Distribution & Logistics Management Module 1

Amity Business School
Distribution Logistics & Management

Module 1
Swati Bhatnagar
Introduction of Distribution Management

“Distribution Management is the
management of all activities which
facilitates movement & coordination of
demand & supply in creation of time &
place utility of goods & services
• Deals with the “place” part of the

marketing mix.
• Helps gain sustainable competitive Time Utility Possession utility
advantage as the same is increasingly
getting difficult through product ,
price or promotion strategy!
• This aspect of marketing function
provides place, time & possession
utility to the customer. Place utility
Overview of distribution channels

• A distribution channel is a group of people & firms involved in the
transfer of title or ownership as the product moves from the producer to
the end user.
• The AMA defines the same as “ A structure of intra company
organisation units & extra company agents, dealers, wholesalers &
retailers through which a commodity, product or service gets marketed.
• Marketing channels comprise complex & dynamic systems but much of
what they do is not visible to the end customer.
• Distribution management study requires one to go “behind the scenes”!
Distribution channels can be broadly classified into :-

 Sales Channel- motivates buyers, shares information between the
company and the customer, negotiates fair bargains & finances the
transaction
 Delivery Channel- consists of CFAs, CSA s ( Consignment Selling agents)
also known as facilitators.
 Service Channel- which performs pre sales & post sales service
Need for distribution channels

• In the past all distribution related operations were undertaken
by the company itself .
• Soon they realized that the intermediaries could do the job
better at a much lower cost !
• The intermediaries became a link between the manufacturer &
its customers.
But are intermediaries necessary?

Discrepancies in marketplace
The distribution channel takes care of 4 discrepancies in the
market place:
 Spatial discrepancy : Space difference b/w production point
& consumption point
 Temporal discrepancy : Time difference b/w production time
& consumption time
 Breaking of the bulk
 To provide assortment
• Companies like Dell & Amazon exist !

• Eureka Forbes is also a case in point !
Normally, in case of a technical & complicated product the
company may want to handle the distribution themselves as
the intermediary may or may not be able to learn as much as
their own salesperson
A combination works better !
• A combination of direct & indirect distribution of goods &
services generally works out better…
• The intermediaries which includes all CFAs, distributors &
retailers enable smooth flow of goods & services at a certain
margin to themselves.
Patterns of Distribution
Intensive distribution : make sure that the product is

made available in as many outlets as possible
Selective distribution: only few select outlets will be
permitted to sell company’s products
Exclusive distribution: All the more selective, only
one outlet in the market may sell the company’s product
Types of channel members

Distributors, dealers , stockists & agents
- are required to invest in products i.e. buy from company, are
on commission basis, may or may not get credit from the
company.
Wholesalers
- deal in large volumes, as margin is quite low, operate out of
the main markets in the city, deal with large no. of
companies’s products & packs
Retailers
- are shopkeepers who set up shops in the market place
CFA s & CSA s
- also known as facilitators. Basically transporters who act as a
mid way point between the company & its distributors. CSA s
act as CFAs but also sell goods in the market & remit the
value of goods sold to the company
Contd. Amity Business School
Facilitators
are business firms which assist in the performance of distribution tasks
other than buying, selling & transferring title.
Some common types of facilitating agencies are

 Transportation agencies
 Storage agencies
 Order processing agencies
 Advertising agencies
 Financial agencies
 Insurance companies
 Market Research firms
Functions performed by the intermediaries

• Facilitation of search
Addresses the uncertainty part at both the consumers & manufacturers end.
At times also enables sales of less known brands
• Sort, Accumulate, Allocate& Assort the right kind of goods
Producers typically produces a large number of variety of goods, whereas
consumers only require limited quantity of wide variety of goods!
• Routinisation of transactions
Helps in reducing the cost of distribution & increase the efficiency.
• Enables flow of information to both the buyers & the sellers to help them
manage their business better
• Reduction in the number of contact points
• Awareness of the environment in which they operate
Channel Formats
Channel formats have been categorised into 4 types
depending upon who drives the channel. They are:-
 Producer driven
 Seller driven
 Service driven
 Others
Producer driven
Manufacturer tries to reach the product directly to his customer
eg –Company owned retail outlets, Licensed outlets, CSAs,
franchisees.
Seller driven
Manufacturer uses the wholesalers & retailers to reach the end
user eg departmental stores, discount stores, specialty stores,
supermarkets etc
Service Driven
CFAs, CSAs, transporters who “ facilitate” distribution
Other formats
Multi level marketing system – Amway, Tupperware, Co-
operative societies, catalogue shopping etc
Channel Levels Amity Business School
The number of channel members decides the

