Sales Management Module PDF

Module Theme Sales and Channel Management supportive materials SALES AND CHANNEL MANAGEMENT MODULE FOR SUPPORT EXIT EXAM Exit Exam Supporting Documents Department of Marketing Management 1 Prepa...

Module Theme Sales and Channel Management supportive materials SALES AND CHANNEL MANAGEMENT MODULE FOR SUPPORT EXIT EXAM Exit Exam Supporting Documents Department of Marketing Management 1 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Module Theme Sales and Channel Management Module Description Companies are facing increasing competition, with threats to many traditional markets and customer bases, as supply and purchase points in many market segments become more concentrated. To tackle the threats and capitalize on opportunities the modern sales manager needs a far broader range of selling and managerial skills and experience than in past decades. Thus, this module is designed to help students learn about sales and marketing channel management concepts and how to apply them to solve business problems. Sales Management focuses on the activities of first line field sales managers. Modern sales management is a complex and disciplined mix of: professional selling and negotiation skills, people and management skills including selection, motivation, compensation, training, forecasting etc. The coverage of the module deals with these topics in practical way. In marketing channel and distribution management, the channel design is discussed, the different components of distribution like transportation, inventory, warehousing has been covered. This will enable students to understand marketing channel management which has improved the efficiency in distribution. Module Objectives Upon completion of this module, student‘s will;  Understand sales and marketing channel management concepts and how to apply them to solve business problems,  Explore the ways in which personal selling is thought to work  Establish the means by which management can organize a sales force 2 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials 1. Introduction to Sales Management In daily life, a layman deals with different transaction in terms of selling and purchasing of goods and services. In these transactions the second one persuades the first person. Therefore, selling may be defined as persuading people to satisfy the want of first one. The person, who does this act, is called as the salesman, the result of this action as sales, while these activities of the person, are supervised and controlled by sales-management.  Definition of Sales Management American Marketing Association agreed that sales management means the Planning, direction and control of Personal selling including recruiting, selecting, equipping assigning, routing, supervising, paying and motivating as these tasks apply to personal Sales force. Sales Managers are responsible for organizing the sales effort, both within and outside their Companies. Within the Company the Sales Manager builds formal and informal organizational structures that ensure effective communication not only inside the sales department but in its relations with other organizational units. Outside the Company, Sales Manager serves as a key contact with customers and other external publics and is responsible for building and maintaining an effective distribution network.  Objectives of Sales Management Broadly sales executives have responsibilities to their organizations, customers and society. From the company‘s view point there are three general objectives of sales management: sales volume, contribution to profits and continuing growth. Top management delegates to marketing management, which then delegates to sales management, sufficient authority to achieve the three general objectives. 3 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  Functions of Sales Management The functions of sales managers are much wider than the tasks of sales force as mention above. The diagram explains some of these functions. Fig 1. Sales Management Functions  Theories of Selling Is selling a science with easily thought basic concepts or an art learned through experience? Some believe it as a science; some others believe it as an art still others believe selling as an art evolving into a science. In this section we will go through four selling theories:  AIDAS Theory of Selling The acronym stands for attention, interest desire, action and satisfaction. 4 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials AIDAS is the skeleton around which many sales training programs are organized. The theory holds that in a successful selling, the prospect‘s mind passes through the five successive mental states (attention, interest desire, action and satisfaction). Implicit in this theory is that the prospect goes through these stages consciously, so the sales presentation must lead the prospect through them in the right sequence if a sale is to result. Securing attention: the goal is to put the prospect into a receptive state of mind. The sales person has to have a reason, or an excuse for conducting a conversation- be a skilled conversationalist. The sales person must establish good rapport at once. He needs an ample supply of conversation openers. Favorable first impressions are assured by for example, proper attire, neatness, friendliness and genuine smile. Gaining interest: the second goal is to intensify the prospect‘s attention so that it evolves into strong interest. Many techniques are used to gain interest. Some sales people develop a contagious enthusiasm for the product or a sample. When the product is bulky or technical, sales portfolios, flipcharts or other visual aids serve the same purpose. Throughout the interest phase, the hope is to search out the selling appeal that is most likely to be effective to inspire the prospects‘ emotion/feeling. Kindling desire: the third goal is to kindle the prospect‘s desire to the ready-to-buy point. The sales person must keep the conversation running along the main line toward the sale. The development of sales obstacles, the prospect‘s objections, external interruptions and digressive remarks can sidetrack the presentation during this phase. Obstacles must be faced and ways found to get around them. Objections need answering to the prospect‘s satisfaction. The chance of making a sale improved if objections are anticipated and answered before the prospect raises them. Inducing Actions: If the presentation has been perfect, the prospect is ready to act- that is to buy. However, buying is not automatic and as a rule, must be induced. Experienced sales 5 Prepared by Marketing Management staffs  Module Theme Sales and Channel Management supportive materials personnel rarely try for a close until they are positive that the prospect is fully convinced of the merits of the proposition. Thus, it is up to the sales person to sense when the time is right. Building Satisfaction: after the sales person has given the order, the sales person should reassure the customer that the decision was correct. I. THE “RIGHT SET OF CIRCUMSTANCES” THEORY OF SALEING Furthermore, the more skilled the sales person is in handling the set of circumstances, the more predictable is the response. The set of circumstances include internal and external to the prospect. For example, the sales person says to the prospect ―let‘s go out for a cup of coffee.‖ the sales person and the remark are external factors. But at least four factors internal to the prospect affect the response. These are the presence or absence of desire: 1) to have a cup of coffee, 2) to have it now, 3) to go out and 4) to go out with the sales person. This theory stresses external factors at the expense of internal factors. It is a seller-oriented theory; stresses the importance of the sales person controlling the situation, does not handle the problem of influencing factors internal to the prospect. III. “Buying Formula” Theory of Selling Emphasizes the buyer‘s side of the buyer-seller dyad and deemphasizes the salesperson‘s influence. Since the sales person‘s normal inclination is to neglect the internal factors, the formula is a convenient way to help the sales person remember. The buyer‘s needs and problems receive major attention, and the sales person‘s role is to help the buyer find solutions. This theory purports to answer the question: what thinking process goes on in the prospect‘s mind that causes the decision to buy or not to buy. This theory proposes a step by step mental process in a purchase: Need (problem) Solution (product, trade name) Purchase Satisfaction 6 Prepared by Marketing Management staffs  Module Theme Sales and Channel Management supportive materials iv. The “Behavioral Equation” Theory of Selling It is based on stimulus-response. The theory explains buying behavior in terms of the purchasing decision process viewed as phases of the learning process. Four essential elements of the learning process included in the stimulus response model are drive, cues, response, and reinforcement. a. Drives: drives are strong internal stimuli that impel the buyer‘s response. Some drives stem from the physiological needs like hunger, thirst, pain, cold and sex. Some others are learned drives like striving for status and social approval. b. Cues: are weak stimuli that determine when the buyer will respond. Triggering cues activate the decision process for any given purchase. Non-triggering cues influence the decision process but do not activate. c. Response: what the buyer does. d. Reinforcement: it is any event that strengthens the buyer‘s tendency to make a particular response. These four elements are incorporated into an equation: B = P*D*K*V Where: B = the internal response tendency, the act of purchasing a brand or patronizing a supplier P = predisposition or the inward response tendency, that is force of habit D =present drive level (amount of motivation) K = ―incentive potential,‖ that is the value of the product or its potential satisfaction to the buyer V = Intensity of all cues 7 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials The relation among the variables is multiplicative. Thus, if any independent variable is a zero value, B will also be zero and there is no response.  Types of Selling  Order-Takers  Inside order-takers. Here the customer has full freedom to choose products without the presence of a salesperson. The sales assistant's task is purely transactional – receiving payment and passing over the goods.  Delivery salespeople. The salesperson's task is primarily concerned with delivering the product.  Outside order-takers. Outside order-takers visit customers, but their primary function is to respond to customer requests rather than actively seeking persuade.  