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Chapter 9 Marketing Channels

SDM- Ch 9

Tata McGraw Hill Publishing


Learning Objectives
• Understand channel structure and how channels manage discrepancies • Understand concept of channel flows • Relationship of channel flows to service levels • Understand channel formats and levels • Understand what channel systems are expected to deliver • Prominent marketing and channel systems
SDM- Ch 9
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Channel Functions
• • • • • • • • Information gathering Consumer motivation Bargaining with suppliers Placing orders Financing Inventory management Risk bearing After sales support
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SDM- Ch 9


Role of Intermediaries
Company 1 Company 2 Company 3


Large number of CONSUMERS
SDM- Ch 9
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Direct and Indirect….


Ch 9 Tata McGraw Hill Publishing 5 . • Selling on the Internet • If products are technically complex.Direct Distribution • Company to consumers or retailers without use of intermediaries. Also includes reaching Institutional buyers. this system is preferred • Cost is a major consideration to adopt this mode SDM.

Direct Distribution .Examples • • • • • • • • Banking services Credit cards Petrol / diesel – company own outlets Land line phone connections Health services Utilities – electricity.Ch 9 6 . water Subsidized ration Education Tata McGraw Hill Publishing SDM.

SDM.Indirect Distribution • Goods may move through a set of intermediaries – Most FMCG companies follow this route • The intermediary has a far better reach than the company • The cost of operations of an intermediary like a wholesaler / retailer is shared with many businesses.Ch 9 Tata McGraw Hill Publishing 7 .

consumer durables and pharmaceutical • Petrol / diesel / cooking gas franchisees • Insurance • Mobile phones • All kinds of passenger transport SDM.Indirect Distribution Examples • All FMCG.Ch 9 Tata McGraw Hill Publishing 8 .

Marketing Channel Systems • Vertical: – Corporate – Administered – Contractual • Horizontal • Multi-channel Vertical…. SDM.Ch 9 Tata McGraw Hill Publishing 9 .

Vertical Marketing System • Various parties like producers.Ch 9 Tata McGraw Hill Publishing 10 . wholesalers and retailers act as a unified system to avoid conflicts • Improves operating efficiency and marketing effectiveness • 3 types: – Corporate – Administered – Contractual Corporate… SDM.

SDM. Goodyear – Suppliers of food items could be also their own supplying firms like Big bazaar and Shoppers Stop. Bombay Dyeing.Corporate VMS • Combines successive stages of production and distribution under single ownership • Examples: – Bata.Ch 9 Administered… 11 . Raymond – Sears.

Kodak. displays. pricing policies and promotion strategies Contractual… SDM. Gillette. Coke and HUL in certain locations – Command high level of co-operation in shelf space. Pepsi.Administered VMS • Co-ordinates distribution activities • Gains market power by dominating a channel • Usually true of dominant brands like GE.Ch 9 12 .

• Could take the forms of: – Manufacturer sponsored retail or wholesale franchise like car dealer of Maruti and Hyundai.Ch 9 13 . – Franchise organizations like soft drink bottlers who buy the concentrate from Pepsi or Coca Cola – Service firm sponsored retail franchise like Starbucks. Mc Donald's and Pizza Hut.Contractual VMS • Value added partnerships between channel members to obtain economies of scale. SDM. CCD.

Ch 9 Tata McGraw Hill Publishing Multi-channel… 14 .Horizontal MS • Two or more unrelated companies join together to pool resources and exploit an emerging market opportunity.Win situation – In-store ATM and banking in hotels. big stores – Retail outlets in petrol pumps – Coffee Day outlets in airports SDM. • Win.

chemists and hospitals SDM.Ch 9 Tata McGraw Hill Publishing 15 . – Most FMCG companies have separate networks for retail market and institutions(CSD Canteens) – Pharma companies may use different channels to reach doctors.Multi-channel Distribution • Company uses different channels to reach / same or different market segments.

Multi-channel Distribution • Used in situations where: – Same product but different market segments – Unrelated products in same market – detergents and ice creams (HUL) – Size of buyers varies-selling tea to retailers and big hotels. SDM.Ch 9 Tata McGraw Hill Publishing 16 . – Geographic concentration of potential consumers varies – Reach is difficult – like selling in Ladakh or the North Eastern States.

Distribution Channels • Take care of the following ‘discrepancies’ – Spatial – Temporal – Breaking bulk – Assortment and – Financial support SDM.Ch 9 Tata McGraw Hill Publishing 17 .

Spatial Discrepancy • The channel system helps reduce the ‘distance’ between the producer and the consumer of his products.Ch 9 Tata McGraw Hill Publishing 18 . – Consumers are scattered – Have to be reached cost effectively • Example: companies produce products in one location even for global needs SDM.

