Session- 11

CAUSES OF CHANNEL CONFLICT• Role incongruities– Set of prescription defining what the position member

should be• Resource scarcities– Frequently the manufacturer may decide to keep some

higher volume retailers• Perceptual difference– Manufacturer perceives POP display material as

valuable promotional tool, retailer may think it’s junk• Expectational difference– Channel member makes a forecast on a decision taken

by manufacturer takes action based on predicted outcome. Eg. Extended warranties

CAUSES OF CHANNEL CONFLICT• Decision domain disagreements– Eg. McDonald’s provides detailed manual specifying

the allocation of decision making responsibilities

• Goal incompabilities– Member of marketing channel have their own goals,

• Communication difficulties– Manufacturers making changes in policies do not

inform channel members

CHANNEL EFFICIENCY“Degree to which the total investments in the various inputs necessary to achieve a given objective can be optimized in terms of output”

Eg. Suppose a manufacturer sets a distribution objective of getting 80% of its wholesalers to carry a new product line and in the process encounters strong resistance in persuading a wholesaler in carrying the stock as they are having too much inventory. The resulting conflict could cause the manufacturer to direct its sales force to spend an extraordinary amount of time and effort to convince the reluctant wholesaler to carry the new line and the extra input (time & effort of sales people) can be measured in terms of rupees.

NEGATIVE EFFECT- REDUCING EFFICIEMCYChannel

efficiency

0RB-11

Conflict level

Wholesaler (W) carries similar product from two manufacturers (M1 & M2)•M1 purchases ↓•M1 has to regain previous volumes from W•Level of input M1 uses will determine channel efficiency•M1 learns M2 purchases are↑•M1 gets angry and cuts of other products which W finds profitable•W reduces M1 purchases further & concentrates on M2 more

NO EFFECT- EFFICIENCY REMAINS CONSTANT

Channel efficiency

0RB-11

Conflict level

Characterized by high level of dependency and commitment amongst channel members

POSITIVE EFFECT- EFFICIENCY INCREASEDChannel

efficiency

0RB-11

Conflict level

Wholesaler (W) very profitable relationship with manufacturers (M)•M bypasses W for certain products and sells directly to retailer•First reaction is anger•W realises previous level of sales effort not high as it should be and M’s decision was justified•W attempts to to put more effort

CONFLICT AND CHANNEL EFFICIENCY – GENERAL CURVE

Channel efficiency

C2C10RB-11

Conflict level

MANAGING CHANNEL CONFLICT• Conflict is an inherent behavioral dimension

in the marketing channel• Given the numerous causes from which

conflict may stem, it is a pervasive phenomenon in marketing channel

• Conflict can effect channel efficiency• Various level of conflict may have both

positive and negative effects on channel efficiency, or possibly no effect

RESOLVING CHANNEL CONFLICT• Establish channel committee for periodic evaluation

of emerging problems• Joint goal setting by the committee which takes into

account the goal and special capacities of the various channel members, the needs of consumers and environmental constraints

• Create position of distribution executive for each major firm in the channel who will be responsible for exploring the firm’s distribution related problems

CONFLICT RESOLUTION

Collaboration or Problem solving•Win-win approach

High Cooperativeness

Low Cooperativeness

Low Assertiveness High Assertiveness

ACCOMODATION•More focused on other’s goals than one’s own- keeping peace• Encourages reciprocation

ASSERTIVENESS•Concern for one’s own outcomes•Aggravates conflict

AVOIDANCE•Passive channel member or in a weak position•Wanting to save time & unpleasantness

COOPERATIVENESS•Compromising repeatedly•Concern for the other party’s outcome•Suited for minor conflicts

Compromise

Competition or Aggression

Coughlan -275

A FLOW CHART OF CHANNEL DESIGN DECISION(1)

Recognize need for channel design decision

(2)Set and coordinate distribution

objectives (in sync with objectives & strategies of the firm)

RB-12

(3)Specify the distribution tasks(Warranty/ service/ credit)

(4)Develop alternative channel

structure (no. of levels/ intensive/ selective/ exclusive)

(5)Evaluate the relevant variables (market/ product/ co./ middlemen/ environment)

(6)Choose the best channel structure

(calculate exact payoff associated with each alternative)

(7)Select the channel member

•Developing a new product / product line•Existing product at anew target market•Major change in the marketing mix (Wheel)•Starting new firm from scratch•Opening up new geographic market•Environmental change•Occurrence of conflict•Reviewing & evaluating

ZERO BASED CHANNELA. Meets the target market segment’s demand for

service outputsB. At minimum cost of performing the necessary

channel flows that produce those service outputs– Spending too little will result in insufficiently low provision

of service outputs. Competition may take advantage of the hole in the service output provision by offering a superior combination of product plus service outputs

– Spending too much will produce a higher level service outputs than the target market value and will unnecessarily increase the cost thus reducing profitability

– Achieving the right balance is a continuously demanding task.

