Distribution Management & Marketing Mix PDF

Distribution Management & Marketing Mix Sales and Distribution Management The Marketing Mix Product Price Promotion Place Distribution channels help in the ‘place’ aspect of the marketing mix Distribution provides place, time and possession utility to the consumer E...

Distribution Management & Marketing Mix Sales and Distribution Management The Marketing Mix Product Price Promotion Place Distribution channels help in the ‘place’ aspect of the marketing mix Distribution provides place, time and possession utility to the consumer Example Consumer wants to buy a tube of toothpaste Made available at a retail outlet close to her residence – place Made available at 8 pm on a Tuesday evening when she wants it – time She can pay for the toothpaste and take it away – possession The company distribution function has made all this possible. The situation would be similar if a customer wants to buy a refrigerator or medicines or even an electric motor Players Involved The company and its distribution network Direct company to consumer Company to a C&FA / distribution center to distributors to retailers Distributor to wholesaler to retailer All these intermediaries help the process of ‘exchange’ of the product or service. Distribution Management Management of all activities which facilitate movement and co-ordination of supply and demand in the creation of time and place utility in goods The art and science of determining requirements, acquiring them, distributing them and finally maintaining them in an operationally ready condition for their entire life. Distribution Channels Defined Are sets of interdependent organizations involved in the process of making a product or service available for use or consumption – Stern & Ansary Whether selling products or services, marketing channel decisions play a role of strategic importance in the overall presence and success a company enjoys in the marketplace. Distribution Channels Are intermediaries or middlemen Exist because producers cannot reach all their consumers Multiply reach and provide efficiency to the marketing process Facilitate smooth flow and create time, place and possession utilities Have the core competence and reach Provide contact, experience, specialization and scales of operation Types of Channels Sales channel motivates buyers, shares information between company and its consumers, negotiates fair bargains for consumers and finances the transactions Delivery channel meant only for physical part of the distribution Service channel – performs after sales service Listing of Channel Members Company own sales team C&FAs and CSAs Distributors, dealers, stockists, value-added re-sellers Agents and brokers Franchisees Electronic channels Wholesalers Retailers C&FAs / C&SAs C&FA: carrying and forwarding agent C&SA: carrying and selling agent Both are on contract with a company Both are transporters who work between the company and its distributors Collect products from the company, store in a central location, break bulk and dispatch to distributors against indents Goods belong to the company C&SA also sells the goods on behalf of the company but remits proceeds after sale Distributors, Dealers, Stockists, Agents Name denotes the extent of re-distribution done by them Distributors invest in the products – buy products from the company Are on commission, margins or mark-up May or may not get credit – but extend credit Distributors cover the markets as per a beat plan. All others merely finance the business. Distributors could be exclusive for a company Agents bring buyer and seller together Wholesalers Operate out of the main markets Deal with a number of company products of their choice Are not on contract with any company Sell to other wholesalers, retailers and institutions Negotiate about 15 days credit from company distributors – also provide credit to their customers Operate on high volumes and low margins Retailers The final contact with consumers Operate out of their shops and sell a large assortment and variety of goods Located closest to consumers Buy from company, distributors or wholesalers Highest margins in the network Provide personalized services to their customers Industrial Products Producer Producer Agent/middleman Industrial Distributor Industrial Distributor Industrial Customer Industrial Customer Customers may also directly purchase from company sales force Consumer Products Producer Producer Producer Distributor Distributor Wholesaler Retailer Retailer Retailer Customer / Customer/ Customer/ consumer Consumer Consumer Retailers may also direct from company sales force Patterns of Distribution Determines the intensity of the distribution Intensity decides the service level provided Types of distribution intensity: Intensive Selective Exclusive Intensive Distribution Distribution through every reasonable outlet available – FMCG Strategy is to make sure that the product is available in as many outlets as possible Preferred for consumer, pharmaceutical products and automobile spares Selective Distribution Multiple, but not all outlets in the market A few select outlets will be permitted to keep the products Outlets selected in line with the image the company wants to project Preferred for high value products Tanishq jewelry Keeps distribution costs lower Exclusive Distribution Highly selective choice of outlets – may be even one outlet in an entire market - car dealers Could include outlets set up by companies – Titan, Bata Producer wants a close watch and control on the distribution of his products. Distribution Channel Strategy Derived from the corporate strategy and the marketing strategy Steps for designing the distribution strategy are: Defining customer service levels Distribution objectives and steps Structure of the network required Policy and procedure to be followed Define Key performance indicators State Critical success factors Customer Service Levels Defined by the nature of the industry, the products, competition and market shares. Affordability also decides the service level It should at least match competition. Customer expectations have no limit Distribution Objectives Influenced by the customer expectations Defines the extent of time, place and possession utility which the customer can expect out of the channel network Set of Activities Manner in which the company and its marketing channels go about achieving the customer service levels Some of these steps could be: Periodic Sales forecasts Dispatch plans Market coverage beat plans Journey plans for service engineers Collection of sales proceeds Carrying out promotional activities The company also decides as to who is to perform which task Distribution Organization Primary aim: determine who will do what Major Decision points: Extent of company support and outsourcing to be decided Budget for the cost of the distribution effort Select suitable channel partners – C&FAs, and distributors Setting clear objectives for the partners Agree on level of financial commitments by the channel partners. Policy and Procedure Define policy and implementation guidelines through Operating Manuals Policy guidelines include Code of conduct for channel members System for redressal of complaints Any additional subsidies etc Handling institutional business Service policy for engineering products Key Performance Indicators Consistent achievement of targets by product groups, periods and territories Achievement of market shares Achievement of profitability Zero complaints from customers No stock returns Ability to handle emergencies and sudden spurts in demand Key Performance Indicators Balanced sales achievement during a period – no period end skews Market coverage with ready stocks Excellent management of accounts receivables Minimize losses on account of stock-outs Minimize damages to products Critical Success Factors The distribution strategy also needs the support and encouragement of top management to succeed Some of the CSFs could be: Clear, transparent and unambiguous policy and procedure Serious commitment of the channel partners Fairness in dealings Clearly defined customer service policy High level of integrity Equitable distribution at times of shortage Timely compensation of channel partners Marketing Channels Sales and Distribution Management Channel Functions Information gathering Consumer motivation Bargaining with suppliers Placing orders Financing Inventory management Risk bearing After sales support Distribution Channels Take care of the following ‘discrepancies’ Spatial Temporal Breaking bulk Assortment and Financial support Spatial Discrepancy The channel system helps reduce the ‘distance’ between the producer and the consumer of his products. Consumers are scattered Have to be reached cost effectively Example: companies produce products in one location even for global needs 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 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 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. For the same product, it could be a variety of brands and pack sizes MICO makes fuel injection equipment, spark plugs etc in different plants but its dealer will sell the entire range. 