Marketing Mix
Sales and Distribution Management
Example
Consumer wants to buy a tube of toothpaste
Players Involved
The company and its distribution network
Direct company to consumer
Company to a C&FA / distribution center to
distributors to retailers
Distributor to wholesaler to retailer
All these intermediaries help the process of
exchange of the product or service.
Distribution Management
Management of all activities which facilitate
movement and co-ordination of supply and demand
in the creation of time and place utility in goods
The art and science of determining requirements,
acquiring them, distributing them and finally
maintaining them in an operationally ready condition
for their entire life.
Distribution Channels
Are intermediaries or middlemen
Exist because producers cannot reach all their
consumers
Multiply reach and provide efficiency to the
marketing process
Facilitate smooth flow and create time, place and
possession utilities
Have the core competence and reach
Provide contact, experience, specialization and
scales of operation
Types of Channels
Sales channel motivates buyers, shares information
between company and its consumers, negotiates fair
bargains for consumers and finances the transactions
Delivery channel meant only for physical part of the
distribution
Service channel performs after sales service
C&FAs / C&SAs
C&FA: carrying and forwarding agent
C&SA: carrying and selling agent
Both are on contract with a company
Both are transporters who work between the company and its
distributors
Collect products from the company, store in a central location,
break bulk and dispatch to distributors against indents
Goods belong to the company
C&SA also sells the goods on behalf of the company but remits
proceeds after sale
Wholesalers
Operate out of the main markets
Deal with a number of company products of their
choice
Are not on contract with any company
Sell to other wholesalers, retailers and institutions
Negotiate about 15 days credit from company
distributors also provide credit to their customers
Operate on high volumes and low margins
Retailers
The final contact with consumers
Operate out of their shops and sell a large assortment
and variety of goods
Located closest to consumers
Buy from company, distributors or wholesalers
Highest margins in the network
Provide personalized services to their customers
Industrial Products
Producer
Producer
Agent/middleman
Industrial Distributor
Industrial Distributor
Industrial Customer
Industrial Customer
Consumer Products
Producer
Producer
Producer
Distributor
Distributor
Wholesaler
Retailer
Retailer
Retailer
Customer /
consumer
Customer/
Consumer
Customer/
Consumer
Patterns of Distribution
Determines the intensity of the distribution
Intensity decides the service level provided
Types of distribution intensity:
Intensive
Selective
Exclusive
Intensive Distribution
Distribution through every reasonable outlet
available FMCG
Strategy is to make sure that the product is
available in as many outlets as possible
Preferred for consumer, pharmaceutical
products and automobile spares
Selective Distribution
Multiple, but not all outlets in the market
A few select outlets will be permitted to keep the
products
Outlets selected in line with the image the company
wants to project
Preferred for high value products
Tanishq jewelry
Keeps distribution costs lower
Exclusive Distribution
Highly selective choice of outlets may be even one
outlet in an entire market - car dealers
Could include outlets set up by companies Titan, Bata
Producer wants a close watch and control on the
distribution of his products.
Distribution Objectives
Influenced by the customer expectations
Defines the extent of time, place and possession
utility which the customer can expect out of the
channel network
Set of Activities
Manner in which the company and its marketing channels
go about achieving the customer service levels
Some of these steps could be:
Periodic Sales forecasts
Dispatch plans
Market coverage beat plans
Journey plans for service engineers
Collection of sales proceeds
Carrying out promotional activities
The company also decides as to who is to perform which
task
Distribution Organization
Primary aim: determine who will do what
Major Decision points:
Extent of company support and outsourcing to be
decided
Budget for the cost of the distribution effort
Select suitable channel partners C&FAs, and
distributors
Setting clear objectives for the partners
Agree on level of financial commitments by the channel
partners.
Marketing Channels
Sales and Distribution Management
Channel Functions
Information gathering
Consumer motivation
Bargaining with suppliers
Placing orders
Financing
Inventory management
Risk bearing
After sales support
Distribution Channels
Take care of the following discrepancies
Spatial
Temporal
Breaking bulk
Assortment and
Financial support
Spatial Discrepancy
The channel system helps reduce the distance between
the producer and the consumer of his products.
Consumers are scattered
Have to be reached cost effectively
Temporal Discrepancy
The channel system helps in speeding up in meeting
the requirement of the consumers
Time when the product is made and when it is consumed is
different
Limited number of production points but hundreds of
consumers
Breaking Bulk
The channel system reduces large quantities into
consumer acceptable lot sizes
Production has to be in large quantities to benefit from
economies of scale
Consumption is necessarily in small lot sizes
Financial Support
The channel system provides critical working
capital to its customers by extending credit.