level of channel in operation.
Zero level channel denotes direct distribution set up.
One level channel consists of one intermediary only. (

retailer)
Two level channel would have two intermediaries (

distributors then retailers)
Prominent channel systems
• Vertical Marketing system (VMS) : corporate,

administered & contractual
• Horizontal marketing system ( HMS)
• Multi- channel marketing system
Examples of channel systems
Category of Channel objectives

product
Industrial/ technology Direct marketing to a small no.of customers
Consumer products Large no. of end users/intensive distribution
Frozen desserts/ ice creams Cold chain supported channel system
Fertilizers, pesticides/ seeds Rural based channel system
Pharmaceutical products Requires different set of partners to handle

doctors, chemists, hospitals
Multi level marketing Distributors to recruit more distributors
House construction items Distributors of hardware

Distribution channel strategy

Corporate strategy
Marketing strategy
Distribution strategy
Channel Mix decisions
Channel Mix deals with organizing & managing distribution

functions. The same requires :-
a) Defining customer service levels
b) Defining distribution objectives
c) Outlining steps to achieve the above objectives
a) Defining policy & procedure
b) Stating KPIs
c) Understanding CSFs
Channel flows Amity Business School
The work of the channel includes the performance of several marketing flows. All the functions
performed by the marketing channel recognizes three kinds of flows:-
 Forward Flows – from the company to the customers, basically goods & services
 Backward Flows -from the customers to the company, basically the value of goods & services
 Flows both ways -mainly Information
On the basis of value added activities performed these can be further categorized into eight
universal marketing flows. The same are
 Physical flow of goods
 Ownership
 Promotion flow
 Negotiation flow
 Financing flow
 Risking flow
 Ordering flow
 Payment flows
A very important flow that permeates all such activities is the information flow. So important is
this flow that logistics mangers often call this flow “ the ability to transform inventory to
information.”
MARKETING FLOWS IN CHANNELS
Physical Physical Physical

Possession Possession Possession
Ownership Ownership Ownership
Promotion Promotion Promotion
Negotiation Negotiation Negotiation Consumers

Producers Wholesalers Retailers Industrial
Financing Financing Financing and
Household
Risking Risking Risking
Ordering Ordering Ordering
Payment Payment Payment
Commercial Channel Subsystem

Implications of marketing/ channel flows
• The progress in information technology provides great

opportunity in capturing the vital information flow.
• Specialization in the performance of channel flows is the
hallmark of an efficiently operating channel.
• Channel members should add value to the various channel
flows.
• Too much specialization also breeds interdependency.
• The performance of certain flows is also co related with that of
other flows.
• One can eliminate or substitute members in a channel but not
the channel flows
• Every channel flow not only contributes to the production of

valued service outputs but also carries an associated cost.
Market Flow Cost represented
Physical possession Storage & Delivery costs

Ownership Inventory carrying costs
Promotion Personal selling, advertising, sales promotion,
publicity, public relations cost
Negotiation Time & Legal costs
Financing Credit terms/ conditions of sale
Risking Price guarantees, warranties, insurance, repair
& after sales service costs
Ordering Order processing costs
Payment Collections / bad debt costs
Service Output Demands/End user preferences
SODs : defined by the desired customer service levels

expected out of channel system.
The same consists of Lot size, waiting time, choice to
the customer , place utility & service support.
Lot size : convenient size
Waiting time: time elapsed b/w the desire in the customer
to buy the product & the time when he actually buys it.
Choice to the customer :Variety of products to choose
from, assortment
Place utility : depends on the intensity of the distribution
Service support: after sales service ; matters quite a lot in
case of industrial products e.g. Maruti service centres
Service Outputs Amity Business School
 Are basically the benefits which the channel system

passes to the end users.
 Other things being equal , the end user would prefer to
deal with a channel system which gives him greater
service output.
 Louis Bucklin came out with the framework on the
service outputs & specified four generic service outputs
:- a) Bulk breaking( more bulk breaking ;
higher price to the end user)
b) Spatial convenience
c) Waiting/ delivery time
d) Product variety
Zero based channel

a) meets the target market’s service outputs & b)
at a minimum cost of performing these channel
flows that produce those service outputs
Channel Design & Implementation

