumptio Assumptio n n n Direct Rs.3,481,00 Rs.3,481,00 Rs.3,481,00 (1- level) 0 0 0 Retailer - 1,740,000 - 1,160,000 - 580,000 (2- level) Savings Rs.1,741,00 Rs.2,321,00 Rs.2,901,00 RB- 224

Session12

PHYSICAL DISTRIBUTION MANAGEMENT

LOGISTICS MANAGEMENT
Completing the marketing transaction once the buyer and the seller come to terms and enter into a contract of sales- 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 confirming to customer’s Inbound Outbound requirement SUPPLIER Production CUSTOMER
Logistics Logistics

MATERIALS MANAGEMENT

PHYSICAL DISTRIBUTION LOGISTICS MANAGEMENT

MK 287

MAJOR ELEMENTS OF DISTRIBUTION LOGISTICS
1. 2. 3. 4. RECEIVING STORING ORDER TAKING DISPATCH

The warehouse function performs a role beyond providing simple subsidiary service to another function. The warehouse adds value in a no. of ways: •Breaking bulk •Creating bulk •Smoothing/ Assembling

WAREHOUSING PRIVATE VS PUBLIC VARIABLES PRIVATE PUBLIC
Owned Fixed investment Unit cost Very high Leased Moderate No fixed investments High if High if volume Low volume is low is low High Highly adequate High Moderately adequate Low management control May not be convenient

Control Adequacy to production line Flexibility

Low

Low

High: Termination of usage can be easily arranged MK 290

• • • 1. 2. 3. 4. 5. 6.

CONSIDERATIONS FOR WAREHOUSING & TRANSPORTATION How many warehouses to have?
Where must they be located? What should be the type of ownership? General warehouses- handles variety of goods Specific warehouse- limited line of goods Bonded warehouses- regulated by govt. laws, insured against loss Bulk storage warehouses- liquid goods Refrigerated warehouse- for keeping in cool or frozen state Field warehouse- owner’s own plant Transportation • Railways • Road • Air • Water
W

m it c o ec h h co m ha ig so n pu n he tr p so te iza r w en his lid ri ti le b ar d ti at za on ve m ett eh is ca io tio a l o an e o to te ns n nd f u ce ag r q se wa d c an , fr lle e ua s. rd on d ei g n me lit It s tr h t t n y p fe ol se t er w , rv a n m er th e ic d it s e

THE BULLWHIP EFFECT
An unmanaged supply chain is not inherently stable. Demand variability moves as one moves up the supply chain away from the retail customer, and small changes in consumer demand can result in large variations of orders placed up stream. Eventually, the network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. This phenomenon has been observed across most industries, resulting

THE BULLWHIP EFFECT

Consumption Customer Retailers Wholesalers Manufacturers Suppliers

Coughlan

Session13

PHYSICAL DISTRIBUTION MANAGEMENT BASED ON SYSTEMS CONCEPT & TOTAL COST APPROACH
Transportation

Managem ent views PD as a system of interrelat ed componen ts

Materials Handling
Order Processing Inventory control Warehousi ng Packaging

Managemen t attempts to minimize the cost of using the components taken as a whole

RB 397

BASIC COMPONENTS OF PHYSICAL DISTRIBUTION Transportation: SYSTEM
Most fundamental. Choosing optimum mode of transportation to meet customer service demands •Own carriers vs common carriers •Different rates available Materials handling: Placement and movement of products in storage areas. •How to minimize the distances products are moved within warehouse during course of receiving Order processing: Key component of physical distribution •Relationship with order cycle time Warehousing: Holding products until they are ready to Packaging: be sold Relevant as a component of PD •Location system •No. of warehousing units •Type of transport can affect •Size of the units packaging and packaging costs •Layout and internal systems

ORDER PROCESSING
Order processing function is very important • it involves entering, processing and as tracking customer orders. Organizations must have a standard procedure for handling orders. Distribution logistics manager must check customer's credit and stock availability, back order management, automatic pricing and discount calculation. Proper order processing can affect customer

INVENTORY HANDLING
1. How much to order? 2. When to order?

