QUALITY CONTROL

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
 INVENTORY CONTROL
Introduction
The term inventory refers to the stock of some kind of physical commodity like raw materials,
component parts, supplies & consumable stores, work-in-progress & finished goods.

The analysis of the cost structure of many of the product reveals that inventories cost range
from 40% to 85% of the product cost. Thus inventories indicate a major application of financial
resources and efficient inventory control can contribute substantially to the profitability of the
business. The type and amount of inventory which an organization should hold will depend upon
several aspects including the product manufactured, or service provided and span of process.

Inventory control is concerned with the acquisition, storage, handling and use of inventories so
as to ensure the availability of inventory whenever needed, providing adequate provision for
contingencies, deriving maximum economy and minimizing wastage and losses.

Hence Inventory control refers to a system, which ensures the supply of required
quantity and quality of inventory at the required time and at the same time prevent
unnecessary investment in inventories.
It is one of the most vital phase of material management. Reducing inventories without
impairing operating efficiency frees working capital that can be effectively employed
elsewhere. Inventory control can make or break a company. This explains the usual
saying that “inventories” are the graveyard of a business.
Designing a sound inventory control system is in a large measure for balancing
operations. It is the focal point of many seemingly conflicting interests and
considerations both short range and long range.
The aim of a sound inventory control system is to secure the best balance between “too
much and too little.” Too much inventory carries financial rises and too little reacts
adversely on continuity of productions and competitive dynamics. The real problem is
not the reduction of the size of the inventory as a whole but to secure a scientifically
determined balance between several items that make up the inventory.
The efficiency of inventory control affects the flexibility of the firm. Insufficient procedures may
result in an unbalanced inventory. Some items out of stock, other overstocked, necessitating
excessive investment. These inefficiencies ultimately will have adverse effects upon profits.

What is Inventory?
 Raw materials and purchased parts

 Partially completed goods

24
  Finished-goods inventories or merchandise

 Replacement parts, tools, and suppliers

 Goods-in-transit to warehouses or Goods In progress

Types of inventory
The Principal types of inventories are :

INPUT Production Inventory

PROCESS In process Inventory

OUTPUT Finished Inventory

1. -Production Inventories:
Items which go into the final products. That is, they are raw materials and bought out
components.

-Maintenance, Repair and Operating Inventories:

Items which do not form a part of final product but are consumed in a production process. They
are spare parts, Consumable items etc.

2. In Process Inventories:
Work-in-progress items which are partly manufactured and await the next stage in process.

3.Finished Goods Inventories : Completed products ready for dispatch.

4. Miscellaneous Inventories :
Arises out of the above three types of inventories. Such as scrap, surplus and obsolete items
which are not to be disposed off.

25
Functions of Inventory

1. To meet anticipated customer demand. These inventories are referred to as anticipation

stocks because they are held to satisfy planned or expected demand.

2. To smoothen production requirements. Firms that experience seasonal patterns in

demand often build up inventories during off-season to meet overly high requirements during
certain seasonal periods. For instance, Companies that process fresh fruits and vegetable deal
with seasonal inventories

3. To decouple operations. The stock permit other operations to continue temporarily while the
problem is resolved. Firms have used stocks of raw materials to insulate production from
disruptions in deliveries from suppliers, and finished goods inventory to support sales operations
from manufacturing disruptions.

4. To protect against stock-outs. Delayed deliveries and unexpected increases in demand

increase the risk of shortages. The risk of shortages can be reduced by holding safety stocks,
which are stocks in excess of anticipated demand.

5. To take advantage of order cycles. Inventory storage enables a firm to buy and

produce in economic lot sizes without having to try to match purchases or production with
demand requirements in short run.

6. To hedge against price increase. The ability to store extra goods also allows a firm to take
advantage of price discounts for large orders.

7. To permit operations. Production operations take a certain amount of time meaning that
there will generally be some work-in-process inventory.

Objectives of Inventory Management

The primary objectives of inventory management are:
(i) To minimize the possibility of disruption in the production schedule of a firm
for want of raw material, stock and spares.
(ii) To keep down capital investment in inventories.

So it is essential to have necessary inventories. Excessive inventory is an idle resource

of a concern. The concern should always avoid this situation. The investment in
inventories should be just sufficient in the optimum level. The major dangers of
excessive inventories are:
(i) The unnecessary tie up of the firm’s funds and loss of profit.
(ii) Excessive carrying cost, and
(iii) The risk of liquidity.

26
Inadequate control of inventories
Inadequate control of inventories can result into two categories:

1) Under stocking results in missed deliveries, lost sales and dissatisfied customers.

2) Overstocking unnecessarily ties up funds that might be more productive.

Requirements for Effective Inventory Management

To be effective, management must have the following:

1. A system to keep track of the inventory on the hand and on order.

2. A reliable forecast of demand that includes an indication of possible forecast error.

3. Knowledge of lead times and lead time variability.

4. Reasonable estimates of inventory holding costs, ordering costs, and shortage costs.

5. A classification system for inventory items.

Additional requirements of effective inventory management

The management should;
(i) maintain sufficient stock of raw material in the period of short supply
and anticipate price changes.
(ii) ensure a continuous supply of material to production department facilitating
uninterrupted
production.
(iii) minimize the carrying cost and time.
(iv) maintain sufficient stock of finished goods for smooth sales operations.
(v) ensure that materials are available for use in production and production services as
and when
required.
(vi) ensure that finished goods are available for delivery to customers to fulfil orders,
smooth
sales operation and efficient customer service.
(vii) minimize investment in inventories and minimize the carrying cost and time.