Coughlan -98

LINKAGE BETWEEN CHANNEL DESIGN & CHANNEL OBJECTIVE

CHANNEL OBJECTIVE• Concentrate on urban

market to fall in line with segmentation/ positioning strategy

• Proximity to customers• Maintain an edge over

competition by competing on quality, service image & value

CHANNEL DESIGN• Establish outlets close to

target buyers • Go for large white goods

dealers and large format stores

• Go for shop-in –shop in super stores

• Have a 3 – tier system to cater to smaller white goods dealers other retailers

REALATIONSHIP BETWEEN CHANNEL CLOSENESS AND DISTRIBUTION INTENSITY

Degree of closeness

Exclusive

Distribution intensity

Intensive Selective

Very loose

Loose

Medium

Close

Very close

RB-181

CUSTOMER MARKETING CHANNEL

Manufacturer

Manufacturer

Manufacturer

Manufacturer

CONSUMER

Industrial Customer

Industrial Customer

CONSUMER

WHOLESALER

RETAILER

JOBBER

CONSUMERRETAILER

Manufacturer WHOLESALER CONSUMERRETAILER

Industrial Distributor

ManufacturerManufacturer’s representative of sales branch

ManufacturerManufacturer’s representative of sales branch

Industrial Distributor

Industrial Customer

BUSINESS MARKETING CHANNEL4- LEVEL

1- LEVELManufacturer

Industrial Customer

2- LEVEL

3- LEVEL

2- LEVEL

1- LEVEL

THE SALES PROCESS

Production•Fans•Appliances•Sewing M/c

Production•Fans•Appliances•Sewing M/c

Ware-house Sales Office Customer(Wholesaler)

Retailer

Direct Sales

Consumer

PaymentCollection

Sales/ DefectiveReturns

• Price• Tax• Schemes• Payment Terms• Credit check• Minimum Order• Billing

• Account Statement• Credit Notes• Account Block

• Delivery/Despatch• Freight

CustomerOrder

MIS Report Generation

MIS Report Generation

KEY CRITERIA TO CONSIDER WHEN SELECTING CHANNEL MEMBERS

Prospective channel member

Sales perform-

ance

Market cove-age

Reputa-tion

Mgmt. succession

Product lines

Sales strength

Credit & financialsSize

Attitude

Mgmt. ability

RB-13

DISTRIBUTION COST APPROACH

RB- 224

1 125 Sales Man @ Rs.10,000 Rs.1,250,000

2. 1 Field Manager per 10 sales men @ Rs.12,000 156,000

3. 5 Branch managers @ Rs. 15,000 75,000

4. Warehouse & office help, inventory, interest on inventory and buildings

2,000,000

5. Total selling cost for direct selling (1- level) Rs.3,481,000

6. 30% Gross Margin on sales would require in sales to cover this cost

Rs.3,481,000/ 0.3= Rs.11,600,000

Suppose retailers (2- level) were used with following different margins allowed on the level of sales

7. If 15%, then 11,600,000 x 0.15 Rs.1,740,000

8. If 10%, then 11,600,000 x 0.10 Rs.1,160,000

9. If 5%, then 11,600,000 x 0.05 Rs.580,000

DIRECT VERSUS RETAILERS COST COMPARISON

RB- 224

15% Margin Assumption

10% Margin Assumption

5% Margin Assumption

Direct(1- level)

Rs.3,481,000 Rs.3,481,000 Rs.3,481,000

Retailer(2- level)

- 1,740,000 - 1,160,000 - 580,000

Savings Rs.1,741,000 Rs.2,321,000 Rs.2,901,000

Session- 12

PHYSICAL DISTRIBUTION MANAGEMENT

SUPPLIER CUSTOMERInboundLogistics Production Outbound

Logistics

MATERIALS MANAGEMENT

PHYSICAL DISTRIBUTION

LOGISTICS MANAGEMENT

LOGISTICS MANAGEMENT

MK 287

Completing the marketing transaction once the buyer and the seller come to terms and enter into a contract of sales- 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 point of origin to point of consumption for the purpose of confirming to customer’s requirement