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. Medical diagnostic equipment to hospitals Channel Flows Forward flow – company to its customers – goods and services Backward flow – customers to the company – payment for the goods. Returned goods. Flows both ways - information Three Flows Recognized FORWARD Goods and Services Customers Company BACKWARD Payment for goods / returns BOTH WAYS Information The Five Channel Flows 1. Physical flow of goods 2. Title flow of goods (negotiation, ownership and risk sharing also) 3. Payment flows (financing and payment) 4. Information flow (about goods, orders placed and orders executed) 5. Promotion flows Channel Flows Some channel member/s have to perform them There is a cost associated with each flow If a channel member is discontinued, the flow has to be performed by another All flows and transactions can be effective only with timely, 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. Direct Distribution Company to consumers or retailers without use of intermediaries. Also includes reaching Institutional buyers. Selling on the Internet If products are technically complex, this system is preferred Cost is a major consideration to adopt this mode Direct Distribution - Examples Banking services Credit cards Petrol / diesel – company own outlets Land line phone connections Health services Utilities – electricity, water Subsidized ration Education 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. Role of Intermediaries Company 1 Company 2 Company 3 Intermediary Large number of CONSUMERS Indirect Distribution - Examples All FMCG, consumer durables and pharmaceutical Petrol / diesel / cooking gas - franchisees Insurance Mobile phones All kinds of passenger transport Degree of Involvement Manufacturer C&FA or Distributor, Wholesaler or Distribution Center dealers retailer Physical Physical Physical Physical Title / Title Title / ownership Title / ownership ownership Information Information Information Information Payment Payment Payment Risk sharing Order processing Order placement Order Promotions Negotiation placement Risk sharing Negotiation Promotions Risk sharing Promotions Channel Formats Is decided by who ‘drives’ the channel system: Producer driven Seller driven Service driven Others Producer Driven This is the effort of the manufacturer to reach the product to his consumers. Examples: Company owned retail outlets – petrol, Bata, Reliance mobiles Licensed outlets – KMF Consignment selling agents Franchisees Brokers Vending machines Company contracted distributors 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 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 Other formats Multi-level marketing systems – Amway, Modicare, Tupperware, Herbalife Co-operative societies Telephone kiosks TV home shopping Catalogue marketing The internet Exhibitions, fairs and trade shows Database marketing Channel Levels Zero level – if the product or service is provided to the end user directly by the company. Used mostly by companies delivering service like health, education, 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 Channel Levels Producer Producer Producer Wholesaler Retailer Retailer Customer / Customer/ Customer/ consumer Consumer Consumer Zero level One level Two level Marketing Channel Systems Vertical: Corporate Administered Contractual Horizontal Multi-channel Vertical Marketing System Various parties like producers, wholesalers and retailers act as a unified system to avoid conflicts Improves operating efficiency and marketing effectiveness 3 types: Corporate Administered Contractual Corporate VMS Combines successive stages of production and distribution under single ownership Examples: Bata, Bombay Dyeing, Raymond Sears, Goodyear Suppliers of food items could be also their own supplying firms - like Nilgiris Administered VMS Co-ordinates distribution activities Gains market power by dominating a channel Usually true of dominant brands like GE, Kodak, Pepsi, Gillette, Coke and HLL in certain locations Command high level of co-operation in shelf space, displays, pricing policies and promotion strategies Contractual VMS Independent producers, wholesalers and retailers operate on a contract Could take the forms of: Wholesaler sponsored voluntary chains Retailer co-operatives Manufacturer sponsored retail or wholesale franchise Franchise organizations Service firm sponsored retail franchise Horizontal MS Two or more unrelated companies join together to pool resources and exploit an emerging market opportunity In-store banking in hotels, big stores Retail outlets in petrol bunks Coffee Day outlets in airports Multi-channel Distribution Company uses different channels to reach / same or different market segments Most FMCG companies have separate networks for retail market and institutions Pharmacy companies may use different channels to reach doctors, chemists and hospitals Multi-channel Distribution Used in situations where: Same product but different market segments Unrelated products in same market – detergents and ice creams (HLL) Size of buyers varies Geographic concentration of potential consumers varies Reach is difficult Expectations from Channel Variety and assortment at one location Bulk Breaking Close to customer location Speed of Delivery Additional services Support Installation After-sales Financial  Wholesaling Sales and Distribution Management Need for Wholesalers Widespread economy – consumers can only reached by thousands of retailers (except for consumer durables and industrial products) Reaching these retailers by a company directly is not possible (except for consumer durables and industrial products) Hence the need for wholesalers in two forms: Well established free-lance wholesalers Contracted distributors, stockists and agents Characteristics of Wholesalers Operate on large volumes but with chosen group of products Food, grocery, pharma or automobile spares etc The company itself, contracted parties or free lancers, can operate as wholesalers Mostly B2B business – trade and institutions Wholesaler could also be a retailer – in rural markets – W/s sells to other retailers and also to consumers Characteristics of Wholesalers Sell physical inputs or products – tangible goods ( Ws in some service industries) Optimise results, maximise service (effectiveness) and minimise operating costs (efficiency) Buy goods for resale, keep inventory, take risks of price changes, negotiate terms, procure orders, deliver and extend credit. Definition Wholesaling is concerned with the activities of those persons or establishments that sell to retailers and other merchants and / or industrial, institutional and commercial users but do not sell in large amounts to consumers US Bureau of Census Delivering Value Keep goods accessible to customers instantly At times, get together to bargain for better terms Pass on benefits or incentives to their customers Have a wide trading area Difference with Retailers Not too worried about location, ambience or promotions – prefer to be in the main market Deal with other businessmen and not consumers Deal with a specific group of products only Much larger trading area Much larger transactions with suppliers and customers Believe in low margins but high volumes. Functions of Wholesalers Varies in degree between free-lance, company distributors and stockists / agents Sales and promotion of chosen company products Buying the assortment of goods Breaking bulk to suit customer requirements Storage and protection of goods till sold Functions of Wholesalers Grading and packing of commodities Transportation of goods to customers Financing the buying of customers Bearing the risks associated with the business Collecting and disseminating market information to both suppliers and customers Types of Wholesalers Full service: stocking, selling, offering credit, delivery and business assistance (company distributors, wholesale merchants) Limited service: range of service is limited (examples include Metro C&C, mail order) Merchant w/s: independent businesses Brokers and agents: bring buyer and seller together – do not take possession of goods Others: agri business, auction companies etc Limitations of Wholesalers Some of them do not give complete information to suppliers for selfish reasons Cannot be relied on to do equitable distribution At times, do not want company and customers to meet Tend to hoard goods and influence pricing Consumers have no say in pricing or quality in a w/s dominated system Major Wholesaling Decisions Which markets to operate in Manpower to employ What products to sell Pricing decisions / Promotional support Credit and collections Image and customer perception Warehouse location and design Inventory Control Favourable Factors Companies have limitations in market / outlet coverage. Wholesalers are required to fill the gaps Hundreds of small companies who cannot afford to set up distribution networks – need to depend on wholesalers In food grains, fruits and vegetables – hardly any organised