27
(viii) protect the inventory against deterioration, obsolescence and unauthorized use.
(ix) maintain sufficient stock of raw material in period of short supply and anticipate price
changes.
(x) control investment in inventories and keep it at an optimum level.

Lead time is time interval between ordering and receiving the order.

Inventory Cost
1. Holding or Carrying Cost is the costs to carry an item in inventory for a length of
time usually a year. Cost includes interest, insurance, taxes, depreciation,

obsolescence, deterioration, spoilage, pilferage, breakage, etc.

2. Ordering Cost is cost of ordering and receiving inventory. These include determining
how much is needed, preparing invoices, inspecting goods upon arrival for quality and
quantity and moving the goods to temporary storage.

3. Storage Cost is cost resulting when demand exceeds the supply of inventory on
hand.

These costs can include the opportunity cost of not making a sale, loss of customer
goodwill, late charges, and similar costs.

Classification System
An important aspect of inventory management is that items held in inventory are not of
equal importance in terms of dollars invested, profit potential, sales or usage volume, or
stock-out penalties.

Example: A producer of electrical equipment might have electric generators, coils

of wire and miscellaneous nuts and bolts among the items carried in inventory. It would
be unrealistic to devote equal attention to each of these items.

28
A-B-C Approach
A-B-C Approach classifies inventory items according to some measure of importance,
usually annual dollar usage, and then allocates control efforts accordingly.

According to this approach of inventory control high value items are more closely
controlled than low value items. Each item of inventory is given A, B or C denomination
depending upon the amount spent for that particular item. “A” or the highest value items
should be under the tight control and under responsibility of the most experienced
personnel, while “C” or the lowest value may be under simple physical control.

Three Classes of Items Used:

A- (very important)

B- (moderately important)

C -(least important)

Advantages of ABC Analysis

1. It ensures a closer and a more strict control over such items, which are having a
sizable investment in there.
2. It releases working capital, which would otherwise have been locked up for a more
profitable channel of investment.
3. It reduces inventory-carrying cost.
4. It enables the relaxation of control for the ‘C’ items and thus makes it possible

for a sufficient buffer stock to be created.

5. It enables the maintenance of high inventory turn over rate.

Determination of inventory levels

A number of factors enter into consideration in the determination of stock levels for
individual items for the purpose of control and economy. Some of them are:
1. Lead time for deliveries.
2. The rate of consumption.
3. Requirements of funds.
4. Keeping qualities, deterioration, evaporation etc.
5. Storage cost.
6. Availability of space.

29
7. Price fluctuations.
8. Insurance cost.
9. Obsolescence price.
10. Seasonal consideration of price and availability.
11. EOQ (Economic Order Quantity), and
12. Government and other statuary restriction

An efficient inventory management, therefore, requires the company to maintain

inventories at an optimum level where inventory costs are minimum and at the same
time there is no stock out which may result in loss of sale or stoppage of production.

Minimum Level
The minimum level of inventories of their reorder point may be determined on the
following bases:
1 Consumption during lead-time.
2 Consumption during lead-time plus safety stock.
3 Stock out costs.
4 Customers irritation and loss of goodwill and production hold costs.
To continue production during Lead Time it is essential to maintain some inventories.
Lead Time has been defined as the interval between the placing of an order (with a
supplier) and the time at which the goods are available to meet the consumer needs.
There are sometimes fluctuations in the lead-time and/ or in the consumption rate. If no
provision is made for these variations, stock out may take place-causing disruption in
the production schedule of the company. The stock, which takes care to the fluctuation
in demand, varies in lead-time and consumption rate is known as safety stock. The
minimum level also governs the ordering point. An order to sufficient size is placed to
bring inventory to the maximum point when the minimum level is reached.

Maximum Level
The upper limit beyond which the quantity of any item is not normally allowed to rise is
known as the “Maximum Level”. It is the sum total of the minimum quantity, and
Economic Order Quantity (EOQ). The fixation of the maximum level depends upon a
number of factors, such as, the storage space available, the nature of the material i.e.
chances of deterioration and obsolescence, capital outlay, the time necessary to obtain
fresh supplies, the Economic Order Quantity (EOQ), the cost of storage and
government restriction.

30
Re-Order Level
Also known as the ‘ordering level’ the reorder level is that level of stock at which a purchase
requisition is initiated by the storekeeper for replenishing the stock. This level is set between the
maximum and the minimum level in such a way that before the material ordered for are received
into the stores, there is sufficient quantity on hand to cover both normal and abnormal
circumstances. The fixation of ordering level depends upon two important factors i.e, the
maximum delivery period and the maximum rate of consumption.

Re-Order Quantity
The quantity, which is ordered when the stock of an item falls to the reorder level, is know as the
reorder quantity or the EOQ or the economic lot size.