MAJOR ELEMENTS OF DISTRIBUTION LOGISTICS

1. RECEIVING2. STORING3. ORDER TAKING4. DISPATCH

The warehouse function performs a role beyond providing simple subsidiary service to another function. The warehouse adds value in a no. of ways:•Breaking bulk•Creating bulk•Smoothing/ Assembling•Combining goods

WAREHOUSING PRIVATE VS PUBLICVARIABLES PRIVATE PUBLIC

Owned Leased

Fixed investment

Very high Moderate No fixed investments

Unit cost High if volume is low

High if volume is low

Low

Control High High Low management control

Adequacy to production line

Highly adequate Moderately adequate

May not be convenient

Flexibility Low Low High: Termination of usage can be easily arranged

MK 290

CONSIDERATIONS FOR WAREHOUSING & TRANSPORTATION

• How many warehouses to have?• Where must they be located?• What should be the type of ownership?

1. General warehouses- handles variety of goods2. Specific warehouse- limited line of goods3. Bonded warehouses- regulated by govt. laws, insured

against loss4. Bulk storage warehouses- liquid goods5. Refrigerated warehouse- for keeping in cool or frozen state6. Field warehouse- owner’s own plant

Transportation• Railways• Road• Air• Water

With

higher leve

l of m

echaniza

tion

and computeriz

ation, freight

conso

lidations a

nd sophisti

cated

contro

l, the tr

end is to

wards f

ewer

warehouses.

It perm

its better

quality m

anagement and exc

ellent

servi

ce

THE BULLWHIP EFFECT

An unmanaged supply chain is not inherently stable. Demand variability moves as one moves up the supply chain away from the retail customer, and small changes in consumer demand can result in large variations of orders placed up stream. Eventually, the network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. This phenomenon has been observed across most industries, resulting in increased costs and poorer service.

THE BULLWHIP EFFECT

Consumption Customer Retailers Wholesalers Manufacturers Suppliers

Coughlan -99

Session- 13

PHYSICAL DISTRIBUTION MANAGEMENT BASED ON SYSTEMS CONCEPT & TOTAL COST APPROACH

Transportation

Materials Handling

Order Processing

Inventory control

Warehousing

RB 397Packaging

Management views PD as a

system of interrelated components

Management attempts to

minimize the cost of using the

components taken as a

whole

BASIC COMPONENTS OF PHYSICAL DISTRIBUTION SYSTEM

Transportation:Most fundamental. Choosing optimum mode of transportation to meet customer service demands•Own carriers vs common carriers•Different rates available

Materials handling:Placement and movement of products in storage areas.•How to minimize the distances products are moved within warehouse during course of receivingOrder processing:Key component of physical distribution•Relationship with order cycle time

Warehousing:Holding products until they are ready to be sold•Location•No. of warehousing units•Size of the units•Layout and internal systems•Ownership

Packaging:Relevant as a component of PD system•Type of transport can affect packaging and packaging costs

ORDER PROCESSING

• Order processing function is very important as it involves entering, processing and tracking customer orders.

Organizations must have a standard procedure for handling orders.

Distribution logistics manager must check customer's credit and stock availability, back order management, automatic pricing and discount calculation.

Proper order processing can affect customer satisfaction in a positive way.

INVENTORY HANDLING

1. How much to order?2. When to order?

EOQ = √ 2DS /IC

WhereQ = Order quantity in unitsD = Annual demand in unitsS = Order processing costsI = Annual inventory costs as percentageC = Cost per stock

MK 295

ECONOMIC ORDER QUANTITY MODEL

Cost per unit of inventory

Order Size

Inventory Carrying CostTotal Cost

Ordering Cost

RB 401

TYPICAL FMCG DISTRIBUTION PARADIGM

FACTORY

C & F AGENT

(2% - 3%)WHOLESALE

(3%)

RETAILERS

•SMALL

•UPCOUNTRY

STOCKIST/ DISTRIBUTOR

(4% - 6%)

RETAILERS(8% - 12%)

MARICO’S DISTRIBUTION NETWORK

URBAN

TOWNS/ CITIES

3200 (135 Sales territories)