distribution network. Wholesalers help move goods from farm gate to consumers Favorable Factors Big companies also need wholesalers to get big volumes W/s extend credit to customers. Companies cannot match this Retailers have to visit w/s markets to buy food grains, cereals and pulses – buy a lot more. Unfavorable Factors Companies coverage focus on retailers and institutions through their distributors Using modern retail formats as wholesalers More outlets like Metro C&C being encouraged Enforcing strict price control so that w/s do not sell below company prices. Distributor Is a wholesaler nominated by a company to exclusively re-distribute the company products to its customers in a designated territory. He does not deal in competitor’s products. Does not sell from his premises. Extends credit selectively. A redistribution stockist for HLL A distributor for Philips lighting division A distributor for L&T engineering division Dealer Role similar to a distributor but May not have a clearly defined territory and may sell both in the market and from his shop May deal with competitive products also Extends credit selectively. Dealers in industrial products may have better defined roles. Examples: Dealer for an edible oil company A dealer for garment brands Stockist May be working for a company with a designated territory but does not re-distribute the stocks. Sells from his premises. Extends credit selectively. A stockist for paper products A stockist for automobile spares Re-distribution is visiting customer premises to sell products Managing Distributors The principles are similar across industry verticals. FMCG is the most complex. Has the capacity to maximize sales and market shares. Has to ensure buying goods from the company and re- distribution to the trade Managing Distributors Distributor responsibilities include: Buying adequate quantities by Stock Keeping Unit (SKU) for redistribution Ensuring full market coverage of all customers in the territory assigned to him Help finance the operations – pays for the goods upfront but extends credit to his customers Maintaining inventory of company products adequate at all times to service the market Assist company in its promotional efforts Need for Distributors Under three circumstances: For entering a new town For additional coverage in the same town For replacing an existing distributor For entering a new town, assess the potential for business to decide: If the town can sustain a full fledged distributor The number of distributors required Starts with a town profile of potential, number of customers to be serviced and the competition. Cost of Servicing Cost benefit of using distributors to be assessed Logistics cost of serving the market The number of customers to be covered by category – wholesalers, retailers, institutions Frequency of visits to markets and outlets Sales revenue estimate from each visit Markets to be covered with ready stocks or order booking for later delivery Likely collections during each visit – gives an idea of the credit requirements Expectations from a Distributor To be stated at the start of the relationship Helps get the right kind of distributor also Achieving sales targets – volume, value and packs Financial commitment on inventory and credit Investment in infrastructure – space, vehicles Manpower – front line and back office Distribution effort – market and outlet coverage as per a beat plan with productive calls Developing new markets and new accounts Managing key accounts and institutional business Expectations from a Distributor Merchandising and displays in the market Secondary sales efforts and tracking – critical for fmcg and pharma (secondary sales is sales from the distributor to the outlets in the market) Effectively handling promotions and schemes initiated by the company Managing damaged stocks Expectations from a Distributor Organising and participation in promotional events Assist company in making a success of launching new products and packs Handling consumer quality complaints Handling statutory requirements on behalf of the company Payments and remittances promptly to the company  Retailing Sales and Distribution Management What is Retailing? Any business entity selling to consumers directly is retailing – in a shop, in person, by mail, on the internet, telephone or a vending machine Retail also has a life cycle – newer forms of retail come to replace the older ones – the corner grocer may change to a supermarket Includes all activities involved in selling or renting products or services to consumers for their home or personal consumption Retailing Term retail derived from French word ‘retaillier’ meaning ‘to break bulk’ Characteristics: Order sizes tend to be small but many Caters to a wide variety of customers. Keeps a large assortment of goods Lot of buying in the outlet is ‘impulse’- inventory management is critical Selling personnel and displays are important elements of the selling process Strengths in ‘availability’ and ‘visibility’ Targeted customer mix decides the marketing mix of the retailer Retailing Retail stores are independent of the producers – not attached to any of them A survey shows that only 35% of purchases are pre- planned. The rest are ‘impulse’- greatly influenced by quality of the merchandising efforts Functions of Retailers Marketing functions to provide consumers a wide variety Helps create time, place and possession utilities May add form utility (alteration of a trouser bought by a customer) Helps create an ‘image’ for the products he sells Functions of Retailers Add value through: Additional services – extended store timings, credit, home delivery Personnel to identify and solve customer problems Location in a bazaar to facilitate comparison shopping How do Customers Decide on a Retailer? Price Location Product selection Fairness in dealings Friendly sales people Specialized services provided Kinds of Retailers Type of Characteristics retailer Specialty store Narrow product line with deep assortment – apparel, furniture, books Department Several product line in different departments – Shoppers store Stop, Big Bazaar Supermarket Large, low-cost, low-margin, high volume, self-service operation with a wide offering Convenience Small stores in residential areas, open long hours all days of store the week – limited variety of fast moving products like groceries, food Discount store Standard merchandise sold at lower prices for low margins - Subhiksha Kinds of Retailers Type of Characteristics retailer Corporate More outlets owned and controlled by one firm – Globus chains Voluntary chain Wholesaler sponsored group of independent retailers Retailer co-ops Independent retailers with centralized buying operations and common promotions Consumer co- Co-op societies of groups of consumers operating their own ops stores – farmers, industrial workers etc Franchise Contractual arrangement between the producer and organisation retailers – selling products exclusively – Kemp Toys Retailers’ Strengths Choice of merchandise is their prerogative – put pressure on producer suppliers Many new products on offer. Can charge penalty if products do not do well New developments in IT help them run operations optimally and keep track of loyal customers. Also helps them identify profitable store locations. Trade / Retail Format Range of goods and customer service dimensions determine the ‘format’. Elements distinguish between stores and include: Store ambience. (Kemp Fort) Saving in time for shopping – interiors of practical design – reduce time for search and pick-up of goods Location Physical characteristics – external appearance, arrangement of goods All these are parts of the positioning strategy and influence the ‘footfalls’ to the store. Categories of Shoppers (1) Identified by Cook & Walters Task focused shopper – visits the store to buy specific things he has planned for Convenience, minimum time, easily accessible goods, pleasing store format Grocery shopping is an example Leisure shopper – more interested in the ambience and environment Has plenty of time, wants to have a good time while shopping Lifestyle stores are examples Category of Shoppers (2) Convenience goods (low value): probable gain from shopping and making comparisons is small compared to the time, effort and mental discomfort required in the search -toothpaste Shopping goods (high value): gain is large - refrigerator Specialty goods: clearly distinguished by brand preferences – Maruti Zen car or Tag-Heuer watch Trading Area Catchment area from where most of the customers of a retail store come Corner grocery store caters to the locality in which it is situated Discount stores have a wider area. Subhiksha locations for consumers in 2 km radius Specialty stores have a much wider trading area – MTR, Shoppers’ Stop etc Trading area increases with the size of the store and the variety it offers Retail Strategy Positioning of the retailer Merchandising Customer service Customer communication Positioning Strategy Wide range with a high value add – Lifestyle brand of stores Limited range but a high value add – Tanishque jewelry store