Channel Design Process Channel Implementation Process
SEGMENTATION:
CHANNEL POWER: CHANNEL CONFLICT:
Recognize and respond to target customers’
Identify sources for all Identify actual and potential
service output demands channel members sources
Decisions About
Efficient Channel Response: MANAGE/DEFUSE
CONFLICT:
CHANNEL STRUCTURE: Use power sources strategically,
What kinds of intermediaries are in my subject to legal constraints
channel?
Who are they?
How many of them?
SPLITTING THE WORKLOAD: GOAL:
With what responsibilities? Channel Coordination
DEGREE OF COMMITMENT:
Distribution alliance?
Vertical integration/ownership?
GAP ANALYSIS:
What do I have to change?
INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS:

Retailing, Wholesaling and Logistics, Franchising
Channel Design & Implementation

• Refers to decisions involving development of new marketing channels
or modification of existing channels.
• Has a strategic connotation as helps a firm achieve sustainable
competitive advantage.
The main elements involved in the design of channel are :-

i) Who shall be the members of the channel &
ii) How many of each type of channel member will be in the channel.
( channel intensity)
iii) Who will do what task?
The process of channel design answers some of these questions

What activities are the channel members required to perform? Which of these
activities is to be performed by which channel partner?
How is the performance of these activities going to help company achieve its
customer satisfaction objective?
The no. of channel members required in the network & of each category?
How do we define the relationship between various channel entities?
Are the roles & responsibilities of the channel partners clearly defined ?
Are all channel members clear about how they would get compensated for their
services?
Is the compensation plan fair to all channel members with regards to the task
they perform?
Are the channel members clear about how their performance going to be
judged & by whom , at what frequency?
What is the risk of their performance being not upto the target ?
Channel Design & Planning Process

Decision for a suitable channel design involves seven phases or steps:-
 Recognizing the need
 Setting & clarifying the distribution objectives
 Specifying distribution tasks
 Developing possible alternate structures
 Evaluating variables affecting channel structures
 Choose the “best”/ideal channel system.
 Select channel members
I. Recognizing the need for channel design

a)Developing a new product/product line
b)Aiming an existing product on a new target market
c)Making a major change in some component of marketing mix
d)Establishing a new firm either from scratch or as a result of merger &
acquisition
e)Response to changing intermediary policies
f)Opening up of new marketing territories
g)Occurrence of some major environment changes
h)Due to conflict or some behavioral problem of channel members
II.Setting & coordinating distribution

objectives
 Become familiar with objectives & strategies in other marketing mix areas
& that of the firm. E.g Frito –Lay ‘s emphasis on freshness of its products
compels them to use almost 13000 salesforce to supply directly to the
grocery store
 Set explicit distribution objectives
 Check for congruency
III.Specify distribution tasks
This job is much more specific and situationally dependent. E.g a

manufacture of high quality tennis racquets aimed at serious amateur tennis
players would specify distribution tasks such as :-
• Gather information on target market’s shopping patterns
• Promote product availability in the target market
• Maintain inventory storage
• Compile information on product features
• Provide for hand on try out of the product
• Sell against competition
• Process & fill specific customer orders
• Transport the product
• Arrange for credit provisions
• Provide product warranty service
• Provide repair and restringing service
• Establish product return procedure.
IV. Developing alternate structures