The re-order quantity should be such that, when it is added to the minimum quantity, the
maximum level is not exceeded. the re-order quantity depends upon two important factors viz,
order costs and inventory carrying costs. It is, however, necessary to remember that the
ordering cost and inventory carrying cost are opposed to each other. Frequent purchases in
small quantities, no doubt reduce carrying cost, but the ordering costs such as the cost inviting
tenders of placing order and of receiving and inspection, goes up. If on the other hand
purchases are made in large quantities, carrying costs, such as, the interest on capital, rent,
insurance, handling charges and losses and wastage, will be more than the ordering costs. The
EOQ is therefore determined by balancing these opposing costs.

The EOQ refers to the order size that will result in the lowest total of order and carrying costs for
an item of inventory.

31
 Total Ordering Cost (TOC) = (A/Q)*O
Average Inventory = Q/2
Total Carrying Cost (TCC) = (Q/2)*C

Total Inventory Cost = TOC+TCC

Total Cost = (AO/2) + (QC/2)
Where A = total annual demand
Q = Quantity order in units
O = Order cost per order
C = Carrying cost per unit

The basic formula is EOQ = 2(U)(OC)

CC%PP

Where 2=mathematical factor that occurs during the deriving of the formula, U-Units
sold per year, a forecast provided by the marketing department. OC=Cost of placing
each order for more inventory provided by cost accounting. CC% = Inventory carrying
cost expressed as a percentage of the average value of the inventory, an estimate
usually provided by cost accounting.
PP = Purchase price per each unit of inventory supplied by the purchasing department.

EXAMPLE

A museum of natural history opened a gift shop two years ago. Managing inventories has
become a problem. Low inventory turnover is squeezing profit margins and causing cash-flow
problems. One of the top-selling items at the museum's gift shop is a bird feeder.

Sales are 18 units per week, and the supplier charges $60 per unit.

The cost of placing an order with the supplier is $45.

Annual holding cost is 25 percent of a feeder's value, and the museum operates 52 weeks per
year.

Management chose a 390-unit lot size so that new orders could be placed less frequently.

32
What is the annual cycle-inventory cost of the current policy of using a 390-unit lot size?

Would a lot size of 468 be better?

We begin by computing the annual demand and holding cost as

A = (18 units/week)(52 weeks/year) = 936 units

C = 0.25($60/unit) = $15

The total annual cycle-inventory cost for the current policy is

Total Inventory Cost = TOC+TCC

= (A/Q)*O+(Q/2)*C

= (936/390)* ($45) + (390/2)*( $15)

=$3,033

The total annual cycle-inventory cost for the alternative lot size is

Total Inventory Cost= $3600

Decision Point

The lot size of 468 units, would be a more expensive option than the current policy.

Inventory Cycles begins with the receipt of an order of Q units, which are withdrawn at instant
rate over time. When the quantity on the hand is just sufficient to satisfy demand during lead
time, an order for Q units is submitted to the supplier.

33
 DECISION THEORY
INTRODUCTION

Decision theory deals with methods for determining the optimal course of action when a number of
alternatives are available and their consequences cannot be forecast with certainty. It is difficult to
imagine a situation which does not involve such decision problems, but we shall restrict ourselves
primarily to problems occurring in business, with consequences that can be described in dollars of profit
or revenue, cost or loss.

Very simply, the decision problem is how to select the best of the available alternatives.

THE MAKE OR BUY DECISION.

The make-or-buy decision is the act of making a strategic choice between producing an item
internally (in-house) or buying it externally (from an outside supplier). The buy side of the
decision also is referred to as outsourcing. Make-or-buy analysis is conducted at the strategic and
operational level. Obviously, the strategic level is the more long-range of the two. Variables
considered at the strategic level include analysis of the future, as well as the current environment.
Issues like government regulation, competing firms, and market trends all have a strategic impact
on the make-or-buy decision. Of course, firms should make items that reinforce or are in-line
with their core competencies. These are areas in which the firm is strongest and which give the
firm a competitive advantage.

The increased existence of firms that utilize the concept of lean manufacturing has prompted an
increase in outsourcing. Manufacturers are tending to purchase subassemblies rather than piece
parts, and are outsourcing activities ranging from logistics to administrative services. In their
2003 book World Class Supply Management, David Burt, Donald Dobler, and Stephen Starling
present a rule of thumb for out-sourcing. It prescribes that a firm outsource all items that do not
fit one of the following three categories:

(1) The item is critical to the success of the product, including customer perception of important
product attributes;

(2) The item requires specialized design and manufacturing skills or equipment, and the number
of capable and reliable suppliers is extremely limited; and

(3) The item fits well within the firm's core competencies, or within those the firm must develop
to fulfill future plans. Items that fit under one of these three categories are considered strategic in
nature and should be produced internally if at all possible.

Make-or-buy decisions also occur at the operational level.