32 DEPOTS

850

DISTRIBUTORS

7,50,000RETAILERS

RURAL

TOWNS/ CITIES

11,000 (35 Sales territories)

115

SUPER DISTRIBUTORS

9,50,000RETAILERS

TP-1

DISTRIBUTION NETWORK - HUL

Home & Personal Care (HPC)

FOODS

URBAN

Urban 1 U 2

Dets RS PP RS U 2 RS Foods Beverages

Modern Trade

KioskBig BazaarPan shops, Marginal outlets

Wholesale Mass Retail

Dets = DetergentsPP= Personal ProductsRS= Redistribution Stockist

U2= Lakme, Axe, Kotex, Huggies, Dove

Kiosk= Marginal outlet coverage(10 SKU & < Rs.5000/- pm

Selling Price of HUL= Rs.100(Through C&FA)

8% - 10% Margin

Selling Priceto trade= Rs.105

DISTRIBUTION NETWORK - HUL

RD LAB

RURAL(U1+Foods)

ShaktiSS

CIDC

RD = Rural Distributor, services large scattered areas where cost of transportation is high & is given an additional 2% marginCIDC = Complete Indirect Coverage, services large rural markets on an order taking basisLAB = Leadership Across Business (Combined TO of less than 1 cr. P.a.) in very small townsSS = Star Seller, usually a wholesaler or a small distributor in a nearby area.

Selling price of HUL = Rs 98Through C&FA

Selling price to trade= Rs 98*1.07

Selling price of HLL = Rs 98Through C&FA

Selling price to trade= Rs 100*1.052% incentive given

borne by HLL

EXERCISE

• XYZ is a company with small beginnings. It sells products in markets very far from the manufacturing plant. Very small t/o. It increased sales through product dev, proper distribution and greater market coverage. It used to send own salesmen to distributors and dealers to collect orders.

• Sometimes there was a shortage of goods, order cycle was as much as 20 days. Billing and payment was through banks. Dealers were keen to place orders as there was demand. And the number of direct sales contacts had increased tremendously. This put a heavy load on staff at HO.

• What were the problems being faced? What should be done? Why? (individual vs exclusive dealers, too many contact points, loss of control using exclusive distributors)

Session- 12

ANATOMY OF OF CHANNEL PRICING STRUCTURE FOR SET OF GUITAR STRINGS WITH A LIST PRICE OF Rs.1000/-

RB-342

MANF.

CONSUMER

WHOLESALER

RETAILER

Cost to produce string = Rs.250/-

Wholesale trade discount = 66%Cost of strings

to wholesaler = Rs.340/-

Retail trade discount = 50%Cost of string

to retailer = Rs.500/-

Consumer discount = 25%Cost of string

to consumer= Rs.750/-

Rupee gross margin received by manufacturer on sale of

strings to wholesaler

Rupee gross margin received by wholesaler on sale of strings to retailer

Rupee gross margin received by retailer on sale of strings

to consumer

Rs.90/-

Rs.160/-

Rs.250/-

(All discounts to wholesaler, retailer, consumer are calculated on list price)

SCHEDULE OF CHANNEL PRICING STRUCTURE FOR A SET OF GUITAR STRINGS WITH A LIST

PRICE OF RS. 1000/-

Pricing data Trade Discount

Cost Rupees mark

up

Gross Margin

on Selling Price

Gross Margin on Cost

Manufacturer Rs. 250 Rs. 90 26.5% 36%Wholesaler 66% Rs.340 Rs.160 32% 47.1%Retailer 50% Rs.500 Rs.250 33.3% 50%Consumer* 25% Rs.750

Channel participant

•Retail discount offered by retailer based on competitive conditions:(Strictly speaking this is not officially a trade discount) RB-343

MARGINS AND OTHER OPERATING DATA OF SELECTED RETAILERS

Type of Retailers Gross Margin Operating Expense

Net Profit before Taxes

Automobiles 14.1% 13.3% 1.1%

Dairy products 34.9% 33.0% 2.2%

Department stores 36.4% 34.4% 1.4%

Drugs 31.0% 27.6% 2.7%

Groceries & meats 22.5% 20.9% 1.5%

Furniture 40.1% 37.2% 2.5%

Household appliances 31.3% 29.1% 1.5%

Restaurants 56.7% 52.7% 2.7%

Sporting goods 34.8% 30.6% 3.2%

RB-347

DISTRIBUTION MARGINS IN INDIATypes of Products

Stockist’s / Distributor’s

Margin

Retailer Margin

Cash Discounts

Controlled drugs

8% -10% 16% -20% •Manufacturer 5% - 10% to stockists (free packs)•Stockists – 2% to retailers