Limited range with a limited value add – Bata stores Wide range of goods but a limited value add – a Food World outlet Merchandising A set of activities involved in acquiring goods and services and making them available at the places, times and prices and the quantity that enable a retailer to reach his goals The most critical function in retail Directly effects the revenue and profitability of the store Also takes into account the assortment of goods and their quality Customer Service Strategy Developed to create ‘stickiness’ in customers Personal data collected using IT – including purchasing practices and preferences Customer loyalty programs planned Create ‘customer’ delight Location strategy to give competitive advantage Understanding the buying profile of the customers Customer Communication The manner in which the retailer makes himself known to his customers. Has two parts to it: The messages which the retailer sends to his customers and prospects The word of mouth support which satisfied customers give to the retailer by talking to others Retailer communicates about: Announcing the opening of a store Promotions running in the store Additional facilities introduced by the stores Pricing Strategy Premium and indicating high value Reasonable pricing with good value Low pricing but high value for money All strategies are focused on giving value to the customer Product Differentiation Feature exclusive national brands not available in competing retailers – unlikely Exclusivity of products – specialty stores Mostly private labels – Westside Feature, big, specially planned merchandising events – Kemp Fashion sows Introduce new products before competition - -again unlikely Retail Performance Measures Gross margin return on inventory investment – GMROI Gross margin multiplied by ratio of sales to inventory (50%*4= 200%) Gross margin per full time equivalent employee Gross margin per square foot Franchising Franchisor is the firm which wants to sell its goods or services Franchisee is the firm or group that are willing to sell the products or services on behalf of the franchisor The first party gives advice and help to the second to find good locations, blue prints for a store, financial, marketing and management assistance Benefits to Franchisor Faster expansion Local franchisee pays lower advertising rates than a national firm Owners motivated to work more hours than mere employees Local taxes and licenses are responsibility of franchisees Benefits to Franchisee Quick recognition among potential customers Management training provided by principal Principal may buy ingredients and supplies and sell to franchisee at lower prices Financial assistance Promotional aids, in-store displays etc Retailing on the Internet Unlimited assortment Items may not be on hold – someone has to deliver the product – delays No product touch or feel More info makes the customer a better shopper Comparison shopping possible Consumer has to plan purchases ahead No need to handle cash – payment can be on-line Shopping is 24X7 E-tailing Issues Logistics support to selling Payment gateway Customer product returns Conflicts with Brick &Mortar – overcome by selling separate products Designing Distribution Channels Sales and Distribution Management Channel Design Factors Product mix and nature of the product Width and depth of market / outlet coverage planned Long term commitments to channel partners Level of customer service planned Cost affordable on the channel system Channel control requirements of the company Channel Design Steps Define customer needs Clarify channel objectives Look at alternative systems which can meet these objectives Estimate cost of operating the channel system Evaluate available alternatives Finalise the ‘ideal’ system Customer Needs Lot size – most convenient pack size which the consumer can buy at a time Waiting time – time elapsed between the desire to buy the product and the time when he can actually buy it – should be almost zero Variety – choice of products, brands, packs Place utility – choice of buying where he wants. For a consumer product it has to be at a location closest to his residence Channel Design Components Revenue generation or the commercial part Physical delivery of the goods or services – the logistics part The ‘service’ part to take care of after-sales support Each part of the system is likely to be handled by a different entity. Channel Design Issues Activities required and who will perform Activities relationship to service levels Number of channel members required and the relationship between categories Roles, responsibilities, remuneration and appraisal of performance of channel members Channel Design Process Segmentation Positioning Focus Development Segmentation Putting customers in similar clusters based on their needs Doctors who prescribe medicines Chemists who dispense medicines Hospitals and nursing homes who use them Each segment has a different need to be serviced by the channel Gives an idea to the sales manager as to the kind of channel members he should be planning for. Positioning Defines the channel element required to service each of the segments The sales manager decides the channel partner who is ‘ideal’ to meet the expectations of the segments. The number of each category of intermediary is also decided based on the number of customers to be serviced in each segment. The service objectives and flows for each channel partner are also frozen Focus It may not be possible to meet the needs of all segments – cost and practicality considerations (the managerial talent available for instance) The sales manager has to firmly decide which of the segments he will service The competitive scenario also helps in this decision Development At this stage the channel system is being put in place to achieve the objectives Select the best of the alternatives Comparison with the most successful competitor could be a good benchmark Channel partners of competitors may be willing to share best practices of their principals For modifying an existing channel, the gap between the ideal and the existing is to be identified for remedial action. Channel Objectives Defines what the channel system is supposed to do to support customer service. Customer needs could include: Lot size convenience Minimum waiting time Variety and assortment Place utility The product characteristics and the market profile also impact the objectives. Competition could also affect the objectives Channel Alternatives Are planned after deciding the customer segments to be serviced and the levels of service Business intermediaries currently available like C&FAs, distributors, dealers, agents wholesalers and retailers. The number and type of intermediaries required Developing new channel types Roles of each channel member Evaluation of Major Alternatives Cost of operations Ability to manage and control Adaptability Range and volume to be handled Evaluation Critieria Cost: If existing sales force can be expanded cost effectively, this is the best alternative Cost of alternatives at different volumes can only be estimated for comparison System with the lowest cost is preferred Adaptability – the channel should be flexible to handle different types of markets and changes in the market conditions Volume and range to be handled – Capable even when business grows or expands Evaluation Criteria Ability to manage and control: Distribution network being an extended arm of the company, the channel partners have some obligations Operating guidelines specify these rules The channel system should help the company enforce these rules fairly to all channel partners Some of the operating rules are…… Company trains channel personnel and provides proper product literature Selecting Channel Partners Getting good channel partners is a difficult part of doing business Some of the methods employed to select channel partners are: Sales people identify prospects and talk to them Press advertising (industrial goods) Existing channel partners can give good references Competitors’ channel members for reference, not poaching Selection Criteria Qualitative: willingness, confidence in company products, willingness to abide by company rules, building company image, innovativeness etc Quantitative: financial status, infrastructure, location, present businesses, customer relationships, market standing etc Training Channel Members Starts from the time of recruitment Channel member owner and his staff Market views channel member as part of the company – he has to behave in a like manner – hence training assumes significance Training could be on the job field training or classroom training Training is an ongoing process. Subjects for Training Field training on how the markets are to be worked to achieve sales, collect payments and ensure the right kind of merchandising Class room training on company products, competition and how to tackle it to gain market shares Special meetings for new product launches Submitting reports and maintaining records Statutory compliance Subjects for Training Care of company products Technical specifications and