Situations demanding for a make or buy decision in an organization

34
  Developing a new product
 Modifying a product or parts
 Having trouble with current suppliers(quality, delivery e.t.c)
 When there is diminishing capacity
 Changing demand for the organization’s products.
 Scarcity of funds

Considerations that favor making a part in-house:

 Cost considerations (less expensive to make the part)

 Desire to integrate plant operations
 Productive use of excess plant capacity to help absorb fixed overhead (using existing idle
capacity)
 Need to exert direct control over production and/or quality
 Better quality control
 Design secrecy is required to protect proprietary technology
 Unreliable suppliers
 No competent suppliers
 Desire to maintain a stable workforce (in periods of declining sales)
 Quantity too small to interest a supplier
 Control of lead time, transportation, and warehousing costs
 Greater assurance of continual supply
 Provision of a second source
 Political, social or environmental reasons (union pressure)
 Emotion (e.g., pride)

Factors that may influence firms to buy a part externally include:

 Lack of expertise
 Suppliers' research and specialized know-how exceeds that of the buyer
 Cost considerations (less expensive to buy the item)
 Small-volume requirements
 Limited production facilities or insufficient capacity
 Desire to maintain a multiple-source policy
 Indirect managerial control considerations
 Procurement and inventory considerations
 Brand preference
 Item not essential to the firm's strategy

The two most important factors to consider in a make-or-buy decision are cost and the
availability of production capacity. Cost considerations should include all relevant costs and be
long-term in nature. Obviously, the buying firm will compare production and purchase costs.
Burt, Dobler, and Starling provide the major elements included in this comparison. Elements of
the "make" analysis include:

 Incremental inventory-carrying costs

 Direct labor costs

35
  Incremental factory overhead costs
 Delivered purchased material costs
 Incremental managerial costs
 Any follow-on costs stemming from quality and related problems
 Incremental purchasing costs
 Incremental capital costs

Cost considerations for the "buy" analysis include:

 Purchase price of the part

 Transportation costs
 Receiving and inspection costs
 Incremental purchasing costs
 Any follow-on costs related to quality or service

Functional aspects of make or buy decision

Make or buy decision should be viewed both in long and short term perspectives in mind. Some of the
effects are tangible and others are intangible and are classified as follows;

1. Financial aspect: A thorough and comparative analysis is carried out by expressing all factors in
monetary terms for a decision to be taken on either to buy or make a product.

2. Technological aspect: This involves

 The access to the latest technology

 Feasibility, terms and conditions of technology transfer
 Product life cycle

3. Marketing aspect: The market should be looked into in terms of the future competition and the
quality as well as the future price of the product.

4. Purchasing aspect: Purchasing is influenced by

 The availability of items or components in sufficient quantities

 The delivery commitments by suppliers.
 Economy in transportation
 Competence and reliability of vendors
 Availability of the product.
 Product quality and price.

5. Strategic aspect: all decisions should be taken with consideration of the overall objective of the
organization.

36
6. Intangible aspects: these are factors like environmental factors, labour unions, political environment
e.t.c

The break even analysis

The break-even analysis, in its simplest form, facilitates an insight into the fact about revenue from a
product or service and incorporates the ability to cover the relevant production cost of that particular
product or service. Moreover, the break-even point is also helpful to managers as the provided info can
be used in making important decisions in business, for example preparing competitive bids, setting
prices, and applying for loans.

Adding more to the point, break-even analysis is a simple tool defining the lowest quantity of sales
which will include both variable and fixed costs. Moreover, such analysis facilitates the managers with a
quantity which can be used to evaluate the future demand. If, in case, the break-even point lies above
the estimated demand, reflecting a loss on the product, the manager can use this info for taking various
decisions. He might choose to discontinue the product, or improve the advertising strategies, or even re-
price the product to increase demand.

Another important usage of the break-even point is that it is helpful in recognizing the relevance of fixed
and variable cost. The fixed cost is less with a more flexible personnel and equipment thereby resulting
in a lower break-even point. However, the applicability of break-even analysis is affected by numerous
assumptions. A violation of these assumptions might result in erroneous conclusions.

Break even chart

37
Below the break even point, the buy decision is appropriate since the cost of production is higher than
the income while above the break even point, the make decision is the best.

Calculation (formula)

Break-even point is the number of units (N) produced which make zero profit.

Revenue – Total costs = 0

Total costs = Variable costs * N + Fixed costs

Revenue = Price per unit * N

Price per unit * N – (Variable costs * N + Fixed costs) = 0

So, break-even point (N) is equal to;

N = Fixed costs / (Price per unit - Variable costs)

Illustration No. 1

Suresh Ltd. is producing a part at a cost of Ksh. 11 per unit. The composition of the cost is as Follows;

(Ksh.)

Materials 3.00

Wages 4.00

Overheads–Variable 2.50

Fixed 1.50

11.00

Presently, the firm has been incurring a total fixed cost of Ksh. 15,000 for manufacturing the current
production of 10,000 units. An outsider is offering the same component, in all aspects identical in
features, for Ksh. 10 per unit. On enquiry, it is found from the firm that the machine that is
manufacturing the parts would remain idle as the machinery cannot be utilized elsewhere.

(A) Should the offer be accepted?

(B) Would your answer be different, if the outside firm reduces the price to Ksh. 9 after negotiation.
What is the impact of the fixed costs in the decision-making process?