Order-Creators  Missionary salespeople. In some industries, notably the pharmaceutical industry, the sales task is not to close the sale but to persuade the customer to specify the seller's products.  Order-Getters Order-getters are those in selling jobs where a major objective is to persuade customers to make a direct purchase. These are the front-line salespeople.  Selling ass a Career There are a number of key qualities that are generally recognized as being important:  Empathy and an interest in people.  Ability to communicate.  Determination.  Self-discipline and resilience.  Image of Selling 8 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Mention of the word ‗selling‘ will prompt a variety of responses. Some of the misconceptions are outlined below:  Selling is not a worthwhile career  Good products will sell themselves and thus the selling process adds unnecessarily to costs.  There is something immoral about selling, and one should be suspicious about those who earn their living from it. 2. Professional Selling For many years, the traditional approach to selling emphasized the first-time sale of a product or service as the culmination of the sales process. However, the marketing concept and accompanying approach to personal selling views the initial sale as merely the first step in a long-term relationship-building process, not as the end goal.  Professional Selling Process stages 1. Prospecting The process of locating potential customers is called prospecting. A prospect is a person or business that needs the product a salesperson is selling and has the ability to buy it. In order to qualify prospects, one needs to:  Plan a sales approach focused upon the needs of the customer.  Determine which products or services best meet their needs.  In order to save time, rank the prospects and leave out those that are least likely to buy. 9 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  Methods of prospecting  Endless chain or family tree method - works on the principle of Multiplication of relations. The salesman collects the names and addresses of friends and relatives and interviews the persons who are likely to be prospects.  Canvassing - Sales canvassing can be defined as a sales activity where you make the first contact with the prospect without prior appointment. Sales canvassing can be done over the phone, or it can be done in in-person.  Center of influence method – Involves using influential people. Such persons may be ministers, doctors, lawyers, bankers, professors, club officials, business leaders, teachers, social workers and the community leaders.  Exhibitions & demonstrations - As the visitors walk into the pavilion to examine the products, an experienced salesman takes a few minutes to qualify leads, gets their names and addresses so as to contact them later on either at their homes or offices for demonstration.  Advertisements and Advertising Agencies - A well designed and placed advertisement brings good many prospects. 2. Pre-approach This includes all the activities a sales representative would perform before actually meeting the prospect. These activities may include knowing the details about the product/ service which is to be sold, knowing about the company which the product/ service represent etc. 3. Approach After identifying the prospect and gathering necessary information, it is time to interact. The aim of the sales representative should be in gaining attention of the customer and stimulate his interest in the product/ service. 10 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  Methods of approach  The Introductory Approach – greeting.  The product approach - if the product is eye-catching.  The consumer benefits approach - mentioning selling points.  The premium approach - giving small gifts.  The Shock approach. E.g. Insurance. 4. Presentation Just as important is the development of good interpersonal skills; they are a key ingredient of effective selling. Salespeople who can adapt their selling style to individual buyer needs and styles have a much stronger overall performance than less flexible counterparts. Essentials features of a good presentation include;  Arousing Interest - Emphasizing the selling points of the product.  Promptness in presentation- alert, smart & knowledge about the product.  Clarity in presentation - clear & complete in every respect.  Showing proper quality and quantity. 5. Objection handling Handling sales objections is as important as making a good presentation for the prospect. Objection handling is about handling the objections of the prospect when he/she refuses the product/ service stating a reason. 6. Closing the deal After successful presentation and effective objection handling it is time for the sales representative to close the deal by obtaining a purchase commitment from the customer. Various closing techniques can be employed by the sales representative in requesting an order for the product/ service. 11 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials After identifying the right time, we can apply some of the closing techniques as described by Ralph W Jackson and Robert D Hisrich in their book ―sales and sales management". Some of them are as follows:-  Trial close: This technique can be used at any stage during the presentation. Once some buying signals are identified, the sales representative should attempt a trial close and see if a positive response is received from the prospect. If a positive response is received then he can go for closing the deal. If he is selling a car to the customer, the trial close can be ―Would you be interested in buying a Maruti Alto or Zen‖. If the prospect says any one of them, you can proceed with the actual closing and discussing the terms and payment methods of the product.  Assumption close: In this the sales representative assumes that the decision to buy is already made by the customer and proceeds to close the deal. For example he can say ―Having found the product/ service to be beneficial, when would you like it to be delivered?‖  Summary-of-benefits close: Here the sales representative summarize the benefits of the product/ service and then go for the sale.  T-account close: This includes describing the advantages and disadvantages of the product/ service by putting them side by side in a T-table format. This form can help the prospect easily understand about the product/ service. 12 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  Special deal close: Here the prospect would be given a one-time special offer on the product/ service such as ―We would like to offer a 15 percent discount if you place an order for the product/ service today‖. 7. Follow-up Post-sales activities often determine whether an individual who has made a recent purchase will become a repeat customer. Follow-up helps build mutually beneficial long-term relationships. 3. SALES FORECAST AND BUDGETING  Sales Forecasting: The Concept Forecasting is the art of estimating future demand by anticipating what buyers are likely to do under a given set of future conditions. Thus it must identify its competitors and estimate their sales. Forecasting is a difficult area of management. Most managers believe that they are good at forecasting. However, forecasts made usually turnout to be wrong. Terms which look synonymous:  Market Potential- is an estimate of the maximum possible sales opportunities present in a particular market segment and open to all sealers of a product during a stated future period assuming the application of appropriate marketing methods.  Sales Potential - is an estimate of the maximum possible sales opportunities present in a particular market segment and open to specified company selling during a stated future period assuming the application of appropriate marketing methods.  Sales Forecasting- is an estimate of sales in a future period under a particular marketing program and an assumed set economic and other factors outside the unit for which the forecast is made. A sales forecast may be for a single product or for an entire product line. It may be for a manufacturer‘s entire market area or for any subdivision of it.  Importance of Sales Forecast 13 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Businesses are forced to look well ahead in order to plan their investments; launch new products; decide when to close or withdraw products and so on. Key decisions that are derived from a sales forecast include: employment levels required, promotional mix and investment in production capacity. Many sales managers do not recognize that sales forecasting is not their responsibility and leave such matters to accountants, who need the forecast in order that they can prepare budgets. Sales managers do not always see the immediate need for forecasting and feel that selling is a more urgent task. Indeed, the task of forecasting by the sales manager is often delayed until the last minute and a hastily put together estimation with no scientific base, little more than an educated guess, is the end result. Plans to be made in advance, they should be preceded by forecasting. Thus, the purpose of sales forecast is to plan ahead and go about achieving forecasted sales. It is again emphasized that the sales manager is the person who should be responsible for the sales forecasting task. The sales manager is the person who should know which way the market is moving. The sales forecasting procedure must be taken seriously because from it stems business planning.  Levels and Procedures Of Forecasting Forecasts can be produced for different horizons starting at an international level and ranging down to national levels, by industry and then company levels until we reach individual product by product forecast. Sales forecasting procedures  The first stage in creating the sales forecast is to estimate market demand. Market demand for a product is the total volume that would be bought by a defined customer group, in a defined geographical area, in a defined time period, in a given marketing environment. This is sometimes referred to as a market demand curve. For example, consider the 14 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials UK overseas mass market package holiday industry. What is market demand? Using the definition above, market demand can be defined as: Defined customer group - customers who buy an air-inclusive package holiday Defined geographical area - customers in the UK Defined time period- the calendar year Defined marketing environment- strong consumer spending in the UK but overseas holidays affected by concerns over international terrorism Recent data for the UK overseas mass market package holiday market suggests that market demand can be calculated as follows: Number of customers in the UK: 17.5 million per calendar year Average selling price per holiday: £450 Estimate of market demand = £7.9 billion (customer number * average price) by assuming the customers buy the product once in the calendar year.  