answering FAQs of customers For technical and industrial products – recognition of specs, installation procedure, repair and maintenance and effective demonstrations Servicing of automobiles and other engineering products Motivating Channel Members Ambitious volume and growth targets – continuous motivation required to achieve Motivation includes: Capacity building programs Training Promotions support Marketing research support Working with company personnel Incentives “Power” of Motivation Reward – positive support Coercion- threat of punitive action Referent – positive effects of association Legitimate – enforcing a contract Expert – support of special knowledge Support – additional benefits for performers Competition – pitting against peers French & Raven Channel Members Evaluation Effectiveness of the distribution channel determines the success of the company Company would like its channel partners to perform at the highest standards possible Need to constantly evaluate performance on sales targets, coverage, productivity, inventory holdings, attending to servicing requests etc ROI as a Measure Leading FMCG companies feel that an ROI of 30% for a distributor is healthy and is a fair indication that he is performing well. If the ROI is more, additional tasks are given If the ROI is less, the company may provide additional support Post evaluation tasks include counseling, retraining and motivating. In extreme cases it may result in termination. Performance Evaluation On pre-agreed tasks only. No surprises. Specific targets on periodical basis are set. Targets on volume and outlet productivity could be for a week or a month Targets relating to increasing market shares or total outlet coverage could be for 6 months Different weightages could be given for each of the parameters for evaluation The performance appraisal is open and transparent Steps for Modifying Networks Service level desired and willing to deliver Activities required to deliver service level, who will do it and at what cost Derive ideal channel structure and compare with existing to know gaps by evaluating based on standard parameters relating to effectiveness and efficiency Action to bridge the gaps and put modified channel system into place Define key performance indicators Channel Comparison Factors Efficiency Effectiveness Scalability Flexibility Consistency Reliability Integrity Non-store Retailing Selling door-to-door Vending machines Tele-shopping networks Selling through catalogs Other forms of direct selling Electronic channels Retailing on the Internet Unlimited assortment Items may not be on hold No product touch or feel More information makes the customer a better shopper Comparison shopping possible Consumer has to plan purchases ahead No need to handle cash – payment can be on-line Shopping is 24X7 Vertical Integration This means owning the channel. The company does the work of production, branding and distribution. Downstream integration means the producer of the goods also does the distribution – Eureka Forbes, Bata Vertical Integration Upstream integration means the seller also produces the goods – private labels of modern retailers. If the organization does the work of production, branding and distribution, it is said to be vertically integrated. Vertical Integration provides better control over the distribution function Outsourcing Distribution Is the most prevalent situation as: The ‘reach’ is better The cost may be lower The company can exploit the ‘core competence’ of its channel partners, which is distribution Vertical integration is a choice which will become long term and cannot be easily changed once the resources have been committed. However, direct distribution (owning the channel) is still the best solution for ‘intensive’ distribution. Channel (Conflict) Management Sales and Distribution Management Channel Management Channel system has a set of players: Not equally motivated to implement the ideal channel design Whose expectations from the system differ Is in three broad phases: Use of power bases Identifying and resolving channel conflicts Channel co-ordination Use of Channel Power Channel members are dependent on each other. The power equations between them keep them working together. There are basically 5 types of power bases – reward, coercion, expert, reference and legitimacy. 2 more can be considered in Indian context as support and competition. Extent of dependence defines the power base which is appropriate. “Power” (Bases) of Motivation Reward – incentives for good performance Coercion – threat of punishment for non-performance Referent – benefit of sheer association with a strong company Legitimate – arising out of a contract Expert – specialized knowledge Support – additional benefits for better performers only Competition – created between channel partners Countervailing Power Balances the power exerted by one channel member. It is not a one-sided equation. Both the channel member and the principal can have influence on each other. Results from interdependence within the channel system. Company exerts power on the distributor to get its coverage and revenues Distributor has enough influence on his customers and this is critical for the company also Weaker partners do get exploited – ancillary units Channel Coordination Channel system is well coordinated if each member understands his role correctly and performs it to help the system achieve its customer service objectives. In a coordinated channel: Interests of all channel members are protected Actions of all are in line with overall objectives Flows are streamlined to desired customer service objectives Channel co-ordination is an on-going effort Channel Conflict Situation of discord or disagreement between partners in the same channel system – has negative connotations and is driven more by feelings than facts Conflict is part of any social system – getting disparate entities to work together as in a channel system is also one such social unit If any member feels that another is working in a manner as to affect him, conflict results Channel Conflict CHANNEL CONFLICT GOAL DOMAIN PERCEPTION Goal conflict – rising out of mismatch in understanding of objectives by various channel members Domain conflict – resulting due to mismatch of understanding of responsibilities and authority Perception conflict – due to mismatch in reading of the market place and thus proposed actions Conflicts Result From… Each channel member wanting to pursue his own goals Each wants to retain his independence There are limited resources which all of them want to utilize in achieving their goals Features of conflicts: Initially latent and does not affect the working Is not normally possible to detect till it becomes disruptive  Each stage is progressively more severe than the earlier one Four Stages of Conflict PERCEIVED MANIFEST LATENT FELT Types of Conflicts Latent Conflict: Some amount of discord exists but does not affect the working or delivery of customer service objectives. Disagreement could be on roles, expectations, perceptions, communication. Perceived Conflict: Discords become noticeable – channel partners are aware of the opposition. Channel members take the situation in their stride and go about their normal business No cause for worry but the opposition has to be recognized Types of Conflicts Felt Conflict: Reaching the stage of worry, concern and alarm. Also known as ‘affective’ conflict. Parties are trying to outsmart each other. Causes could be economical or personal Needs to be managed effectively and not allowed to escalate. Manifest Conflict: Reflects open antagonistic behavior of channel partners. Confrontation results. Initiatives taken are openly opposed affecting the performance of the channel system. May require outside intervention to resolve Root Causes for Channel Conflict Roles not defined properly Allocation of scarce resources between members seem unfair to some Differences in perception of the business environment Future expectations not likely to materialize Decision domain disagreements – who has to decide on what (key account pricing) Channel members do not agree on objectives Misunderstanding or misinterpretation of routine business communication Resolving Conflicts Understanding nature and intensity Tracing the source of the conflict Understand the impact of the conflict Strategy and plan of action for resolution Conflict Resolution Styles Avoidance Styles are a combination of assertiveness and co-operation. Aggression Accommodation Compromise Collaboration Least effort and results Maximum effort and Best results Kenneth W Thomas Avoidance Used by weak channel members. Problem is postponed or discussion avoided. Relationships are not of much importance. As there is no serious effort on getting anything done, conflict is avoided. Aggression Also known as a competitive or selfish style. It means being concerned about one’s own goals without any thought for the others. The dominating channel partner (may be the principal) dictates terms to the others. Long term could be detrimental to the system. Accommodation A situation of complete