Consumer durables

5% 15% - 20% Manufacturer 2% - to distributors

FMCG 4% - 6% 8% - 12%

PRICING STRUCTURE OF BAJAJ APPLIANCES

Authorized service Dealers receive additional 2% for providing after sales service

PRICE (RS.)LIST PRICE 100RETAILER DISCOUNT (10%) 90RETAILER INCENTIVE (5%) 85.5DISTRIBUTOR DISCOUNT (5%) 81.2CASH DISCOUNT (3%) 78.7ANNUAL INCENTIVE (2%) 77.1

DISTRIBUTOR PRICING STRUCTURE OF BAJAJ WATER HEATER WITH OFF-SEASON DISCOUNT

Authorized Service Dealers receive additional 2% for providing after sales service

15 LITRES 25 LITRESBASIC (RS.) 3330 4692

LESS:- OFF-SEASON DISCOUNT 250 500

NET AFTER DISCOUNT 3080 4192

ADD: - VAT (12.5%) 385 524

TOTAL 3465 4716

LESS: CD (3%) 104 141

COST TO DISTRIBUTOR 3361 4575

MRP 4499 5100

21.A customer buying a branded product from a low-priced distributor likely is:

a. Getting a counterfeit productb. Buying in gray marketc. From an unauthorized dealer with high-

volume operating economicsd. Purchasing from a free ridere. There is no way to tell from the

information given

Answer to question 21:‘e’

GRAY MARKET AND FREE RIDING• GRAY MARKET– Sale usually at very low prices, of brand- name products by

unauthorized distributors or dealers

• FREE RIDING– Behavior of distributors and dealers who offer extremely

low prices but little if any service to customers– Gray market and free riding phenomena are related when

products sold by free riders are obtained from gray market• NET EFFECT– Unhappy channel member retaliate by “foot-balling” the

product or “if you can’t beat ‘em join ‘em’ approach and become gray market or free riders themselves

Session- 13

COSTS & SCOPE OF PRODUCT RETURNS

• The value of returned goods is closed to $60- 100 billion annually

• Web returns alone had a value between $1.8 and $2.5 billion in 2002

• Estimates are that the costs of processing those web returns is twice as high as the merchandise value itself!!

• US companies are estimated to spend from $35 billion to more than $40 billion per year on reverse logistics

• The average company takes 30-70 days to move a returned product back into the market

• The estimated no. of packages returned in 2004 is 500 million

Coughlan -83

REVERSE LOGISTICS

MANUFACTURER

CONSUMER CHARITY

MANUFACTURER-RUN RETURN/

SORTING FACTORY REPAIR/

REFURBISHMENT FACTORY

SECONDARY MARKET,

BROKER, JOBBERRetu

rn fo

r re

fund

RETAILER

THIRD-PARTY RETURNS/ REVERSE

LOGISTICS FIRM

Retu

rn fo

r cr

edit

High quality product

Reparable productReturn for sale

Reparable product

Inspect, grade

Inspect, grade

Inspect, grade

Poor quality product ships as spare parts to manufacturers

Solid line denote product to be salvaged for subsequent revenue. Dotted lines denote non-revenue producing product flows Coughlan -85

TOOLS FOR SALES MANAGEMENT

POSE THE FOLLOWING QUESTIONS TO THE CHANNEL MEMBER

–Do channel members hold inventories?–Do they make purchases in large or small

quantities?–Do they provide repair service?–Do they extend credit to customers?–Do they deliver?–Do they help train customers’ sales force?

COMPONENTS OF LOGISTICS SYSTEM• Transportation

– Deciding on the modes of transport to be used• Materials handling.

– The range of activities and equipment involved in the placement and movement of products in storage areas

• Order processing– The procedures and “paper work” needed to fill orders

• Inventory control– The process of managing inventory levels so as to have the products

desired by customers while minimizing inventory levels• Warehousing

– The holding of products until they are ready to be sold• Packaging

– How products are protected for shipment and storage as it relates to other components of a logistics system

RB (Instructor)- 13