Step two in the forecast is to estimate company demand Company demand is the company‘s share of market demand. This can be expressed as a formula: Company demand = market demand*company‘s market share. For example, taking package holiday market example; the company demand for first choice holidays in this market can be calculated as follows: First choice holiday‘s demand = £7.9 billion *15% market share = £1.2 billion. A company‘s share of market demand depends on how its products, services, prices, brands and so on are perceived relative to the competitors. All other things being equal the company‘s market share will depend on the size and effectiveness of its marketing spending relative to competitors. 15 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  Step three is then to develop the sales forecast The sales forecast is the expected level of company sales based on a chosen marketing plan and an assumed marketing environment.  Forecasting Time Horizons Forecasting is usually classified by the future time horizon it covers. There are three categories of forecasting horizons.  Short range forecast: this forecast generally has a time span of up to three months. It is used for planning purchasing, job scheduling, workforce levels, job assignments, and production levels.  Medium range forecast: also called an intermediate forecasting generally spans from three months to three years. It is useful in sales planning, production planning, budgeting and analyzing various operating plans.  Long range forecast: generally three years or more in time span. It is used in planning for new products, capital expenditures facility location or expansion and research and development.  Sales Forecasting Methods The forecasting methods can be broadly classified as qualitative and quantitative. Qualitative methods are:  Jury of Executive opinion – The assumption is that the executives are well informed about the industry outlook and the company‘s market position, capabilities, and marketing program. 16 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  The Delphi Technique - This is a version of the jury of executive opinion method in which those giving opinions are selected for their ―expertise‖.  Poll of Sales force opinion - ask customers about their future buying plans.  Survey of customers buying plan - Since the sales force operates in the market, they can best estimate the future trends of the markets and thus forecast the sales.  Product and market testing - involves the limited launch of a product in a closely defined geographical test area. Quantitative forecasting methods involve mathematical models that rely on historical data and/or causal variables to forecast demand. These techniques fall into two categories: time series model and causal models. Time series models predict on the assumption that the future is a function of the past. The techniques are useful in predicting sales in markets that are relatively stable and not susceptible to sudden irrational changes in demand.  Naïve approach: it is the simplest forecasting technique. A naïve forecast for any period equals the previous period‘s actual value. Setting the sales forecast for the coming year at the same figure as the current year‘s actual sales. Alternatively, the forecast can be represented by the following formula: Yt = Yt-1 Where: Yt = forecast at time t Yt-1 = actual data at time t 17 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Although at first glance the naïve approach may appear too simplistic, nonetheless, it is a legitimate forecasting tool. Its advantages include: it has virtually no cost; it is quick and easy to prepare a forecast because data analysis is non-existent, and it is easy for user to understand. The main objection to this method is its inability to provide highly accurate forecasts. However, resulting accuracy is acceptable, this approach deserves serious consideration.  Simple moving average - is a technique to get an overall idea of the trends in a data set; it is an average of any subset of numbers. The moving average is extremely useful for forecasting long-term trends. You can calculate it for any period of time. For example, if you have sales data for a twenty-year period, you can calculate a five-year moving average, a four-year moving average, a three-year moving average and so on. The moving average (MA) forecast can be computed using the following equation: (simple moving average) MAn = Where: i = refers to the most recent period (i = 1, 2, 3, …, n) n = number of periods in the moving average yi = actual value with period i MAn = moving average of the most recent n actual forecast For example MA3 would refer to a 3 period moving average. 18 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Example 1. Compute a three period moving average forecast for period six given sales for shipping a product for the last five periods. Period Sales volume Sales for three year Three year moving period average 1 200 2 250 3 300 750 4 350 900 300 5 450 1100/3 366.6 6 ? Period 6 forecast = 366.6 Solution MA3 = (450+ 350+ 300)/3 = 366.6 The advantage of moving average is that it is easy to compute and understand. It limitations are, data storage requirements can be significant, extensive records of data, can‘t pickup trends very well.  Weighted moving average - Weighted moving WMA average is similar to SMA, except that it assigns more weight to the most recent values in a time series. This is done by multiplying each sales figure by a weighting factor.It may be expressed mathematically as: =  weigh for period n  (demand in period n)  weights 19 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Example: the forecasting analyst for the detergent manufacturing company has assigned weight of 0.6 to the most recent demand, 0.3 to the demand one month ago and 0.1 to the demand two months ago. Using the data given, calculate the weighted moving average forecast for June? Months Sales volume Three months moving average Jan 300 Feb 350 Mar 280 Apr 450 May 230 Jun ? [(0.1*280)+(0.3*450)+(0.6*230)] =301 Solution [(0.1*280) + (0.3*450) + (0.6*230)]=301  Exponential smoothing - In this technique each new forecast is based on the previous forecast plus a percentage of the difference between that forecast and the actual value of the series at that point. That is: Ft = Ft -1 +  (At-1 - Ft-1) Ft = forecast for period t Ft-1 = forecast for period t -1  = Smoothing constant At-1 = actual sales for period t-1 Example. Suppose the previous forecast was 42 unit, actual sales was 40 units, and  = 10%. What is the new forecast? 20 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Ft = 42 + 0.1(40 - 42) = 41.8 A causal associative model is produced by putting the value of the independent variable into the calculation.  Simple linear regression - A simple linear regression model consists of two variables that are thought to be related. One of these is the variable to be forecasted and it is referred to as the dependent variable, its value depends on (is a function of) the value of another variable. The other variable which will be used to explain or predict the value of the dependent variable is referred to as the independent variable. The cause and effect relationship of the variables is given by a linear equation: Y = a + bx Where: Y= dependent variable a = vertical axis intercept b = slope of the regression line x= independent variable Example: BIRTES S.C is engaged in whole selling business that imported electronic stove for domestic use. Over time the company has found that its sales volume is dependent on the advertising expenditures. During one executive meeting, the marketing manager gives his information about the advertising budget for the electronic stove. The following are sales and advertising data for the past five months. 21 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Month Sales (thousands of units) Advertising (thousands of birr) 1 18 7 2 11 6 3 26 18 4 30 20 5 40 24 The marketing manager says that next month the S.C will spend 30,000 birr on advertising for the product. Use linear regression to develop an equation and a forecast for the product. Solution: it is assumed that sales are linearly related to advertising expenditures. Hence, sales are dependent variable, and advertising is independent variable. Y = a +bx Where: Y is sales in units X is advertising expenditure in birr b is slope of the line n xY   x Y b n x 2   (x) 2 a  Y  b X n 22 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials N Sales (thousands of units) Advertising (thousands of birr) X2 xy Y X 1 18 7 49 126 2 11 6 36 66 3 26 18 324 468 4 30 20 400 600 5 40 24 576 960 ∑y = 125 ∑x = 75 ∑x2=1385 ∑xy = 2220 ( ) ( ) b= = = = 1.32 ( ) ( ) ( ) a= = = 5.2 The regression equation is: Y = 5.2+ 1.32x Therefore, as the advertising expenditure will be 30,000birr, the forecast for month 6 is Y = 5.2 + 1.32(30) = 44.8 0r 44,800 units  Forecasting Accuracy And Errors Forecasting sales is never easy. There as many reasons why forecasts are missed as there are customers, the economy, misunderstood sales pipeline, customer budget cuts, competition, market shifts, product inadequacies, supply shortages, etc. Anyone who ever carried a quota can create an explanation of how things did not turn out according to how they were ―supposed to‖. Over achieving the forecast is almost as undesirable as underachieving. Forecasting almost always contain errors. Forecast errors can be classified as either bias errors or random errors. 23 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Bias errors: are the results of consistent mistakes – the forecast is always too high or too low. These errors often are the result of neglecting or not accurately estimating patterns of demand, such as trend, seasonal or cyclical pattern. Random errors: result from unpredictable factors that cause the forecast to deviate from the actual demand. Forecasting analysts try to minimize the effects of errors by selecting appropriate forecasting models, but eliminating all forms of errors is impossible. Forecast error is simply the difference between the forecast and actual sales for a given period. Et = Dt – Ft Where: Et is forecast error for period t Dt is actual sales for period t Ft is forecast for period t However, managers usually are more interested in measuring forecast error for a relatively long period of time. They usually use the cumulative forecast errors (CFE) that measure the total forecast error. CFE = ∑Et CFE is useful to assess bias in a forecast. Evaluating and controlling forecast accuracy requires the use of one or more summary measures of forecast error. Most commonly used for these purposes include: the mean absolute deviation (MAD) measures the average forecast error for a number of periods without regard to the sign of the error. For computation all errors are treated as positive. 