surrender. One party helps the other achieve its goals without being worried about its own goals. Emphasis is on full co-operation and flexibility in approach. May generate matching feelings in the receiver. If not handled properly, can result in exploitation Compromise Obviously both sides have to give up something to meet mid way. Can only work with small and not so serious conflicts. Used often in the earlier two stages. Collaboration Also known as a problem solving approach Tries to maximize the benefit to both parties while solving the dispute. Most ideal style of conflict resolution – a win-win approach Requires a lot of time and effort to succeed. Sensitive information may have to be shared Channel Policies Defines how the channel is required to operate. Normally framed by the channel principal to guide the operations of the channel system If not framed properly could prove the starting point of channel conflicts. Some subjects of channel policies could be as seen in the next slide: Channel Policies Markets to be covered Customer coverage Pricing Product portfolio to be handled Selection, termination of channel members Ownership of the channel The Services Sector Twice the size of the manufacturing sector Services offered are to be in line with customer demand Services have to be presented in an appealing manner to sustain customers. Needs specialized channels which understand the characteristics of service delivery 5 Characteristics of Services They are intangible – can only be felt. No visual features like size, style. They are inseparable from their service providers – a 3P cannot deliver They cannot be standardized – custom made and delivered Customers are involved to a great degree – define the services They are perishable – cannot be stored for delivery later. Salvage value of an unsold service is zero. Channels Used Shorter channels than for products Some channels used are: Direct from service provider to user Agents or brokers to bring buyer and seller together Franchisees or contractors Electronic channels High degree of customization is provided Channel Information Systems Sales and Distribution Management CIS Purpose CIS is Channel Information Systems CIS is the orderly flow of pertinent operational data both internally and between channel members, for use as a basis of decision making in specified responsibility areas of channel management CIS is of primary use of sales managers. Information - Advantages Useful in marketing planning – helps improve quality of marketing decisions Can help tap market opportunities Provides an alert against competition Helps spot trends – favourable or otherwise Helps develop action plans for growth Gives feedback on consumer needs Classification of Information Based on the use made of it by marketing – planning, operations, decision making or control Based on subjects – consumers, products, competition, channels, promotions, pricing, sales volume, value etc Operations data – facts and figures Also based on assumptions, anticipated occurrences – forecasts relating to the channel system Information Process COLLECTION PROCESSING STORAGE USE Information Process Collection: acquiring and placing raw data – monthly sales by each territory Processing: analyzing data to get meaning out of it – arranging, modifying and interpreting the data by the user – comparison of sales between periods Storage: keeping the information intact till it is needed Use: application of information for management decision making – sales data of the last 6 months to forecast the sales of the next month. Developing a Channel MIS Decide what information is required Organize information in a manner suitable for interpretation and action Decide who will use the information when and for what purpose Use of Information Planning: sales forecasts or distributor indents Control: expenses against budget There is always a cost of collecting information. If data collected is not used properly, the data provider will hesitate to give the information. The channel MIS works at the sales operational level. It has very little strategic intent. Sources of Data Reports (oral and written) and records of channel members, sales people Letters, statements and market research Any other info collected by the sales people and the channel members from the market External sources like business publications, magazines, newspapers, trade journals. In a dedicated channel system the collection of info is well streamlined – in the JC meeting With use of IT enabled systems collection and processing has become simpler. A Good Channel MIS… Integrated system to handle all regular data Useful decision support system Reflects the style of the marketing organization User friendly and user oriented Convincing to the providers of the info as to its purpose Be cost effective Not need for verification from other sources Be fast and totally reliable Element Importance In a good channel MIS, it is necessary to define upfront for each element of the MIS, the following: Purpose of the info Source of the info Action possible Impact on customer service Competition Tracking Purpose Plan day to day corrective action to protect market shares and shelf space Source Trade, channel partners and sales people Action Spot action while in the market and taken by possible channel partners or sales people Impact on Timely action to provide better support to the service trade and retain their goodwill Market Logistics and SCM Sales and Distribution Management Materials Management Materials forms the largest single cost item in most manufacturing companies – needs to be carefully managed Materials management function includes planning and control, purchasing and stores and inventory control Materials management is the precursor to logistics and supply chain management Logistics Defined Logistics means having the right thing, at the right place, at the right time The procurement, maintenance, distribution and replacement of personnel and materials – Webster’s Dictionary The science of planning, organizing and managing activities that provide goods or services – Logistics World, 1997 Logistics Functions: planning, procurement, transportation, supply and maintenance Processes: requirements determination, acquisition, distribution and conservation Business: science of planning, design and support of business operations of procurement, purchasing, inventory, warehousing, distribution, transportation, customer support, financial and human resources Scope of Logistics Choice of markets Procurement Plant location and layout Inventory management Location and management of warehouses Choices of carriers, mode of transport Packaging decisions Relevant to all enterprises: manufacturing, Government, Institutions, service organizations Components of Logistics Management Logistics Activities Customer service Demand forecasting Output Distribution Input Communications Marketing Inventory control Orientation Natural Materials handling (competitive Resources Order processing Advantage) HR Parts and service support Plants and warehouse selection Time and Place Finance Procurement utility Information Packaging Efficient move Return goods handling to customer Salvage and scrap disposal Traffic and transportation Warehouse and storage Links and Flows General material flow/ service flow Information flow Information flow Customer’s Supplier’s Customer Lead Firm Supplier customer supplier General cash flow Outbound / Downstream logistics Inbound / Upstream logistics Logistics and Marketing Interface on: Product design and pricing Customer service policies Sales forecasts and order processing Inventory policies and location of warehouses Channels of distribution and dispatch planning Transportation to reach products to customers Production wants larger production runs to minimize time spent on set up changes on the machines. Marketing wants smaller runs of a variety of products.  