• Possible channel structures should be in terms of the
following three dimensions
 Number of levels in the channel
 Intensity at various levels
 Types of intermediaries at each level
So a 3 level channel with 3 degrees of intensity & 5
different types of members can theoretically have 45
possible structures!!!!
Factors and variables affecting the channel

design
Number of factors are to be kept in mind while
designing the channel are :-
a) Nature of the product or service being marketed
b) The expectations/ “deliverables” from the system
c) Location & nature of customers
d) Nature of competition
e) Intensity of distribution required
f) Nature of the markets being targeted
A marketing channel is required to add value to the
product passing through it !
V.Evaluating variables affecting channel structure

Some basic categories of variables are:-
i. Market variables
ii. Product variables
iii.Company variables
iv.Intermediary variables
v. Environmental variables
vi.Behavioral variables
Market variables Amity Business School
Greater the distance b/w manufacturer & the market

greater the need for intermediaries
Larger the size better is the use of intermediaries,

Geography
else serving large numbet of individual customers
will increase transaction costs
Size
Market Greater the density of market better it is to

variables eliminate intermediaries
Density
Four types of customer behaviour – how , when ,

Behaviour
where , who?
Product variables
Bulk& weight
Perishability
Unit Value
Product variables
Technical vs
Non technical
Degree of
standardisation
Newness of
product
Company variables Amity Business School
Size
Financial
capacity
Company
variables Managerial
expertise
Objectives
&
strategies
Intermediary variables Amity Business School
Availability
Intermediary Cost
Services
Environmental variables
Political, sociocultural, technological,economical, competitive
legal forces
Behavioral variables
Avoid members with behavioral problems which can distort
communications.
VI. Choosing the “best” channel structure

Calculate exact payoffs associated with each
possible channel structure
Stages in channel
planning
Segmentation Positioning Focus Development

Segmentation stage Amity Business School
For channel design its not just important to know what end users want to
consume rather how they want to consume the product/service being
purchased !
End –user channel preferences
 End users routinely make trade offs among service outputs, product
attributes, price & analyze which product/ service bundle offers maximum
satisfaction/ overall utility
 Clusters of customers on the basis of what each segment expects out of the
channel is grouped together.
 This helps the marketer to identify whom not to pursue just as much as
whom to pursue
 Different segments represent different business opportunities.
For eg : Albert Karoll, a custom tailor in Chicago

Segmenting the market by SODs

• Service outputs clearly differentiate marketing channels.
• Different group of end users value service outputs
differently.
• The channel segmentation process should be such that it
produces group of buyers who are
a) Maximally similar within a group
b) Maximally different b/w groups
c) Differ on dimensions that matter on building the
distribution system
Positioning stage Amity Business School
 Identify the channel elements.

 Identify the “ ideal” channel partner.
 Analyse how many of them are required? Basically
the no. & type of intermediaries is decided.
 Define the service objectives & flows of each
channel element
Importance of positioning stage

The tasks performed in the positioning stage :-
1) Helps the channel manager diagnose & remedy shortcomings
in the provision of service outputs.
2) Helps establish a new channel or revise an existing channel to
minimize the cost of providing desired service outputs
3) Helps in allocating profits equitably because…..
Compensation in the channel system should be given

on the basis of the degree of participation in the
marketing flows & the value created by the
participation !
Focus Stage Amity Business School
 Decide which segment to be targeted as it may be

impractical & expensive to target all segments.
 Identify constraints such as those of the environment,

managerial talent pool available & competition which
makes targeting all segments insensible.
Developing the right channel alternative

 Involves either-
a) Establishment of new channel
b) Refine existing channel
 Work out best possible alternatives in case a new
channel needs to be established keeping in mind the
environment & managerial constraints.
 Where an existing channel exists which needs to be
modified , identify the gaps which exist b/w the
ideal channel & existing channel .
 Take steps to minimize these gaps
• Producer should periodically review & modify the

channel design & arrangements
• Distribution channel may not work as planned due
to:-
-Change in consumer buying patterns
-Expansion of market
-New competition
-Emergence of innovative distribution channel
-Product entering into later stages of PLC
Refine existing channelAmity Business School
• For a pre existing channel which is not effective & productive,

perform a gap analysis.
• The difference b/w a zero based and the actual channel on the
demand &supply side constitute gaps in the channel design.
• In a Demand side gap at least one of the SOD is not being
appropriately met by the channel
• The SOD can be oversupplied or undersupplied.
• Supplying too much leads to higher prices to the end users
• Supplying too little will result in end users asking for more.
• In a Supply side gap at least one flow in a channel