24 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials The following formulas are used in their computation: / Et/ MAD = n CFE Ē= n n is total number of observations Ē is the average forecast error The mathematical symbol / / is used to indicate the absolute value – i.e. it tells you to disregard positive or negative signs Example: the following table shows the actual sales of commercial trucks for a truck assembly plant and the forecast made for each of the six months. Calculate CFE, Ē and MAD for this product. Month Demand (Dt) Forecast (Ft) Error (Et) Absolute error, /Et/ 1 80 84 -4 4 2 70 62 8 8 3 65 67 -2 2 4 90 84 6 6 5 60 63 -3 3 6 50 43 7 7 ∑Et = 12 ∑/Et/ = 30 Solution: Using the formulas for measures, we get Cumulative forecast error (CFE) = 12 CFE Average forecast error (Ē) = = =2 n / Et/ Mean absolute deviation (MAD) = n = =5 25 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Interpretation: a CFE of 12 indicates that the forecast has a tendency to underestimate demand. The MAD statistics provide measures of forecast error variability. A MAD of 5 means that the average forecast error was 5 units in absolute value.  Appropriateness of Forecasting Technique Chosen The selection of which type of forecasting to use depends on several factors:  The degree of accuracy required - if the decisions that are to be made on the basis of the sales forecast have high risks attached to them, and then it stands to reason that the forecast should be prepared as accurately as possible. However, this involves more cost.  The availability of data – in some areas there is a wealth of available sales information (e.g. clothing retail, food retailing, holidays); in others it is hard to find reliable up-to-date information.  The time horizon that the sales forecast is intended to cover. For example, are we forecasting the next weeks‘ sales, or are we trying to forecast what will happen to the overall size of the market in the next five years?  The position of the product in its life cycle. For example for products at the introductory stage of the PLC, less sales data and information may be available than for products at the maturity stage when time series can be a useful forecasting method.  Sales Budget A sales budget is simply a tool, a financial plan that depicts how resources should best be allocated to achieve forecasted sales. In other words, sales budget is a blueprint for making profitable sales. The purpose of sales budgeting is to plan for and control the expenditure of resources necessary to achieve the desired sales objectives. 26 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  Methods of Sales Budgeting Some important methods are;  Percentage of Sales: In this method manager multiplies the forecast sales by various percentages for each category of expense.  What is affordable: Companies giving low emphasis on sales and marketing function or having small size of operation make use of this judgmental method.  Competitive parity method: This method advocates determining sales budget comparable to the competitors.  Objective and task method: In this method the manager starts with identifying the objectives of sales department followed by determination of tasks that must be accomplished in order to achieve the set objectives. 4.Sales Force Size Determination and Organization Determining how many people are required to meet the sales volume and profit objectives of a firm is not an easy decision area. Three basic approaches are used in approximating the right size of sales people.  Work Load Method - The basic assumption is that all sales personnel should shoulder equal workload. Companies applying this method generally assume that the interactions of three major factors (customer size, sales volume potential, and travel load) determine the total work load involved in covering the entire market.  Sales Potential Method - This method is based on the assumption that performance of the set of activities contained in the job description represents one sales personnel unit. If management expects all company sales personnel to perform as specified in the job description, then the number of sales persons required equals the number of units of sales personnel required. 27 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  Incremental Method - It is based on one proposition: net profits will increase when additional sales personnel are added if the incremental sales revenues exceed the incremental costs incurred.  Sales Force Organization Structure  Geographic Sales Force Organization Structure - This form of organization, each sales person is assigned to territory over which to have sole responsibility for sales achievement. Compared to other forms of organization, travelling expenses are likely to be lower. A potential weakness of this structure is that the sales person is required to sell the full range of the company‘s products. They may be very different technically and sell into a number of diverse markets. In such a situation it may be unreasonable to expect the sales person to have the required depth of technical knowledge for each product and be conversant with the full range of potential applications within each market. A further related disadvantage is, sales persons in discrete geographical territories, covering all types of customers are relatively weak in interpreting buyer behavior patterns and reporting about changes in the operational circumstances of customers.  Product Specialization Structure - Conditions which are conducive to this form of organization are where the company sells a wide range of technically complex and diverse products.  A market-based structure - Often in industrial selling the market is defined by industry type. Thus, although the range of products sold is essentially the same, it might be sensible for a computer firm to allocate its sales people on the basis of the industry served i.e. banking, manufacturing, health, etc. given that different industry groups have widely varying needs, problems and potential applications. Specialization by market helps monitor changes and trends within the industry which might affect demand for their products yet follows travel expenses. 28 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  Functional Specialization Structure - In industrial selling, companies sometimes separate their sales force into development and maintenance sales teams. The development sales people are highly trained in handling very technical new products. They spend considerable time overcoming commercial technical and installation problems for new customers. Companies using this structure assume that one of the causes of new product failure is the inadequacy of the sales force to introduce the product. Employment of developmental sales people reduces this problem.  Mixed Organization In practice many firms use a combination of two or more. For example, in order to minimize travelling expenses, a company using two-product group structure may divide the country into geographically based territories with two sales people operating within each one. Like many selling decisions, the choice of sales organizations is not a black and white affair. Financial conditions, customer coverage, organizational flexibility need to be assessed. 4. Human Resource Functions in Sales Management HR is more than hiring and firing. As a sales manager, HR responsibilities may include:  Sales force Staffing - It is one of the most challenging and important responsibilities / activities of sales management. Sales force staffing process includes following stages: planning, recruiting, selecting, hiring and socialization.  Sales force training - is the process of improving seller skills, knowledge, and attributes to drive seller behavioral change and maximize sales success. To be most effective, sales training should be viewed, designed, and executed as a change management initiative. 29 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials  Sales force compensation - refers to the payment a salesperson receives for their work. Here are some of sales compensation plan.  Salary-based compensation plan model - you decide ahead of time how much you'll pay your salespeople. It doesn't matter how much (or how little) they sell; their take-home earnings are set.  Commission-based compensation model - presupposes paying sales reps based on their performance only. So, if they don‘t close a deal, they get a zero.  Salary plus Commission - They‘re structured in a way that sales people receive a lower base salary along with commission pay that makes up the majority of the total compensation.  Salary plus bonus compensation model - This plan can be used if you know that your sales reps tend to meet the pre-set goals. You may foresee your expenses by paying your salespeople a base amount and a predictable bonus per the particular number of sales.  Straight-line commission model - This sales compensation plan presupposes rewarding salespeople based on how much or little they sell. For example, if a total commission is $1,000 and a sales rep reaches 90% of their quota, they get 90% of the commission, which is $900.  Sales Force Motivation - One of the most difficult problems a sales manager faces is the motivation of the sales force.. Sales managers can motivate their team by following any of the theories of motivation, namely, Maslow's hierarchy of needs theory, Herzberg's two-factor theory, goal-setting theory, expectancy theory, and job design theories. 30 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Module Theme Marketing channels and Logistics (Mktm 3081) 31 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Module Description Dear learners, This module deals with fundamental concepts, principles and techniques of Marketing channels and Logistics and on enhancing practical problem solving skills based on these concepts and principles, thereby, it enhances students understanding of Marketing channels and Logistics concepts there by improve ability to make decisions in the firm that create shareholder value. This module includes the following major concepts and more; Elements of Logistics and Distribution, Importance of Logistics and Distribution, Key, Logistics Management Goals, Modes of transportation, Measuring customer service, Channel types and structure, Classification of distribution channels, Logistics design strategy and Needs and problems of channel member Chapter One An Overview of Logistics & Channel Management Chapter objectives At the end of this chapter, you will be able to;  Define logistics  Describe the role and importance of logistics  Analyze the logistics system  Identify the logistics cost and components Introduction 1.1 Evolution of logistics Management 1. Evolution of Logistics The concept of “Logistics” started many years before Christ and was used by Greek generals (Leon the Wise, Alexander the Great) in order to describe all the procedures for the army‘s procurement on food, clothing, ammunition, etc.  