Ch 9 Tata McGraw Hill Publishing 19 .Temporal Discrepancy • The channel system helps in speeding up in meeting the requirement of the consumers – Time when the product is made and when it is consumed is different – Limited number of production points but hundreds of consumers • Maruti plant in Gurgaon – cars and spares are available when the consumer wants SDM.

Ch 9 Tata McGraw Hill Publishing 20 .Breaking Bulk • The channel system reduces large quantities into consumer acceptable lot sizes – Production has to be in large quantities to benefit from economies of scale – Consumption is necessarily in small lot sizes • India is the ultimate example in breaking bulk – you can buy one cigarette. one Anacin. one toffee etc SDM.

it could be a variety of brands and pack sizes • MICO makes fuel injection equipment.Need for Assortment • The channel system helps aggregate a range of products for the benefit of the consumer – it could be made by one company or several of them. spark plugs etc in different plants but its dealer will sell the entire range.Ch 9 Tata McGraw Hill Publishing 21 . SDM. – For the same product.

Financial Support • The channel system provides critical working capital to its customers by extending credit. • Some channel members like stockists and wholesalers finance the business of their customers.Ch 9 Tata McGraw Hill Publishing 22 . – Medical diagnostic equipment to hospitals SDM.

information SDM. Returned goods.Channel Flows • Forward flow – company to its customers – goods and services • Backward flow – customers to the company – payment for the goods. • Flows both ways .Ch 9 Tata McGraw Hill Publishing 23 .

Three Flows Recognized Goods and Services FORWARD BACKWARD Payment for goods / returns Information BOTH WAYS Company SDM.Ch 9 Tata McGraw Hill Publishing Customers 24 .

Ch 9 Tata McGraw Hill Publishing 25 . orders placed and orders executed) • Promotion flows Who is responsible? SDM.The Five Channel Flows • Physical flow of goods • Title flow of goods (negotiation. ownership and risk sharing also) • Payment flows (financing and payment) • Information flow (about goods.

accurate and correct information • The channel flow is ideally to be handled by the most competent channel member who can deliver best service at the lowest cost. the flow has to be performed by another • All flows and transactions can be effective only with timely.Channel Flows • Some channel member/s have to perform them • There is a cost associated with each flow • If a channel member is discontinued.Ch 9 Tata McGraw Hill Publishing 26 . SDM.

dealers Physical Title / ownership Information Payment Order placement Negotiation Risk sharing Promotions Wholesaler or retailer Physical Title / ownership Information Payment Order placement Negotiation Risk sharing Promotions Physical Title / ownership Information Risk sharing Promotions SDM.Degree of Involvement Manufacturer C&FA or Distribution Center Physical Title Information Payment Order processing Distributor.Ch 9 Tata McGraw Hill Publishing Channel formats… 27 .

Channel Formats • Is decided by who ‘drives’ the channel system: – Producer driven – Seller driven – Service driven – Others SDM.Ch 9 Tata McGraw Hill Publishing 28 .

Bata. Examples: – Company owned retail outlets – petrol. Reliance mobiles – Licensed outlets – KMF – Consignment selling agents – Franchisees – Brokers – Vending machines – Company contracted distributors SDM.Producer Driven • This is the effort of the manufacturer to reach the product to his consumers.Ch 9 Tata McGraw Hill Publishing 29 .

Ch 9 Tata McGraw Hill Publishing 30 .Seller Driven • Use of existing channels to reach the largest number of end users – Existing wholesalers and retailers – Modern retail formats – Specialty stores – Shoppers’ Stop – Discount stores – Subhiksha – Pheriwalas SDM.

Service Driven • These are the people who facilitate the distribution – Transporters and freight forwarders – Providers of warehouse space – C&F agents – 3P Logistics service providers – Couriers SDM.Ch 9 Tata McGraw Hill Publishing 31 .

Herbalife • Co-operative societies • Telephone kiosks • TV home shopping • Catalogue marketing • The internet • Exhibitions. Modicare. Tupperware.Other formats • Multi-level marketing systems – Amway.Ch 9 Tata McGraw Hill Publishing 32 . fairs and trade shows • Data base marketing Channel levels… SDM.

Channel Levels • Zero level – if the product or service is provided to the end user directly by the company. banking (also known as service channels) • One level – consists of one intermediary • Two level – consists of two intermediaries and is the most common for FMCG products SDM. education. – Used mostly by companies delivering service like health.Ch 9 Tata McGraw Hill Publishing 33 .

events or web sites to reach customers SDM.Service Channel • Companies establish their own unique channels to deliver services like health.Ch 9 Tata McGraw Hill Publishing 34 . banking. education. insurance etc – Hundreds of bank branches to be close to prospects – Banks may also recruit independent agents to get customers to walk in – Consulting or IT firm uses one team for Biz Development and another for execution – Musician or magician may use mass media.