38
Solution:

The variable cost of the product is as under:

(Ksh)

Materials 3.00

Wages 4.00

Overheads–Variable 2.50

Total Variable Cost 9.50

(A) Here, the additional costs (variable costs) for making are (Ksh) 9.50. The outside market price is (Ksh)
10. The outside offer is on a higher side by (Ksh) 0.50 per unit, so the offer is to be rejected. For every
unit bought outside, it results in a loss of (Ksh) 0.50 per unit.

(B) Now, the outside firm is willing to reduce the price to (Ksh) 9, while the variable cost is (Ksh) 9.50.
The offer is to be accepted.

So far as the fixed costs (Ksh). 15,000 is concerned, the firm would incur, whether the firm makes the
product itself or buys it outside. In other words, the existing fixed costs are not to be considered, while
taking a decision.

39
 MARKETING
Introduction
Most of the people define marketing as selling or advertising. It is true that these are parts of the
marketing. But marketing is much more than advertising and selling. In fact marketing comprises
of a number of activities which are interlinked and the decision in one area affects the decision in
other areas.
Market
The term ‘market’ originates from the Latin word ‘Marcatus’ which means ‘a place where
business is conducted’. A layman regards market as a place where buyers and sellers personally
interact and finalize deals.
Marketing
Numerous definitions were offered for marketing by different authors. Some of the definitions
are as follows :
1. Marketing is the process that seeks to influence voluntary exchange transactions
between a customer and a marketer. .William G. Zikmund and Michael d.Amico

2. Marketing is the process of discovering and translating consumer needs and wants
into products and services, creating demand for these products and services and
then in turn expanding this demand. .H.L. Hansen.

3. Marketing consists of the performance of business activities that direct the flow of
goods and services from producers or suppliers to consumers or end-users.
.American Marketing Association
4. Marketing is the performance of activities that seek to accomplish an
organization’s objectives by anticipating customer or client needs and directing
the flow of need satisfying goods and services from producer to customer or
client. William D. Perreault and E. Jerome McCarthy

Marketing (management) is the process of planning and executing the conception, pricing,
promotion, and distribution of ideas, goods, services to create exchanges that satisfy individual
and organizational goals.

Scope of Marketing
Marketing is typically seen as the task of creating, promoting and delivering goods and services
to consumers and businesses. In fact, marketing people are involved in marketing 10 types of
entities : goods, services, experiences, events, persons, places, properties, organizations,
information and ideas. Marketing concepts can be used effectively to market these entities.

1. Goods. Good is defined as something tangible that can be offered to market to satisfy a need
or want. Physical goods constitute the bulk of most countries production and marketing effort. In
a developing country like India fast moving consumer goods (shampoo, bread, ketchup,

40
cigarettes, newspapers etc.) and consumer durables (television, gas appliances, fans etc.) are
produced and consumed in large quantities every year.
2. Services. As economies advance, the share of service in gross domestic product increases. For
example, in USA, service jobs account for 79% of all jobs and 74% of GDP. A service can be
defined as any performance that one party can offer to another that is essentially intangible and
does not result in the ownership of anything.
Its production may or may not be tied to a physical product. Services include the work of hotels,
airlines, banks, insurance companies, transportation corporations etc. as well as professionals
like lawyers, doctors, teachers etc. Many market offerings consist of a variable mix of goods and
services. At the pure service end would be psychiatrist listening to a patient or watching movie in
a cinema hall; at another level would be the landline or mobile phone call that is supported by a
huge investment in plant and equipment; and at a more tangible level would be a fast food
establishment where the consumer consume both a good and a service.
3. Experiences. By mixing several services and goods, one can create stage and market
experiences. For example water parks, zoos, museums etc. provide the experiences which are not
the part of routine life. There is a market for different experiences such as climbing Mount
Everest, travelling in Palace on Wheels, river rafting, a trip to Moon, travelling in Trans Siberian
Railways across five time zones etc.
4. Events. Marketers promote time-based, theme-based or special events such as Olympics,
company anniversaries, sports events (Samsung Cup), artistic performances (live concert), trade
shows (International Book Fair, Automobile fair), award ceremonies (Filmfare awards, Screen
awards), beauty contests (Miss World, Miss Universe, Miss India), model hunts (Gladrags Mega
Model). There is a whole profession of event planners who work out the details of an event and
stage it. In India event management companies are growing and in case of organising Miss
World at Bangalore and World Cricket Cup (Hero Cup) they won the acclaim from all over the
world.
5. Persons. Celebrity marketing has become a major business. Years ago, someone seeking fame
would hire a press agent to plant stories in newspapers and magazines. Today most of cricket
players like Sachin Tendulkar, Saurav Ganguly, Rahul Dravid etc. are drawing help from
celebrity marketers to get the maximum benefit.
6. Places. Places, cities, states, regions and whole nations compete actively to attract tourists,
factories, company headquarters and new residents. India and China are competing actively to
attract foreign companies to make their production hub. Cities like Bangalore, Hyderabad and
Gurgaon are promoted as centre for development of software. Bangalore is regarded as software
capital of India and Hyderabad is emerging as the hub of biotechnology industry. Gurgaon and
Noida are competing for call centres to open their offices. Due to its cost effectiveness and
competitive ability of Indian doctors coupled with ancient therapies, India is fast emerging as
country that can provide excellent medical treatment at minimum costs.
7. Properties. Properties are intangible rights of ownership of either real property (real estate) or
financial property (share and debt. instruments). Properties are bought and sold, and this requires
marketing effort. Property dealers in India work for property owners or seekers to sell or buy
plots, residential or commercial real estate. In India some builders like Ansal, Sahara Group,
both build and market their residential and commercial real estates. Brokers and sub-brokers buy
and sell securities on behalf of individual and institutional buyers.
8. Organizations. Organizations actively work to build a strong, favorable image in the mind of
their publics. We see ads of Reliance Infocomm which is trying to provide communication at