Value Chain (Michael Porter) Firm’s Infrastructure Activities Support Human Resources (Organization, people, methods) Systems and Technology Procurement Operations Marketing Outbound Inbound Logistics Logistics Service & Sales Primary Activities Logistics Plan Outline Internal analysis (current position) Organization Human resources Transportation Relations with internal customers Quality of product Quality of Service External / situation analysis Competitor logistics performance Trends External environment / economy Public, private and contract warehouse Public, private and contract carriage Principles of Logistics Excellence Strategic Operational Link logistics to corporate Focus on financial strategy performance Organize comprehensively Target optimum service levels Use the power of Manage the details information Leveraging logistics volumes Emphasize human resources Measure and react to Form strategic alliances performance Alling & Tyndall Logistics Focus Areas Customer service related Operations related Packaging Plant and warehouse site Order processing location Spare parts and service support Procurement After sales Customer service Inventory control support Materials handling Demand forecasting Salvage and scrap disposal Distribution communications Traffic and transportation Return goods handling Warehousing and storage Logistics may be confined to the company whereas SCM extends beyond Supply Chain Management Business context: Globalization of the market place Advances in technology Increasingly demanding, informed customer base Purchase decisions on dimensions of quality, price and time Innovative supply chain: To meet customer driven challenges To reduce costs Improve service levels Enhance speed to market Supply Chain Integration Optimizing the supply chain requires supplier and customer involvement to integrate processes, policies, systems, database and strategies between diverse trading partners Supply Chain Integration Customer Analysis Order Fulfillment Purchasing/Supplier Partnering Integrated Inventory Management Storage & Supply Chain and control Transportation Management Manufacturing/ Demand & Lead Time Re-manufacturing/ Management Assembly Materials Management 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 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 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 Categories of Inventory Anticipation – built in anticipation of future demand – peak season, strike, promotion Fluctuation (safety) – to cover random, unpredictable fluctuations in supply and demand and lead time – to prevent disruption in operations, deliveries etc Lot-size – to take advantage of quantity discounts, reduce shipping, set up and clerical costs – also called cycle stock 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, lubricants, consumables etc Types of Inventory Obvious…. Raw materials Work-in-process Finished goods – of primary concern to marketing Maintenance, repair and operating (MRO) supplies In-transit, pipeline Performance Measures Inventory turns = Annual cost of goods sold /average inventory in value Days of sales = inventory on hand / average daily sales Types of Inventory Systems Pure Inventory – when and how much to order. RM procurement. Simple manufacturing operations Production Inventory – finite production rates. Demand fluctuation. Products compete for manufacturing capacity Production – distribution Inventory – compete for production capacity. Geographic placement of inventory for best service of demand Types of Classification ABC category – most common for all HML - high, medium, low - similar FSND – fast moving, slow moving, non-moving, dead – spare parts / FG SDE – scarce, difficult, easy to obtain – procurement / Spares GOLF – govt, ordinary, local, foreign source – procurement / Spares VED – vital, essential, desirable – spare parts / FG SOS – seasonal, off-seasonal - commodity 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 Inventory Related Costs Unit costs – basic value of the item carried Ordering costs – generating and sending a material release, transport, any other acquisition costs Carrying costs – capital, storage, obsolescence Stock-out costs Quality costs – non-conforming goods Other costs – duties, tooling, exchange rate differences etc 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, Materials Requirement Planning, Distribution Requirement Planning etc Automated inventory tracking systems Supplier – buyer cycle-time reduction Stores Management Objectives Providing efficient service to users Reduce cost of carrying goods Providing correct, updated stock figures Controlling inventory Preventing damage to or obsolescence of materials Achieve all of the above with good housekeeping  Functions Warehouses Material handling Customer Service Information Transfer Storage Function Receive goods Identify goods Sort goods Temporary Permanent Dispatch to storage Hold inventory Recall, select goods Marshal the shipment Dispatch the shipment Prepare records and advices Purpose of Warehousing To provide desired level of customer service at the lowest possible total cost It is that part of the firm’s logistics system that stores products (RM, Packing Materials, WIP, FG) at and between point of origin and point of consumption and provides info to management on the status, condition and disposition of items being stored Distribution warehousing relates mainly to FG Reasons for Warehousing Service related Cost related Maintain source of supply Achieve production economies Support customer service policies Achieve transportation economies Meet changing market conditions Take advantage of Quantity Overcome time and space Purchase discounts and forward differentials buys Support JIT programs of suppliers Least Logistics cost for a desired and customers level of customer service Provide customers with the right mix of products at all times Temporary storage of materials to be disposed or re-cycled Warehouses Support manufacturing Mix products from multiple facilities for shipment to a single customer Break-bulk Aggregate Used more as a ‘flow-thru’ point than as a ‘hoarding’ point Distribution Warehousing The objective is to set up a network of warehouses closest to the customer locations to service markets better and minimise cost Could be C&FA s, depots or distribution centers Macro location strategies: Market positioned Production positioned Intermediately positioned Distribution Center Warehouse designed to speed the flow of goods and avoid unnecessary costs Speeds bulk-breaking to avoid inventory carrying costs Helps to centralise control and co-ordination of logistics activities Products can also be cross-docked (one vehicle to another) Market Positioned Warehouses located nearest to the final customer Factors influencing are: Order cycle time Transportation costs Sensitivity of the product Order size Levels of customer service offered Production Positioned Warehouses located close to the production facilities or supply sources Not the same level of customer service as the earlier one Serve as points of aggregation / collection for products made in a number of plants Factors influencing are: Perishability of raw materials Number of products in the product mix Assortments ordered by customers Transport consolidation rates ex; FTL Intermediate Positioned Mid point locations between the final customer and the producer High customer service levels possible even if products made in number of units Other macro approaches look at cost minimisation or cost and demand elements to maximise profitability Transportation Very important in the Logistics function: Movement across space or distance adds value to products Transportation provides time and place utility Role of transportation includes: Provides opportunity for growth under competitive conditions Deeper penetration into markets Wider distribution means greater demand Can influence product prices favourably Transportation Principles Continuous flow Optimise unit of cargo - stackability Maximum vehicle unit – capacity utilization Adaptation of vehicle unit to volume and nature of traffic Standardisation Compatibility of unit load equipment Minimum of dead weight to total weight Maximum utilization of capital, equipment and personnel The Selection Criteria Environmental analysis: shipper, carrier, government regulations, public influence Deciding objectives Selecting mode Select transport type within the mode Define functions of transport Evaluation and control – customer perception / satisfaction, best practice benchmarking Cost Factors Can be product related or market related. Product related: density, stowability, ease or difficulty of handling and liability Market related: competition, location of markets, Government regulations, traffic in and out of the market, seasonality of movements and impact on customer service Five prominent modes: Road, rail, air, water and pipeline. Sixth one is use of Ropeways Customer Service Factors Consistency, dependability Transit time Coverage – door-to-door for example Flexibility in handling a range of products Loss and damage performance Additional services provided Reverse Logistics Movement of goods from the market or customer back to the company The need: Increased awareness of the environment Stringent legislation For some it is part of the business Profitability of dealing with scrap, surplus Surplus, obsolescence can result due to: Over optimistic sales forecasts, change in product specs, errors in estimating material usage, losses in processing or overbuying based on incentives Advantages of Rail Economy – more so for goods over long distances Efficiency of energy Reliability – not affected by weather conditions Disadvantages Uneconomical for small shipments and short distances Not suitable for remote stations Costly terminal handling facilities Inflexible time schedules Road Freight Advantages Through movement – direct from consignor to consignee, no transshipment Flexibility – routes and loading routines can be easily altered, operate day and night Less capital costs – for own fleet + immunity from industrial action Fast turn-around – if articulated units like tractors and trailers are used Minimum delays Disadvantages Susceptibility to weather and road conditions – in spite of the best