Ch 9 One level Tata McGraw Hill Publishing Two level 35 .Summarize Expectations… Channel Levels Manufacturer Manufacturer Manufacturer Distributor/ wholesaler Retailer Retailer End User End User End User Zero level SDM.

Ch 9 Tata McGraw Hill Publishing 36 . information and promotion covered by forward. title. payments. backward and flows both ways • Each channel partner has a different role in supporting customer service through suitable channel flows • Number of categories operating in a channel system define the channel levels as one.Key Learnings • Marketing channels are responsible for flows – physical possession. two etc SDM.

financial help.Ch 9 Tata McGraw Hill Publishing 37 . place utility. installation and after sales support. • Customer service has to be done at optimum cost • Marketing channel systems are categorised as vertical. providing assortment. horizontal and multi-channel depending on the structure and the functionality SDM. reduced waiting time.Key Learnings • Channel system deliverables are: bulk breaking.

Why Carry Inventory? • Support production requirements • Support operational requirements • Maximize customer service – ensure availability when needed – protect against uncertainty • Hedge against marketplace uncertainty • Take advantage of order quantity discounts SDM – Ch 15 Tata McGraw Hill Publishing 38 .

Functions of Inventory • Inventory serves as a buffer between: – Supply and demand – Customer demand and finished goods – Requirements for an operation and the output from the previous operation – Parts and materials to begin an operation and the suppliers of the materials The shock absorber of business ! SDM – Ch 15 Tata McGraw Hill Publishing 39 .

Factors Which Drive Inventory • Target service level parameters • Lot sizing practices • Safety stock and safety time conventions • Volume discounts and purchase arrangements • Seasonal build up needs SDM – Ch 15 Tata McGraw Hill Publishing 40 .

strike. unpredictable fluctuations in supply and demand and lead time – to prevent disruption in operations. reduce shipping. set up and clerical costs – also called cycle stock SDM – Ch 15 Tata McGraw Hill Publishing 41 . promotion • Fluctuation (safety) – to cover random.Categories of Inventory • Anticipation – built in anticipation of future demand – peak season. deliveries etc • Lot-size – to take advantage of quantity discounts.

lubricants. consumables etc SDM – Ch 15 Tata McGraw Hill Publishing 42 .Categories of Inventory • Transportation – pipeline or movement inventories – to cover the time needed to move from one point to another – factory to distribution point for example • Hedge – for materials where prices are volatile • Maintenance. repair and operating supplies (MRO) – to support M and O – spare parts.

pipeline Performance measures… SDM – Ch 15 Tata McGraw Hill Publishing 43 . repair and operating (MRO) supplies – In-transit. – Raw materials – Work-in-process – Finished goods – of primary concern to marketing – Maintenance.Types of Inventory • Obvious….

Performance Measures • Inventory turns = Annual cost of goods sold /average inventory in value • Days of sales = inventory on hand / average daily sales SDM – Ch 15 Tata McGraw Hill Publishing 44 .

Products compete for manufacturing capacity • Production – distribution Inventory – compete for production capacity. Simple manufacturing operations • Production Inventory – finite production rates. Demand fluctuation.Types of Inventory Systems • Pure Inventory – when and how much to order. RM procurement. Geographic placement of inventory for best service of demand SDM – Ch 15 Tata McGraw Hill Publishing 45 .

off-seasonal . ordinary. non-moving.Types of Classification  ABC category – most common for all  HML . dead – spare parts / FG  SDE – scarce. local.commodity SDM – Ch 15 Tata McGraw Hill Publishing 46 .high.similar  FSND – fast moving. low . slow moving. desirable – spare parts / FG  SOS – seasonal. easy to obtain – procurement / Spares  GOLF – govt. essential. foreign source – procurement / Spares  VED – vital. medium. difficult.

ABC Inventory Analysis • Based on Pareto’s law: – A – 20% items worth 80% of value – B – 30% items worth 15% of value – C – about 50% items account for 5% of the usage • Classify items based on the above criteria • Apply degree of control in proportion to the importance of the group SDM – Ch 15 Tata McGraw Hill Publishing 47 .

tooling. transport.Inventory Related Costs  Unit costs – basic value of the item carried  Ordering costs – generating and sending a material release. storage. obsolescence  Stock-out costs  Quality costs – non-conforming goods  Other costs – duties. any other acquisition costs  Carrying costs – capital. exchange rate differences etc SDM – Ch 15 Tata McGraw Hill Publishing 48 .

Materials Requirement Planning.Approaches for Controlling Inventory • Continuous review: – Safety stocks and forecasting methods – Excess and obsolete inventory • Part simplification and re-design • On-site supplier managed inventory • Use of supply chain inventory management systems. Distribution Requirement Planning etc • Automated inventory tracking systems • Supplier – buyer cycle-time reduction SDM – Ch 15 Tata McGraw Hill Publishing Warehouse management 49 .