EOQ = √ 2DS /IC
Where Q = Order quantity in units D = Annual demand in units S = Order processing costs I = Annual inventory costs as percentage C = Cost per stock
MK 295

ECONOMIC ORDER QUANTITY MODEL
Cost per unit of invent ory Total Cost Invent ory Carryin g Cost

Orderi ng Cost Order Size RB 401

TYPICAL FMCG DISTRIBUTION PARADIGM
FACTORY

C & F AGENT (2% - 3%)

WHOLESALE (3%)

STOCKIST/ DISTRIBUTOR (4% - 6%) RETAILERS (8% - 12%)

RETAILERS •SMALL •UPCOUNTR Y

MARICO’S DISTRIBUTION NETWORK 32 DEPOTS
URBAN
TOWNS/ CITIES 3200 (135 Sales territories) 850 DISTRIBUTORS

RURAL
TOWNS/ CITIES 11,000 (35 Sales territories) 115 SUPER DISTRIBUTORS 9,50,000 RETAILERS TP-1

7,50,000 RETAILERS

DISTRIBUTION NETWORK HUL ets = Detergents
URBAN Home & Personal Care (HPC) Urban 1 Dets RS PP RS Big Bazaar Wholes ale Mass Retail
U2= Lakme, Axe, Kotex, Huggies, Dove

P= Personal Products S= Redistribution Stockist

Selling Price of HUL= Rs.100 (Through C&FA) Selling

FOODS

U2 U 2 RS Moder n Trade Foods

Price to trade = Rs.105

Bevera ges
8% - 10% Margin Pan

Kiosk

Kiosk= Marginal outlet coverage (10 SKU & < Rs.5000/- pm

shops, Marginal outlets

DISTRIBUTION NETWORK HUL
RURAL (U1+Foods)

elling price of HUL = Rs 98 hrough C&FA

Selling price of HLL = Rs 98 Through C&FA

RD

CIDC

LAB

SS

Shakti

Selling price to trade = Rs 98*1.07

Selling price to trade = Rs 100*1.05 2% incentive given borne by HLL

RD = Rural Distributor, services large scattered areas where cost of transportation is high & is given an additional 2% margin CIDC = Complete Indirect Coverage, services large rural markets on an order taking basis LAB = Leadership Across Business (Combined TO of less than 1 cr.

EXERCISE
• XYZ is a company with small beginnings. It sells products in markets very far from the manufacturing plant. Very small t/o. It increased sales through product dev, proper distribution and greater market coverage. It used to send own salesmen to distributors and dealers to collect orders. Sometimes there was a shortage of goods, order cycle was as much as 20 days. Billing and payment was through banks. Dealers were keen to place orders as there was demand. And the number of direct sales contacts had increased tremendously. This put a heavy load on staff at HO. What were the problems being faced? What should be done? Why? (individual vs exclusive dealers, too many contact points, loss of control using exclusive distributors)

Session12

ANATOMY OF OF CHANNEL PRICING STRUCTURE FOR SET OF GUITAR STRINGS WITH A LIST PRICE OF Rs.1000/Cost to produce string = Rs.250/MANF. Rupee gross margin received by manufacturer on sale of strings to wholesaler Rs.90/Rupee gross margin received by wholesaler on sale of strings to retailer Rs.160/Rupee gross margin received by retailer on sale of strings to consumer Rs.250/RB-342

Wholesale trade discount = 66% Cost of strings to wholesaler = Rs.340/WHOLESAL ER

Retail trade discount = 50% Cost of string to retailer = Rs.500/-

RETAILER

Consumer discount = 25% Cost of string to consumer= Rs.750/-

CONSUMER

(All discounts to wholesaler, retailer, consumer are

SCHEDULE OF CHANNEL PRICING STRUCTURE FOR A SET OF GUITAR STRINGS WITH A LIST PRICE OF RS. 1000/Pricing data Channel particip ant Manufactur er Wholesaler Retailer Consumer* Trade Cost Rupee Gross Gross Discoun s Margin Margin t mark on on Cost up Selling Price Rs. 250 66% 50% 25% Rs. 90 26.5% 32% 36% 47.1% 50%
RB-343

Rs.340 Rs.160

Rs.500 Rs.250 33.3% Rs.750

•Retail discount offered by retailer based on competitive conditions:

MARGINS AND OTHER OPERATING DATA OF SELECTED RETAILERS
Type of Retailers Gross Margin Automobiles Dairy products Department stores Drugs Groceries & meats Furniture Household appliances Restaurants Sporting goods 14.1% 34.9% 36.4% 31.0% 22.5% 40.1% 31.3% 56.7% 34.8% Operating Expense 13.3% 33.0% 34.4% 27.6% 20.9% 37.2% 29.1% 52.7% 30.6% Net Profit before Taxes 1.1% 2.2% 1.4% 2.7% 1.5% 2.5% 1.5% 2.7% 3.2%RB-