is carried out at too high a cost..
• Wastes channel profit margins
• Translates into higher prices for end users which they
are unwilling to pay.
• Sales drop and thus there is a fall in market share.
• Generally occurs due to lack of up to date expertise in
channel flow management or simply from wastage in
a channel
Gap Analysis Amity Business School
The Gap Analysis framework considers :-

a) Sources of gaps
b) Types of gaps
c) Closing gaps
The gap analysis framework
Sources of gaps
Environmental Managerial
• Local legal constraints Lack of knowledge
• Local physical retailing infrastructure Optimization at a higher
level
Types of gaps
Demand side gaps Supply side gaps
• SOS <SOD Flow cost too high
• SOS>SOD Which flow(s)?
• Which service outputs?
Closing gaps
Demand side gaps Supply side gaps
• Offer tiered service levels Change flow responsibilities of current channel members
• Expand- contract provision of SO Invest in low cost distribution technology
• Change segment(s) targeted Bring in new channel members
Channel Design Process
Segmentation
Segmentation Positioning
Positioning Targeting
Targeting Establish
Establish new
*Define optimal • Choose Channels
segments to
new channels
* Define SODs channel flow *Channel flow
by segment performance target to
Performance
* Identify for each *Channel structure
environment Channel *Environment
-al *Define optimal Bounds
characteristic
*Managerial Refine existing
-s & channel structure Refine existin
for each segment Bounds Channels
constraints
*Competitive *Gapchannels
analysis
benchmarks *Channel flow
Performance
*Channel structure
Channel Design Process

Distribution &amp; Logistics Management Module 1

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Amity Business School

Amity Business School

Distribution Logistics & Management

Introduction of Distribution Management

• Deals with the “place” part of the

Overview of distribution channels

Distribution channels can be broadly classified into :-

Need for distribution channels

But are intermediaries necessary?

• Companies like Dell & Amazon exist !

Intensive distribution : make sure that the product is

Types of channel members

Some common types of facilitating agencies are

Functions performed by the intermediaries

The number of channel members decides the

Zero level channel denotes direct distribution set up.

One level channel consists of one intermediary only. (

Two level channel would have two intermediaries (

Prominent channel systems

• Vertical Marketing system (VMS) : corporate,

Category of Channel objectives

Consumer products Large no. of end users/intensive distribution

Frozen desserts/ ice creams Cold chain supported channel system

Fertilizers, pesticides/ seeds Rural based channel system

Pharmaceutical products Requires different set of partners to handle

House construction items Distributors of hardware

Distribution channel strategy

Channel Mix decisions

Channel Mix deals with organizing & managing distribution

MARKETING FLOWS IN CHANNELS

Physical Physical Physical

Promotion Promotion Promotion

Negotiation Negotiation Negotiation Consumers

Ordering Ordering Ordering

Payment Payment Payment

Commercial Channel Subsystem

Implications of marketing/ channel flows

• The progress in information technology provides great

• Every channel flow not only contributes to the production of

Physical possession Storage & Delivery costs

SODs : defined by the desired customer service levels

 Are basically the benefits which the channel system

Zero based channel

Channel Design & Implementation

Channel Design Process Channel Implementation Process

INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS:

Channel Design & Implementation

The main elements involved in the design of channel are :-

The process of channel design answers some of these questions

Channel Design & Planning Process

I. Recognizing the need for channel design

II.Setting & coordinating distribution

This job is much more specific and situationally dependent. E.g a

IV. Developing alternate structures

Factors and variables affecting the channel

V.Evaluating variables affecting channel structure

Greater the distance b/w manufacturer & the market

Larger the size better is the use of intermediaries,

Market Greater the density of market better it is to

Four types of customer behaviour – how , when ,

VI. Choosing the “best” channel structure

Segmentation Positioning Focus Development

For eg : Albert Karoll, a custom tailor in Chicago

Segmenting the market by SODs

Distribution & Logistics Management Module 1

Distribution & Logistics Management Module 1