41
lower rates, Dhirubhai Ambani Entrepreneur programme to promote entreprenenrship among the
Indians. Companies can gain immensely by associating themselves with the social causes.
Universities and colleges are trying to boost their image to compete successfully for attracting
the students by mentioning their NAAC grades in the advertisements and information brochures.
9. Information. Information can be produced and marketed as a product. This is essentially what
schools, colleges and universities produce and distribute at a price to parents, students and
communities. Encyclopaedas and most non-fiction books market information. Magazines such as
Fitness and Muscle provide information about staying healthy, Business India, Business Today
and Business World provide information about business activities that are taking place in various
organizations. Outlook Traveller provides information about various national and international
tourist destination. There are number of magazines which are focused on automobiles,
architecture and interior designing, computers, audio system, television programmes etc. which
cater to the information needs of the customers. We buy CDs and visit internet sites to obtain
information. In fact, production, packaging and distribution of information is one of the society.s
major industry. More and more companies are using professional research agencies to obtained
information they need.
10. Ideas. Film makers, marketing executives and advertising continuously look for a creative
spark or an idea that can immortalise them and their work. Idea here means the social cause or an
issue that can change the life of many. Narmada Bachao Andolan was triggered to bring the
plight of displaced people and to get them justice. Endorsement by Amitabh Bachhan to Pulse
Polio Immunization drive and pledge by Aishwarya Rai to donate her eyes after her death gave
immense boost to these. Various government and non-government organizations are trying
to promote a cause or issue which can directly and indirectly alter the life of many.
For example
Traffic police urges to not to mix drinks and drive, central and state government urging not to
use polyethelene as carrying bag for groceries.

Importance of Marketing
(A) To the Society
1. It is instrumental in improving the living standards. Marketing continuously identifies the
needs and wants satisfying products or services which can propel the people to do an extra to
earn money which can be exchanged for the desired products or services. The people are likely
to spend the additional income over and above the disposable income on the products or services
which helps in minimizing the physical efforts. Thus marketing by indirectly increasing the
earning ability will help in improving the standard of living of the customers.

2. Marketing generates gainful employment opportunities both directly and indirectly. Directly,
marketing provides employment to the people in various areas like in advertising agency, in the
company sales force, in the distributor.s sales force, in public relation firms etc. Indirectly,
marketing is responsible for selling the offerings of the organisation. If the organisation.s
products or services are able to satisfy the customers, then customers will demand organisation.s
products or services again and again, thereby sustaining the production activities. Thus
marketing indirectly provides employment in other functional areas like finance, production,
research and development, human resource management etc.

42
3. Marketing helps in stabilising economic condition in the sense that marketing helps in selling
the products or services, which keeps the various organizations functioning and gainful
employment is available to the people. With the earnings from the employment, the people will
purchase the products and/or services, thus sustaining the demand. This will happen in all the
industries, then gainful employment will be available throughout the time period and economy
will remain stable, healthy and vibrant.

(B) To the firms/companies

1. Marketing sustains the company by bringing in profits. Marketing is the only activity that
brings revenue to the firm, whereas other activities incur expenditure. If the company.s products
or services satisfy the customer.s requirements, then the satisfied customers will keep the
company in business by repeat orders and recommending other profitable customers. Thus
marketing is the driving force behind a successful company.

2. Marketing is the source of new ideas. New product or service ideas usually comes from the
research laboratories, employees or from marketplace. It.s the marketing people who are in
continuous touch with the consumers and marketing intermediaries.
Interaction with them helps in identifying strong and weak points of company’s product or
services as well as competitor’s products or services. This interaction can also help in identifying
unmet needs or wants of the consumers and the features, consumers are looking into the products
or services which can satisfy those unmet needs or wants. Thus marketing can help immensely in
identifying new product or service ideas which can help in sustaining the firm’s operations.
Successful companies are those which identifies customer’s requirements early and provides
the solution earlier than the competitors.

3. Marketing provides direction for the future course. The marketing oriented company
continuously brings out new product and service ideas which provide the direction for corporate
strategic planning for longer time horizon.

(C) To the Consumers

1. Meeting the unmet needs or wants. Marketing identifies those needs or wants which were not
satisfied and helps in developing the product or service which can satisfy those unmet needs or
wants of the people. For example a number of drugs were invented to treat various physical
problems of the people. Again the low cost formulations were developed to treat the people who
are unable to afford the expensive drugs.