Alexander The subsequent development of integrated logistics is reviewed in four time periods during which revised attitudes and practices emerged regarding movement and storage of materials. 1. 1956-1965 - decade of conceptualization-integrated logistical concept began to crystallized 2. 1966-1970 -Time to test for relevancy 3. 1971-1979 - period of changing priority 32 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials 4. 1980-1985 – A period of significant political and technological change 5. 1986 and beyond – Toward integrated logistics 1.2 Definition of Logistics Logistics is the art and science of management, engineering and technical activities concerned with requirements, design and supplying, maintaining resources to support objectives, plans and operation. Logistics management is that part of supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers‘ requirements. It can be defined as: Logistics is the process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from the point of origin to point of consumption for the purpose of conforming to customer requirements. (Council of Logistics Management) 1.2.1 The role and importance of logistics  The role of logistics The movement of the right amount of the right product to the right time in essence of the role of logistics in the market channel. 1.3. Logistical System Thus, the logistical process is viewed in terms of two inter related efforts: 1. Value – added inventory flow, and 2. Requirements information flow 1. Value – added inventory flow Logistics is about creating value-value for customers and suppliers of the firm, and value for firm‘s stakeholders. The operational aspect of logistics is concerned with management of the movement and storage of materials and finished goods. As such logistical operations are viewed as commencing with the initial transportation of a material from suppliers and terminating with the final delivery of a manufactured or processed product to a consumer. Logistical operations of an enterprise are divided in to three categories: 1. Market distribution - (concerned with physical movement of finished products to consumers) 2. Manufacturing support-(concerns control over WIP inventory as it flows b/n stages of MFG) 33 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials 3. Purchasing - (concerned with the procurement and movement of materials, parts and finished inventory from supplier location to mfg or assembly plants, warehouses or retail stores.) 2. Requirements information flow Requirement information flow is concerned with the identification of what specific inventory is needed at which locations within the logistical system. The primary objective of developing requirements information is to establish a plan to integrate logistical operations and maintain operational continuity. 1.4. Logistical System Components (the work of logistics) The performance of value added inventory and requirements information flows is formulated in to an integrated logistical process by the coordination of: 1. Facility structure 4. Inventory , and 2. Forecasting and order management 5. Warehousing and packaging 3. Transportation 1.5. Total Cost Concept The logistical system should be viewed as a cost center and every effort must be made to hold expenditure to a minimum. Central to the scope and design of logistics system is trade-off analysis, which, in turn, leads to the total cost concept. The cost trade-off is the recognition that cost pattern of various activities of the firm frequently display characteristics that put them in conflict with one another. The conflict is managed by balancing the activities so that they are collectively optimized. For example; when transportation service is selected, the direct cost of transport service and the indirect cost effect on inventory level in the logistics channel due to different delivery performance of carriers are said to be in cost conflict with each other. The best economic choice occurs at the point where the sum of both costs is lowest. There are also other tradeoffs such as setting customer service level, setting safety stock levels, and determining number of warehouses. 34 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Inventory flow Enterprise Customer s Suppliers Logistical operation Information flow Chapter Two Transportation Management Chapter objectives After Completion of this chapter students are able to:  Identify the factors that drive transport costs,  Explain about the cost structures or classifications,  Identify Carrier pricing strategy,  Identify transportation rates and ratings,  Analyze transport decisions. 2.1 Transportation Economics and Pricing Transportation economics and pricing are concerned with factors and characteristics that drive cost. To develop effective logistics strategy, it is necessary to understand such factors and characteristics. Successful negotiation requires a full understanding of transportation economics. An overview of transportation economics and pricing builds upon four topics: (1) the factors that drive transport costs, (2) the cost structures or classifications, (3) carrier pricing strategy, and (4) transportation rates and ratings. 35 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials 2.1.1 Economic Drivers Transportation costs are driven by seven factors. While not direct components of transport tariffs, each factor influences rates. The factors are: (I) distance, (2) volume, (3) density, (4) stowability, (5) handling, (6) liability, and (7) market. In general, the discussion sequence reflects the relative importance of each factor from the shipper's perspective. Keep in mind that the precise impact of each factor varies based on specific product characteristics. Distance Distance is a major influence on transportation cost since it directly contributes to variable expense, such as labor, fuel, and maintenance. Volume The second factor is load volume. Like many other logistics activities, transportation scale economies exist for most transportation movements. Transport cost per unit of weight decreases as load volume increases. This occurs because the fixed costs of pickup, delivery, and administration can be spread over incremental volume. This relationship is limited by the size of the transportation vehicle. Once the vehicle is full, the relationship begins again for each additional vehicle. Density A third factor is product density. Density is a combination of weight and volume. Weight and volume are important since transportation cost for any movement is usually quoted in dollars per unit of weight. Transport charges are commonly quoted as amount per hundredweight (CWT). In terms of weight and volume, vehicles are constrained more by cubic capacity than by weight. Since actual vehicle, labor, and fuel expenses are not dramatically influenced by weight, higher- density products allow relatively fixed transport costs to be spread across more weight. As a result, higher density products are typically assessed lower transport costs per unit of weight. 2.2 Transport Decisions The selection of mode of transportation or service offering within a mode of transportation depends on a variety of service characteristics. The six key factors include: 1. Freight rate 4. Loss, damage, claim processing, and 2. Reliability tracing 3. Transit time 5. Shipper market consideration and 6. Carrier consideration 36 Prepared by Marketing Management staffs Module Theme Sales and Channel Management supportive materials Chapter Three Traffic Management Chapter Objectives At the end of this chapter students will be able to;  Describe with traffic management  Identify the goal conflicts between transport and traffic  Identify the responsibilities of traffic manager 3.1. Introduction of Traffic Traffic is a special area of macro logistics. Traffic scientists investigate the traffic flows of goods, persons and transport means between anonymous sources and sinks in a region, of a country or around the globe, which are the sum of all single transport flows between households, companies and other actors of an economy. Topics of traffic technique are development, planning, construction and realization of traffic routes, traffic networks and public transport systems, traffic control, and traffic safety. Traffic management and traffic politics plan and initiate the building of new traffic networks. They care for safe, fast and efficient traffic flows through existing networks. Their goal is to enable and secure the disturbance-free and environmentally safe fulfillment of the transport demand of a region or a country at lowest costs. Traffic economics deals with the economic aspects of public transport systems and traffic networks. Traffic economists investigate the structure of traffic networks, routes and nodes and the crossings between different transport modes. They study costs, prices and pricing-models and the competitors on transport markets. Further topics are the structure and directions of traffic flows, the development of traffic within and between regions and countries, the causes of traffic emergence and the possibilities of traffic restriction. Goal Conflicts between Transport and Traffic Transport and traffic are interdependent: Prerequisites for efficient transports between the actors of an economy are safe traffic networks and public transport systems with sufficient capacities, demand driven traffic control, and cost- based and use-related pricing. 37 Module Theme Sales and Channel Management supportive materials Prerequisites for investments in traffic networks and public transport systems and for their economic operation are adequate traffic flows respectively sufficient user frequencies. From the different tasks and the partially deviating interests of the participants result the following goal conflicts between transport and traffic: Transport business cares for the goals of single companies and traffic participants, even if they are inconsistent with the goals of the society. Traffic economy aims at safe and economic utilization of traffic networks and public transport in the interest of all companies, traffic participants and society, even if some individuals or groups are put at a disadvantage. These conflicts lead to challenging tasks for logistic research:  Analysis of the organizational, technical and economic options of action to achieve the different goals of transport and traffic.  