DISTRIBUTION MARGINS IN INDIA
Types of Products Stockist’s Retailer / Margin Distributor ’s Margin 8% -10% 16% -20% Cash Discounts

Controlled drugs

•Manufacturer 5% - 10% to stockists (free packs) •Stockists – 2% to retailers Manufacturer 2% - to distributors

Consumer durables

5%

15% 20%

PRICING STRUCTURE OF BAJAJ APPLIANCES
PRICE (RS.) LIST PRICE 100 RETAILER DISCOUNT (10%) 90 RETAILER INCENTIVE (5%) 85.5 DISTRIBUTOR DISCOUNT 81.2 (5%) CASH DISCOUNT (3%) 78.7 Authorized service Dealers receive additional ANNUAL INCENTIVE (2%) 77.1
2% for providing after sales service

DISTRIBUTOR PRICING STRUCTURE OF BAJAJ WATER HEATER WITH OFF-SEASON DISCOUNT
15 LITRES
3330 250 3080 385 3465 104 3361 4499

25 LITRES
4692 500 4192 524 4716 141 4575 5100

BASIC (RS.) LESS:- OFF-SEASON DISCOUNT NET AFTER DISCOUNT ADD: - VAT (12.5%) TOTAL LESS: CD (3%) COST TO DISTRIBUTOR MRP

Authorized Service Dealers receive additional 2% for providing after sales service

21.A customer buying a branded product from a low-priced distributor likely is: a. Getting a counterfeit product b. Buying in gray market c. From an unauthorized dealer with high-volume operating economics d. Purchasing from a free rider e. There is no way to tell from the information given

Answer to question 21: ‘e’

• GRAY MARKET • FREE RIDING

GRAY MARKET AND FREE RIDING
– Sale usually at very low prices, of brand- name products by unauthorized distributors or dealers – Behavior of distributors and dealers who offer extremely low prices but little if any service to customers – Gray market and free riding phenomena are related when products sold by free riders are obtained from gray market

• NET EFFECT
– Unhappy channel member retaliate by “foot-balling” the product or “if you can’t beat ‘em join ‘em’ approach and become gray market or free riders themselves

Session13

COSTS & SCOPE OF PRODUCT RETURNS
• The value of returned goods is closed to $60- 100 billion annually • Web returns alone had a value between $1.8 and $2.5 billion in 2002 • Estimates are that the costs of processing those web returns is twice as high as the merchandise value itself!! • US companies are estimated to spend from $35 billion to more than $40 billion per year on reverse logistics • The average company takes 30-70 days to move a returned product back into the market • The estimated no. of packages returned in 2004 is 500 million

Coughlan

REVERSE LOGISTICS
MANUFACTU RER
Return for credit
Return for sale Inspect, grade Poor quality product ships as spare parts to manufacturers MANUFACTU RER-RUN RETURN/ SORTING FACTORY THIRD-PARTY RETURNS/ REVERSE LOGISTICS FIRM Reparable product

Inspect, grade Inspect, grade

REPAIR/ REFURBISHM ENT FACTORY
Reparable product

RETAILER
Return for refund

High quality product

CONSUMER

CHARITY

SECONDARY MARKET, BROKER, JOBBER

Solid line denote product to be salvaged for subsequent revenue. Dotted lines denote non- Coughlan

TOOLS FOR SALES MANAGEMENT

POSE THE FOLLOWING QUESTIONS TO THE CHANNEL MEMBER
– Do – Do – Do – Do – Do – Do channel members hold inventories? they make purchases in large or small quantities? they provide repair service? they extend credit to customers? they deliver? they help train customers’ sales force?

COMPONENTS OF LOGISTICS SYSTEM Transportation
– Deciding on the modes of transport to be used – The range of activities and equipment involved in the placement and movement of products in storage areas

• Materials handling. • Order processing
– The procedures and “paper work” needed to fill orders

• Inventory control
– The process of managing inventory levels so as to have the products desired by customers while minimizing inventory levels

• Warehousing
– The holding of products until they are ready to be sold

• Packaging
– How products are protected for shipment and storage as it relates to other components of a logistics system
RB (Instructor)- 13

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