2. Reducing the price of products or services. Marketing helps in popularizing the product or
service which attracts the customers as well as competitors towards that product or service
categories. Due to increase in demand, the manufacturing capacity increase which brings down
per unit fixed costs of the product or service. Furthermore increase in competition led to decrease
in the prices charged by the firm. Thus the growing demand and increasing competition both
help in bringing down the price of the product or service. For example price of both mobile
phone handset and mobile phone service are showing a continuous downward trend thereby
making the mobile phone service affordable to more and more people.

43
 The Difference Between Selling and Marketing
Marketing is much wider than selling, and much more dynamic. In fact, there is a fundamental
difference between the two.

Selling
1. Selling starts with the seller, and is
preoccupied all the time with the needs of the
seller.
2. Seller is the centre of the business universe;
activities start with the sellers’ existing
products.
3. Emphasises on saleable surplus available
within the corporation.
4. Seeks to quickly convert ‘products’ into
‘cash’.
5. Concerns itself with the tricks and
techniques of getting the customers to part with
their cash for the products available with the
salesman.
6. Views business as a ‘goods producing
Process’.
7. Over emphasises the ‘exchange’ aspect,
without caring for the ‘value satisfactions’
inherent in the exchange.
8. Sellers’ preference dominates the
formulation of the ‘marketing mix’.
9. The firm makes the product first and then
figures out how to sell it and make profit.
10. Cost determines the price.
11. Transportation, storage and other
distribution functions are perceived as mere
extensions of the production function.
12. In firms practising ‘selling’, production is
the central function of the business.
13. ‘Selling’ views the customer as the last link
in the
Marketing
1. Marketing starts with the buyer and focuses
constantly on the needs of the buyer.
2. Buyer is the centre of the business universe;
activities follow the buyer and his needs.
3. Emphasises on identification of a market
opportunity.
4. Seeks to convert customer ‘needs’ into
‘products’.
5. Emphasises on fulfilling the needs of the
customers.
6. View business as a ‘customer satisfying
Process’.
7. Concerns itself primarily and truly with the
‘value satisfactions’ that should flow to the
customer from the exchange.
8. Buyer determines the shape the ‘marketing
mix’ should take.
9. What is to be offered as a product is
determined by the customer.
10. Consumer determines price; price
determines costs.
11. They are seen as vital services to be
provided to the customer, keeping customer’s
convenience in focus.
12. In firms practising ‘marketing’, marketing
is the central function of the business; the
entire company or business is organised around
the marketing function.
13. ‘Marketing’ views the customer as the very
purpose of the business.

The Marketing Concept

The marketing concept holds that the key to achieving its organizational goals consists of the
company being more effective than competitors in creating, delivering, and communicating
customer value to its chosen target markets.
The marketing concept rests on four pillars : target market, customer needs, integrated
marketing, and profitability.

44
 1. Target Market
Companies do best when they choose their target market(s) carefully and prepare tailored
marketing programs.
2. Customer Needs
A company can define its target market but fail to understand correctly the customers’ needs.
Understanding customer needs and wants is very important.

3. Integrated Marketing
When all the company’s departments work together to serve the customer’s interest, the result is
integrated marketing.
4. Profitability
The ultimate purpose of the marketing concept is to help organizations achieve their objectives.
In the case of private firms, the major objective is profit; in the case of nonprofit and public
organizations, it is surviving and attracting enough funds to perform useful work. Private firms
should not aim for profits as such but to achieve profits as a consequence of creating superior
customer value. A company makes money by satisfying customer needs better than its
competitors.

Marketing Mix
Marketing mix is the set of marketing tools that the firm uses to pursue its marketing objectives
in the target market.

These tools are classified into four broad groups called the four Ps of marketing: product, price,
place and promotion.

1. Product
The term product refers to what the business or non-profit organization offers to its prospective
customers or clients. The offering may be a tangible good, such as a car; service, such as an
insurance plan; or an intangible idea, such as the importance of donating eyes after the death.

Product A good, service, or idea that offers a bundle of tangible and intangible attributes to
satisfy consumers of marketing, because they can be controlled and manipulated by the market.

2. Place
Place, or distribution, activities involve bridging the physical separation between buyers and
sellers to assure that products are available at the right place. Determining how goods get to the

45
customer, how quickly, and in what condition are decisions that are made to place products
where and when buyers want them.
Place (distribution) : The element of the marketing mix that encompasses all aspects of getting
products to the consumer in the right location at the right time.

A channel of distribution is the complete sequence of marketing organizations involved in

bringing a product from the producer to the consumer. Its purpose is to make possible transfer of
ownership and/or possession of the product.

Consider the following definitions :

A manufacturer is an organization that recognizes a consumer need and produces a product
from raw materials, components parts, or labour to satisfy that need.
A wholesaler is an organization that serves as an intermediary between manufacturer and retailer
to facilitate the transfer of products or the exchange of title to those products, or an organization
that sells products to manufacturers or institutions that resell the products (sometimes in another
form).
Wholesalers neither produce nor consume the finished product.
A retailer is an organization that sells products it has obtained from a manufacturer or
wholesaler to the ultimate consumer. Retailers neither produce nor consume the product.
The ultimate consumer is the individual who buys or uses the product for personal
consumption.