Development of methods to solve current and future tasks and problems of transport and freight  Investigation of the transport markets and freight markets, the competitors and the pricing for transport and networks.  Conception of strategies to accomplish or to restrain excessive transport demand and traffic volume.  Proposals for the legislature to regulate goal conflicts between transport and traffic A fair solution of these tasks requires independency of logistic research from the particular interests of business and daily policy.While traffic managers administer many different activities, they are fundamentally responsible for: (1) Operations management, (4) Freight control, (2) Freight consolidation, (5) Auditing and claims, and (3) Rate negotiation, (6) Logistical integration. 38 Module Theme Sales and Channel Management supportive materials 1. Freight Consolidation The fact that freight costs are directly related to size of shipment and length of haul, places a premium upon freight consolidation. To control transportation cost when using a time-based strategy, managerial attention must be directed to the development of ingenious ways to realize benefits of transportation consolidation. To plan freight consolidation, it is necessary to have reliable information concerning both current and planned inventory status. It is also desirable to be able to reserve or promise scheduled production to complete planned consolidations. To the extent practical, consolidations should be planned prior to order processing and warehouse order selection to avoid delays. All aspects of consolidation require timely and relevant information concerning planned activity. From an operational viewpoint, freight consolidation techniques can be grouped as reactive and proactive. Each type of consolidation is important to achieving transportation efficiency. Reactive Consolidation A reactive approach to consolidation does not attempt to influence the composition and timing of transportation movements. The consolidation effort takes shipments as they come and seeks to combine freight into larger shipments for line-haul movement. From an operational viewpoint, there are three ways to achieve effective reactive freight consolidation: (1) market area, (2) scheduled delivery, and (3) pooled delivery. Market Area - The most basic method of consolidation is to combine small shipments going to different customers within a geographical market area. This procedure does not interrupt the natural freight flow by changing the timing of shipments. Scheduled delivery may conflict with the trend toward customer-specified delivery appointments. Specified delivery time means that an order is expected to be delivered within a narrow time window. In today's world, a requirement to provide l-hour delivery of a component or part may be written into the purchase contract. Pushed to the limit, customer-specified delivery requires the capability to deliver any size shipment at any time specified by a customer. The objective of scheduled delivery is to offer a solution that the customer can depend upon while also achieving consolidation benefits. Pooled Delivery- Participation in a pooled delivery plan typically means that a freight forwarder, public warehouse, or transportation company arranges consolidation for multiple shippers 39 Module Theme Sales and Channel Management supportive materials serving the same geographical market area. Integrated source providers that arrange pooled consolidation services typically have standing delivery appointments at high-volume delivery destinations. It is common, under such arrangements, for the consolidation company to perform value-added service such as sorting, sequencing, or segregation of inbound freight to accommodate customer requirements. Proactive Consolidation While reactive efforts to develop transportation consolidations have been successful, firms are becoming more innovative concerning pre-transaction planning. Two forces are driving a more proactive approach to consolidation. First, the impact of time-based responsive logistical systems is creating a larger number of small shipments. This trend towards increased smaller shipments has been intensified by increased e-commerce fulfillment. Second, proactive consolidation has increased the desire for shippers, carriers, and consignees to participate in consolidation savings. Traditional consolidation programs typically favored one of the three to the exclusion of one or both of the others. A willingness to share benefits can provide incentive for all members of the supply chain to achieve freight consolidation. 2. Rate Negotiation For any given shipment it is the responsibility of the traffic department to obtain the lowest possible rate consistent with service requirements. The prevailing price for each transport alternative-rail, air, motor, pipeline, water, and so on-is found by reference to tariffs. 3. Freight Control Other important responsibilities of transportation management are tracing and expediting. Tracing is a procedure to locate lost or late shipments. Shipments committed across a transportation network are bound to be misplaced or delayed from time to time. Most large carriers maintain online tracing to aid shippers in locating a shipment. The tracing action must be initiated by the shipper's traffic department, but once initiated, it is the carrier's responsibility to provide the desired information. Expediting involves the shipper notifying a carrier that it needs to have a specific shipment move through the carrier's system as quickly as possible and with no delays. 4. Auditing and Claim Administration When transportation service or charges are not performed as promised, shippers can make claims for restitution. Claims are typically classified as loss and damage or over charged undercharge. 40 Module Theme Sales and Channel Management supportive materials Loss and damage claims occur when a shipper demands the carrier pay for partial or total financial loss resulting from poor performance. As the name implies, loss and damage claims usually occur when product is lost or damaged while in transit. Over charge /under charge claims result when the amount billed is different from that expected and are typically resolved through freight bill audit procedures. 5. Logistical Integration For any given operating period, traffic management is expected to provide the required transportation services at budgeted cost. It is also traffic management's responsibility to search for alternative ways to deploy transportation to reduce total logistics cost. CHAPTER FOUR MARKETING CHANNEL MANAGEMENT Chapter Objectives At the end of this chapter students will be able to  Identify Marketing channels  Discuss the importance of channel  Identify the role of channel  Identify the channel function  Discuss channel management decision 4.1 Marketing Channels Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions. These intermediaries constitute a marketing channel (also called a trade channel or distribution channel). Formally, marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. They are the set of pathways a product or service follows after production, culminating in purchase and use by the final end user. Some intermediaries—such as wholesalers and retailers—buy, take title to, and resell the merchandise; they are called merchants. Others—brokers, manufacturers' representatives, sales agents—search for customers and may negotiate on the producer's behalf but do not take title to the goods; they are called agents. Still others—transportation companies, independent warehouses, banks, advertising agencies—assist in the distribution process but neither take title to goods nor negotiate purchases or sales; they are called facilitators. 41 Module Theme Sales and Channel Management supportive materials 4.1.1 The Importance of Channels A marketing channel system is the particular set of marketing channels employed by a firm. 4.1.2 Channel Development A new firm typically starts as a local operation selling in a limited market, using existing intermediaries. The number of such intermediaries is apt to be limited: a few manufacturers' sales agents, a few wholesalers, several established retailers, a few trucking companies, and a few warehouses. Deciding on the best channels might not be a problem; the problem might be to convince the available intermediaries to handle the firm's line. 4.1.3 The Role of Marketing Channels Why would a producer delegate some of the selling job to intermediaries? Delegation means relinquishing some control over how and to whom the products are sold. Producers do gain several advantages by using intermediaries:  Many producers lack the financial resources to carry out direct marketing. For example, General Motors sells its cars through more than 8,000 dealer outlets in North America alone. Even General Motors would be hard-pressed to raise the cash to buy out its dealers.  Producers who do establish their own channels can often earn a greater return by increasing investment in their main business. If a company earns a 20 percent rate of return on manufacturing and a 10 percent return on retailing, it does not make sense to do its own retailing.  In some cases direct marketing simply is not feasible. The William Wrigley Jr. Company would not find it practical to establish small retail gum shops throughout the world or to sell gum by mail order. It would have to sell gum along with many other small products and would end up in the drugstore and grocery store business. Wrigley finds it easier to work through the extensive network of privately owned distribution organizations.  Intermediaries normally achieve superior efficiency in making goods widely available and accessible to target markets. Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own. According to Stern and his colleagues:  Intermediaries smooth the flow of goods and services.... This procedure is necessary in order to bridge the discrepancy between the assortment of goods and services generated by the producer and the assortment demanded by the consumer. The discrepancy results from the 42 Module Theme Sales and Channel Management supportive materials fact that manufacturers typically produce a large quantity of a limited variety of goods, whereas consumers usually desire only a limited quantity of a wide variety of goods. 