protection Unsuitability for heavy loads – rail transport more economical for bulk loads Unsuitability for long distances – again the rail telescopic rates are more favourable Air Transport Advantages Faster mode Reduction in cost particularly inventory Broad service range Increasing capabilities Disadvantages: High cost Weather affects flight conditions Limitations on heavy consignments Water Transport Advantages: Mass movement of bulk Lowest freight cost Preferred for long haul of low value commodities Disadvantages: Not for quick transit Suitable for certain types on commodities only Pipeline Movement Advantages: Reliable, continuous, all weather transport Low energy consumption – hence low cost Low maintenance and operating costs Underground, no space problem Can traverse difficult terrain Minimal transit losses Operation round the clock, safe Economies of scale – double the throughput for only 30% additional cost Disadvantage is in the investment cost Ropeways Advantages: In hilly or inaccessible areas Long and circuitous routes with streams / deep valleys For commodities capable of movement in ropeway buckets Short haulages of less than 50 kms Areas where other carriers are uneconomical Disadvantages: Heavy investments Limitations on size and quantity of haul Carrier Selection Traffic Related Shipper related Service related Length of haul Size of firm Speed (transit time) Consignment weight Investment priorities Reliability Dimensions Marketing strategy Cost Value Network of production Customer relationship Urgency and distribution Geographical coverage Regularity of shipment Availability of rail Accessibility Fragility sidings Availability of special Toxicity Stockholding policy vehicles / equipment Perishability Management structure Monitoring of goods Type of packing System of carrier Unitisation evaluation Ancillary services – bulk Special handling required breaking, storage Chart of Relative Merits Parameter Weightage Rail Road Air Water Pipe Rope line way Speed 30 5 6 8 4 3 3 Versatility 10 6 8 5 6 3 2 Reliability 20 6 8 5 5 7 4 Availability 10 7 8 5 6 3 2 Continuity of 10 6 7 5 5 8 3 service Distribution cost 20 4 5 6 6 7 8 Total score 10 5.4 6.7 5.1 5.1 5.1 4.0 Overall ranking 10 2 1 4 5 5 6 International Sales & Distribution Sales and Distribution Management Why International? The WTO agreement has resulted in opening up of new areas for freer trade (Textiles, Services & Agricultural products) China, Russia, India & the East European countries have embraced free market policies resulting in huge opening up of underserved populations. Domestic competition has increased especially from imports. Outsourcing in manufacturing and services has increased due to cost pressures & improvement in infrastructure. Choosing the Market Factors to be borne in mind while choosing markets: Size of the market Language & Culture of the market Competition in the market Proximity of the market Political and Financial stability of the country Ease of doing business Culture and International Business Culture influences everything from taste & preferences to consumption patterns and attitude to foreigners. Culture influences communication modes Culture influences dress and behavior Culture influences usage of a product Language is very important in international business to communicate effectively. Legal Aspects of International Business Laws vary from country to country – there is no “international law” Important to know the local laws to do business – on investment, management, employment, marketing, pricing, royalties, profit repatriation, taxation etc Developed countries have stringent laws on safety, pollution, intellectual property rights etc. In times of disputes, which law will prevail – this needs to be spelt out in contracts Risks in International Business Two main risks in international business: Political risks – involve disruption of contracts or payments due to sudden political changes, expropriation of businesses etc Commercial & Financial risks – failure of the buyer to pay due to bankruptcy or sudden changes in the exchange availability or rate. Risks in International Business Risks can be insured with agencies like the export credit guarantee corporation(ECGC) for a premium based on the country’s risk. Letters of credit may be guaranteed by international banks located in major financial centers like London, New York, Singapore etc. Trade Between Countries Reasons for trade between countries include: Non availability of a product or resource Cost advantages in buying rather than making a product locally Differentiated products-Luxury products or better designed products in the same category may be available from different countries (cars, electronics, textiles and garments etc) International Trade-Company Perspective Companies may choose to sell internationally for the reasons given below: Limited growth in home market Overseas markets offer large profitable opportunities Excess capacity which cannot be absorbed locally Cost advantage over international competitors Mitigating risk of increased domestic competition Entry Strategy Exporting through local agent Exporting through foreign agent Exporting to foreign importer / distributor Setting up local office / representative Licensing / Franchising Setting up Joint ventures for distribution / manufacture Setting up wholly owned manufacturing facilities Organizing for International Sales Structure depends on volume of sales and nature of the product. In situations of low volumes, exporting through local or foreign agents is cost effective As volume grows and in complex products or large value deals, using own sales personnel is preferable. To be effective, it is preferable to have local personnel in the sales force Distribution Distribution is a vital aspect of marketing – ensuring availability of the product in the right quantity, at the right time and right place. More important in international markets due to distance and transportation time. Importers, manufacturers and retailers are increasingly asking for Just in Time deliveries. Distribution strategy varies from market to market depending on size and local conditions. Multiple channels may be used in countries. Distribution Options Depends on the volume of the business Positioning of the product Infrastructure of distribution in the country Local laws – some countries insist on local companies in the distribution business Internet as a channel of sales and distribution Role of Logistics Very important aspect of international selling Logistics can make up over 15% of the cost of the product Involves multiple modes of transport – land, sea and air Considerable paperwork and formalities to be completed in international trade Logistics providers now offer complete one stop solution including distribution, invoicing and collection of payment Profile of International Salespersons Pleasant and amiable personality Ability to adapt to foreign culture – especially food, drink etc Conversant in one or more foreign languages Ability to act independently and decisively Ability to understand complexities of financing, foreign exchange etc Some local sales persons in the force will be useful to overcome some barriers and leverage local networks for business development Pricing and Payment Terms Common pricing terms are: Ex Works – at the mfrs factory gate FOT, FOR – free on truck / rail –loaded on truck/rail FAS – free along side – at port next to ship FOB – free on board – loaded on ship C&F – cost and freight – inclusive of to destination CIF – cost, insurance and freight – inclusive to destination Pricing and Payment Terms Payment terms can include: Cash in advance Cash on delivery – cash against documents Consignment basis – payable after sale Usance – payment … days after acceptance of documents Letter of credit Long term credit financing – for machinery / projects Each method has risks for the buyer or seller. The LC offers safety and comfort for both Currency of Pricing The US Dollar is the most widely used currency for pricing international sales Importers in some countries may prefer invoicing in local currencies like Japanese Yen or Euro or Pound Sterling, Singapore Dollars or UAE Dirhams Saudi riyals etc. This reduces the risk of exchange rate fluctuations for the buyer Exchange fluctuation is a major risk for sellers and can be managed by hedging the currency. Packing and Shipping Packing is of two types: Industrial packing – bulk for protection during shipping & transport Consumer packing – to enhance sales appeal Packing could makeup up to 5% of product costs Countries have laws or practices in packing which must be understood and adhered to. Packing depends on the product and must be suitable for containerized shipping and mechanical handling. Market Intelligence Secondary data is very easy to gather from various publications, agencies like chambers of commerce, trade bodies, embassies, trade shows, internet, banks etc Usually secondary data is sufficient to establish the feasibility of the market. Care must be taken to understand the data and the measures used before drawing conclusions.