3. Promotion
Promotion : The element of the marketing mix that includes all forms of marketing
communciation.
Marketers need to communicate with consumers. Promotion is the means by which marketers
‘talk to’ existing customers and potential buyers. Promotion may convey a message about the
organization, a product, or some other element of the marketing mix, such as the new low price
being offered during a sale period. Simply put, promotion is marketing communication.

Advertising, personal selling, publicity and sales promotion are all forms of promotion. Each
offers unique benefits, but all are forms of communication that inform, remind, or persuade.
4. Price
The money or something else of value given in exchange for something is its price. In other
words, price is what is exchanged for a product. The customer typically buys a product with cash
or credit, but the price may be a good or service that is traded. In not-for-profit situations, price
may be expressed in terms of volunteered time or effort, votes, or donations.
Marketers must determine the best price for their products. To do so, they must ascertain a
product.s value, or what it is worth to consumers. Once the value of a product is established, the
marketer knows what price to charge. However, because consumers. evaluations of a product’s
worth change over time, prices are subject to rapid change.

Price : The amount of money or other consideration, that is, something of value, given in
exchange for a product.

46
The Major Factors Influencing Buying Behaviour
Consumer’s buying behaviour is influenced by cultural, social, personal, and psychological
factors. Cultural factors exert the broadest and deepest influence.

1. Cultural Factors
Culture, subculture, and social class are particularly important in buying behaviour.

2. Social Factors
In addition to cultural factors, a consumer’s behaviour is influenced by such social factors as
reference group, family, and social roles and statuses.

3. Personal Factors
A buyer’s decisions are also influenced by personal characteristics. These include the Buyer’s
age and stage in the life cycle, occupation, economic circumstances, lifestyle, and personality
and self-concept.

4. Psychological Factors
A person’s buying choices are influenced by four major psychological factors, motivation,
perception, learning, and beliefs and attitudes.

There are several differences between consumers in industrialized nations and those in less-
developed and developing ones.
In general, consumers in less-developed and developing countries.
1. Have access to less information.
2. Have fewer goods and services from which to choose.
3. Are more apt to buy a second choice if the first one is not available.
4. Have fewer places of purchase and may have to wait on long lines.
5. Are more apt to find that stores are out of stock.
6. Have less purchase experience for many kinds of good and services.
7. Are less educated and have lower incomes.
8. Are more apt to rebuy items with which they are only moderately satisfied (due to a lack
of choices).

The Stages of the Buying Decision Process

47
The consumer passes through five stages: problem recognition, information search, evaluation of
alternatives, purchase decision, and post-purchase behavior. Clearly the buying process starts
long before the actual purchase and has consequences long afterward.
But this is not the case always: Consumers may skip or reverse some stages. A woman buying
her regular brand of toothpaste goes directly from the need for toothpaste to the purchase
decision, skipping information search and evaluation.

Five-Stage Model of the Consumer buying Process

Importance of Product Branding

A brand is a name, term, sign, symbol, or design, or a combination of them, intended to identify
the goods or services of one seller or group of sellers and to differentiate them from those of
competitors.
1. Product identification is eased. A customer can order a product by name instead of
description.
2. Customers are assured that a good or service has a certain level of quality and that they
will obtain comparable quality if the same brand is reordered.
3. The firm responsible for the product is known. Unbranded items cannot be as directly
identified.
4. Price comparisons are reduced when customers perceive distinct brands. This is most
likely if special attributes are linked to different brands.
5. A firm can advertise (position) its products and associate each brand and its
characteristics in the buyer.s mind. This aids the consumer in forming a brand image,
which is the perception a person has of a particular brand.
6. Branding helps segment markets by creating tailored images. By using two or more
brands, multiple market segments can be attracted.
7. For socially-visible goods and services, a product.s prestige is enhanced via a strong
brand name.
8. People feel less risk when buying a brand with which they are familiar and for which they
have a favourable attitude. This is why brand loyalty occurs.
9. Cooperation from resellers is greater for well-known brands. A strong brand also may let
its producer exert more control in the distribution channel.
10. A brand may help sell an entire line of products, such as Britannia Biscuits.

48
 11. A brand may help enter a new product category, like Samsung Mobile.

Product Life-cycle Marketing Strategies

A company’s differentiating and positioning strategy must change as the product, market, and
competitors change over time. Here we will describe the concept of the product life cycle and the
changes that are normally made as the product passes through each stage of the life cycle.

The Concept of the Product Life Cycle

To say that a product has a life cycle is to assert four things:
1. Products have a limited life.
2. Product sales pass through distinct stages, each posing different challenges, opportunities,
and problems to the seller.
3. Profits rise and fall at different stages of the product life cycle.
4. Products require different marketing, financial, manufacturing, purchasing, and human
resource strategies in each stage of their life cycle.

Product life-cycle curve

Most product life-cycle curves are portrayed as bell-shaped. This curve is typically divided into
four stages : introduction, growth, maturity and decline.
1. Introduction: A period of slow sales growth as the product is introduced in the market. Profits
are nonexistent in this stage because of the heavy expenses incurred with product introduction.
2. Growth: A period of rapid market acceptance and substantial profit improvement.

49
3. Maturity: A period of a slowdown in sales growth because the product has achieved
acceptance by most potential buyers. Profits stabilize or decline because of increased
competition.

50