4.2 Channel Functions and Flows A marketing channel performs the work of moving goods from producers to consumers. It overcomes the time, place, and possession gaps that separate goods and services from those who need or want them. Members of the marketing channel perform a number of key functions some functions (physical, title, promotion) constitute a forward flow of activity from the company to the customer; other functions (ordering and payment) constitute a backward flow from customers to the company. Still others (information, negotiation, finance, and risk taking) occur in both directions. If these flows were superimposed in one diagram, the tremendous complexity of even simple marketing channels would be apparent. A manufacturer selling a physical product and services might require three channels: a sales channel, a delivery channel, and a service channel. Marketing functions, then, are more basic than the institutions that perform them at any given time. Changes in channel institutions largely reflect the discovery of more efficient ways to combine or separate the economic functions that provide assortments of goods to target customers. 4.3 Channel Levels The producer and the final customer are part of every channel. We will use the number of intermediary levels to designate the length of a channel.  A zero-level channel (also called a direct-marketing channel) consists of a manufacturer selling directly to the final customer. The major examples are door-to-door sales, home parties, mail order, telemarketing, TV selling, Internet selling, and manufacturer-owned stores.  A one-level channel contains one selling intermediary, such as a retailer.  A two-level channel contains two intermediaries. In consumer markets, these are typically a wholesaler and a retailer.  A three-level channel contains three intermediaries. In the meatpacking industry, wholesalers sell to jobbers, who sell to small retailers. Identifying Major Channel Alternatives Companies can choose from a wide variety of channels for reaching customers—from sales forces to agents, distributors, dealers, direct mail, telemarketing, and the Internet. Each channel 43 Module Theme Sales and Channel Management supportive materials has unique strengths as well as weaknesses. Sales forces can handle complex products and transactions, but they are expensive. The Internet is much less expensive, but it cannot handle complex products. Distributors can create sales, but the company loses direct contact with customers. A channel alternative is described by three elements: the types of available business intermediaries, the number of intermediaries needed, and the terms and responsibilities of each channel member. TYPES OF INTERMEDIARIES The following alternatives were identified:  Expand the company's direct sales force. Assign sales representatives to contact all prospects in an area, or develop separate sales forces for the different industries.  Hire manufacturers' agents in different regions or end-use industries to sell the new equipment.  Find distributors in the different regions or end-use industries that will buy and carry the device. Give them exclusive distribution, adequate margins, product training, and promotional support. NUMBER OF INTERMEDIARIES Companies have to decide on the number of intermediaries to use at each channel level. Three strategies are available: exclusive distribution, selective distribution, and intensive distribution. Exclusive distribution means severely limiting the number of intermediaries. It is used when the producer wants to maintain control over the service level and outputs offered by the resellers. Often it involves exclusive dealing arrangements. By granting exclusive distribution, the producer hopes to obtain more dedicated and knowledgeable selling. It requires greater partnership between seller and reseller and is used in the distribution of new automobiles, some major appliances, and some women's apparel brands. When the legendary Italian designer label Gucci found its image severely tarnished by overexposure from licensing and discount stores, Gucci decided to end contracts with third-party suppliers, control its distribution, and open its own stores to bring back some of the luster. Exclusive deals between suppliers and retailers are becoming a mainstay for specialists looking for an edge in a business world that is increasingly driven by price. 44 Module Theme Sales and Channel Management supportive materials Selective distribution involves the use of more than a few but less than all of the intermediaries who are willing to carry a particular product. It is used by established companies and by new companies seeking distributors. The company does not have to worry about too many outlets; it can gain adequate market coverage with more control and less cost than intensive distribution. Disney is a good example of selective distribution. Intensive distribution consists of the manufacturer placing the goods or services in as many outlets as possible. This strategy is generally used for items such as tobacco products, soap, snack foods, and gum, products for which the consumer requires a great deal of location convenience. Evaluating the Major Alternatives Each channel alternative needs to be evaluated against economic, control, and adaptive criteria. ECONOMIC CRITERIA Each channel alternative will produce a different level of sales and costs. Clearly, sellers would try to replace high-cost channels with low-cost channels when the value added per sale was sufficient. The lower-cost channels tend to be low-touch channels. This is not important in ordering commodity items, but buyers who are shopping for more complex products may prefer high-touch channels such as salespeople. When sellers discover a convenient lower-cost channel, they try to get their customers to use it. CONTROL AND ADAPTIVE CRITERIA Using a sales agency poses a control problem. A sales agency is an independent firm seeking to maximize its profits. Agents may concentrate on the customers who buy the most, not necessarily those who buy the manufacturer's goods. Furthermore, agents might not master the technical details of the company's product or handle its promotion materials effectively. To develop a channel, members must make some degree of commitment to each other for a specified period of time. Yet these commitments invariably lead to a decrease in the producer's ability to respond to a changing marketplace. In rapidly changing, volatile, or uncertain product markets, the producer needs channel structures and policies that provide high adaptability. 4.4 Channel-Management Decisions After a company has chosen a channel alternative, individual intermediaries must be selected, trained, motivated, and evaluated. Channel arrangements must be modified over time. 45 Module Theme Sales and Channel Management supportive materials Selecting Channel Members Companies need to select their channel members carefully. To customers, the channels are the company. To facilitate channel member selection, producers should determine what characteristics distinguish the better intermediaries. They should evaluate the number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness, and service reputation. If the intermediaries are sales agents, producers should evaluate the number and character of other lines carried and the size and quality of the sales force Training Channel Members Companies need to plan and implement careful training programs for their intermediaries Motivating Channel Members A company needs to view its intermediaries in the same way it views its end users. It needs to determine intermediaries' needs and construct a channel positioning such that its channel offering is tailored to provide superior value to these intermediaries. Being able to stimulate channel members to top performance starts with understanding their needs and wants. The company should provide training programs, market research programs, and other capability- building programs to improve intermediaries' performance. The company must constantly communicate its view that the intermediaries are partners in a joint effort to satisfy end users of the product. Producers vary greatly in skill in managing distributors. Channel power can be defined as the ability to alter channel members' behavior so that they take actions they would not have taken otherwise. Manufacturers can draw on the following types of power to elicit cooperation:  Coercive power. A manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate. This power can be effective, but its exercise produces resentment and can generate conflict and lead the intermediaries to organize countervailing power.  Reward power. The manufacturer offers intermediaries an extra benefit for performing specific acts or functions. Reward power typically produces better results than coercive power, but can be 46 Module Theme Sales and Channel Management supportive materials overrated. The intermediaries may come to expect a reward every time the manufacturer wants a certain behavior to occur.  Legitimate power. The manufacturer requests a behavior that is warranted under the contract. As long as the intermediaries view the manufacturer as a legitimate leader, legitimate power works.  Expert power. The manufacturer has special knowledge that the intermediaries value. Once the expertise is passed on to the intermediaries, however, this power weakens. The manufacturer must continue to develop new expertise so that the intermediaries will want to continue cooperating.  Referent power. The manufacturer is so highly respected that intermediaries are proud to be associated with it. Companies such as IBM, Caterpillar, and Hewlett-Packard have high referent power. Coercive and reward power are objectively observable; legitimate, expert, and referent power are more subjective and dependent on the ability and willingness of parties to recognize them. Most producers see gaining intermediaries' cooperation as a huge challenge. They often use positive motivators, such as higher margins, special deals, premiums, cooperative advertising allowances, display allowances, and sales contests. At times they will apply negative sanctions, Evaluating Channel Members Producers must periodically evaluate intermediaries' performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs. A producer will occasionally discover that it is paying too much to particular intermediaries for what they are actually doing. One manufacturer that was compensating a distributor for holding inventories found that the inventories were actually held in a public warehouse at its expense. Producers should set up functional discounts in which they pay specified amounts for the trade channel's performance of each agreed-upon service. Underperformers need to be counseled, retrained, motivated, or terminated. Modifying Channel Arrangements A producer must periodically review and modify its channel arrangements. Modification becomes necessary when the distribution channel is not working as planned, consumer buying 47 Module Theme Sales and Channel Management supportive materials patterns change, the market expands, new competition arises, innovative distribution channels emerge, and the product moves into later stages in the product life cycle. Consider Apple. No marketing channel will remain effective over the whole product life cycle. 5.1. Vertical marketing system For the channel as a whole to work well, each channel member‘s role must be specified and channel conflict must be managed. A conventional distribution channel consists of one or more independent producers, wholesalers and retailers, each is a separate business seeking to maximize its own profits even at the expense of the system as a whole. No channel member has much control over the other members and no formal means exists for assigning roles and resolving channel conflict. In contrast the biggest channel development is a vertical marketing system (VMS) consists of producers, wholesalers and retailers acting as a unified system. One channel member owns the others; has contracts with them; or exercises so much power that they must all cooperate. There are three major types of VMS: corporate VMS, contractual VMS and administered VMS. Corporate VMS: This integrates successive stages of production and distribution under single ownership. Coordination and conflict management are attained through regular organizational channels. Contractual VMS: Contractual VMS consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies that each could achieve alone. Coordination and conflict management are attained through contractual agreements among channel members. Administered VMS: In administered VMS leadership is assumed not through common ownership or contractual ties but through size and power of one or a few dominant channel members. 5.2. Horizontal marketing system HMS Another channel development is the horizontal marketing system, in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Each company lacks the capital, know-how, production, or marketin resources to venture alone, or it is afraid of the risk. The companies might work with each other on a temporary or permanent basis or create a joint venture company. 48 Module Theme Sales and Channel Management supportive materials 5.3. Multi-channel distribution system It is alternatively called hybrid marketing channel. It occurs when a single firm set up two or more marketing channels to reach one or more customer segments. Consumers Producer Retailers Consumers Wholesalers Retailers Consumers Agents Wholesalers Retailers Consumers Multi-channel distribution system offers many advantages to the company; with each channel the company expands its sales and market coverage. However, such channel systems are harder to control and they generate conflict as many channels compete for customers. 5.4. The nature and importance of marketing channels Some producers sell their marketing offers directly to final consumers. On the other hand, most companies use marketing intermediaries to bring their products into the target market. Marketing intermediaries are independent business organizations involved in the process of making the product available and accessible for users. In relation to this, channel of distribution refers to the route through which products move and change hands between and among the participants in the value delivery network. Marketing Channels: Growing Importance 1. Greater Difficulty of gaining a sustainable competitive advantage 2. Growing power of Distributors 3. Need to reduce the distribution cost 4. New stress on growth 5. Increasing role of technology 5.2. Flows in marketing channels When Marketing Channel has been developed, a series of flows emerges. The most important flows are:  Product flow  Information flow  Negotiation flow  Promotion flow  Ownership flow 49 Module Theme Sales and Channel Management supportive materials 5.3. Marketing Channels: Types  Direct Selling  Direct channel: Marketing channel that moves goods directly from a producer to ultimate user.  Direct selling: Strategy designed to establish direct sales contract between producer and final user.  Dual Distribution: Network that moves products to a firm‘s target market through more than one marketing channel.  Reverse Channels: Channels designed to return goods to their producers. 5.2.1. Direct Marketing Channel No Intermediaries Between Them Manufactures and customers Occurs when the producer sells and delivering goods or services directly to the customer without intermediaries. Direct-marketing channel consists of a manufacturer selling directly to the final customer. Seeks a direct, immediate, and measurable consumer response. Can take many different forms. Forms of Direct Marketing Channel A. In telemarketing - telephone is used to sell directly to consumers.Telemarketing is used in both consumer and B2B markets.There are two general types of telemarketing include:Outbound telephone marketing to sell directly to consumers. B. Direct mail marketing - involves sending an offer, announcement, reminder, or other item to a person at a particular address. Addresses obtained from customer lists. List sources Companies develop their own databases. Buy a list from a list broker. Direct mail is well suited to direct, one-to-one communication.Even though the cost per thousand can be high, the people who reached through direct-mail marketing Channel are better prospects than those who reached with other media. New forms of direct mail include:  Fax mail.  Voice mail.  E-mail. 50 Module Theme Sales and Channel Management supportive materials C. Online marketing is conducted through interactive online computer systems, which link consumers with sellers electronically.  There are two types of online channels:  1). Commercial online services offer information and marketing services to subscribers who pay a monthly fee. The best known is America Online.  2). The commercial online services are now being overtaken by the Internet as the primary online marketing channel. The Internet is a vast and growing global web of computer networks. The World Wide Web is a popular meeting place for consumer and business commerce. D. A catalog is a printed, bound piece of at least eight pages, selling multiple products, and offering a direct ordering mechanism. E. Face-to-Face Marketing The original and oldest form of direct marketing is the sales. F. Kiosk- Ordering machines generally found in stores, airports, and other locations.  Some companies place information and ordering machines (called kiosks) in stores, airports, and other locations (in contrast to machines which dispense products--vending machines).  Marketers can also use kiosks (such as at trade shows). Kiosks are also going online as companies merge real-world and virtual worlds of commerce. The Gap interactive kiosk is a great example of this technology. G. Direct-response television marketing channel takes one of two major forms. Advantages of Direct Marketing Channel  Powerful tool for building customer long-term customer relationships  Can reach prospects at just the right moment.  Provides access to buyers unreachable through other channels  Minimizes ―wasted reach‖  Effectiveness is easily measured 5.4. Number of channel levels Channel level is a layer of participants in the value delivery that perform some work in bringing the product and its ownership closer to the final buyer. Because the producer and the final consumers perform some functions, they are part of every channel. The number of intermediary levels indicates the length of the channel. 51 Module Theme Sales and Channel Management supportive materials Zero-level channel (also called a direct-marketing channel), One-level channel contains one selling intermediary, such as a retailer, Two-level channel contains two intermediaries; Three-level channel contains three intermediaries. Producer Consumers (0 level channel) Producer Retailers Consumers (1level channels) Producer Agents Consumers (1 level channels) Producer Wholesalers Retailer Consumers (2 level channels) Producer Agents Retailers Consumers (2 level channels) Producer Agents Wholesalers Consumers (2 level channels) Producer Agents wholesalers Retailers Consumers (3 level channel) Except one level channel, all others contain marketing intermediaries which assist the movement of products from producers to consumers. All of the institutions in the channel are connected by several types of flows. These include physical flows of products, flow of ownership, flow of payment and the flow of information from customers to the company and vice versa. 5.5. Channel Management Decisions: 1) Selecting Channel Members 3) Motivating Channel Members 2) Training Channel Members 4) Evaluating Channel Members 5) Modifying Channel Arrangements 5.6. How channel members add value Why do producers give some of the selling job to channel partners? After all, doing so means giving up some control over how and to whom the products are sold. The greater use of marketing intermediaries results from efficiency in making products available to the target markets. Through their contacts, experience, specialization, intermediaries usually offer the firm more than it can achieve on its own. 5.7. Channel behavior and organizations A marketing channel consists of firms that have partnered for their common good. Each channel member depends on others. Each channel member plays a specialized role in the channel. Distribution through Intermediaries: Why do intermediaries so often stand between producers and the users? 1. Specialization and Division of Labor 2. Contractual Efficiency 52 Module Theme Sales and Channel Management supportive materials 5.8. Channel Structures: Channel Structure: The group of channel members to which a set of distribution tasks has been allocated. Ancillary Structure: The group of Institutions (Facilitating Agencies) that assists channel member in performing distribution task. (Eg: Transportation, Storage, Insurance, Financing, After sales etc ) 5.9. Analyzing marketing channel structure Channels as a network of systems Channel consists of interdependent institutions and agencies. In other words, their members are interdependent relative to task performance. A distribution channel comprises two major sectors: 5.10. Service output as determinants of channel structure Other things being equal (price), end user will prefer to deal with a marketing channel that provides a higher level of service outputs. Bucklin has specified f