Some channel members like stockists and
wholesalers finance the business of their
customers.
Medical diagnostic equipment to hospitals
Channel Flows
Forward flow company to its customers goods and
services
Backward flow customers to the company payment
for the goods. Returned goods.
Flows both ways - information
Company
Information
FORWARD
BACKWARD
BOTH WAYS
Customers
Channel Flows
Some channel member/s have to perform them
There is a cost associated with each flow
If a channel member is discontinued, the flow has to
be performed by another
All flows and transactions can be effective only with
timely, accurate and correct information
The channel flow is ideally to be handled by the most
competent channel member who can deliver best
service at the lowest cost.
Direct Distribution
Company to consumers or retailers without use of
intermediaries. Also includes reaching Institutional
buyers.
Selling on the Internet
If products are technically complex, this system is
preferred
Cost is a major consideration to adopt this mode
Indirect Distribution
Goods may move through a set of intermediaries
Most FMCG companies follow this route
Role of Intermediaries
Company 1
Company 2
Intermediary
Company 3
Degree of Involvement
Manufacturer
Physical
Title /
ownership
Information
Risk sharing
Promotions
C&FA or
Distribution Center
Distributor,
dealers
Wholesaler or
retailer
Physical
Title
Information
Payment
Order processing
Physical
Title / ownership
Information
Payment
Order placement
Negotiation
Risk sharing
Promotions
Physical
Title / ownership
Information
Payment
Order
placement
Negotiation
Risk sharing
Promotions
Channel Formats
Is decided by who drives the channel system:
Producer driven
Seller driven
Service driven
Others
Producer Driven
This is the effort of the manufacturer to reach the
product to his consumers. Examples:
Company owned retail outlets petrol, Bata,
Reliance mobiles
Licensed outlets KMF
Consignment selling agents
Franchisees
Brokers
Vending machines
Company contracted distributors
Seller Driven
Use of existing channels to reach the largest number of
end users
Service Driven
These are the people who facilitate the distribution
Other formats
Multi-level marketing systems Amway, Modicare,
Tupperware, Herbalife
Co-operative societies
Telephone kiosks
TV home shopping
Catalogue marketing
The internet
Exhibitions, fairs and trade shows
Database marketing
Channel Levels
Zero level if the product or service is provided to
the end user directly by the company.
Used mostly by companies delivering service like
health, education, banking (also known as service
channels)
One level consists of one intermediary
Two level consists of two intermediaries and is the
most common for FMCG products
Channel Levels
Producer
Producer
Producer
Wholesaler
Retailer
Retailer
Customer /
consumer
Customer/
Consumer
Customer/
Consumer
Zero level
One level
Two level
Horizontal
Multi-channel
Corporate VMS
Combines successive stages of production and
distribution under single ownership
Examples:
Bata, Bombay Dyeing, Raymond
Sears, Goodyear
Suppliers of food items could be also their own
supplying firms - like Nilgiris
Administered VMS
Co-ordinates distribution activities
Gains market power by dominating a channel
Usually true of dominant brands like GE,
Kodak, Pepsi, Gillette, Coke and HLL in certain
locations
Command high level of co-operation in shelf space,
displays, pricing policies and promotion strategies
Contractual VMS
Independent producers, wholesalers and retailers
operate on a contract
Could take the forms of:
Wholesaler sponsored voluntary chains
Retailer co-operatives
Manufacturer sponsored retail or wholesale
franchise
Franchise organizations
Service firm sponsored retail franchise
Horizontal MS
Two or more unrelated companies join together to
pool resources and exploit an emerging market
opportunity
In-store banking in hotels, big stores
Retail outlets in petrol bunks
Coffee Day outlets in airports
Multi-channel Distribution
Company uses different channels to reach /
same or different market segments
Most FMCG companies have separate
networks for retail market and institutions
Pharmacy companies may use different
channels to reach doctors, chemists and
hospitals
Multi-channel Distribution
Used in situations where:
Same product but different market segments
Unrelated products in same market detergents
and ice creams (HLL)
Size of buyers varies
Geographic concentration of potential consumers
varies
Reach is difficult
Wholesaling
Sales and Distribution Management
Characteristics of Wholesalers
Operate on large volumes but with chosen group of
products
Food, grocery, pharma or automobile spares etc
Characteristics of Wholesalers
Sell physical inputs or products tangible goods ( Ws
in some service industries)
Optimise results, maximise service (effectiveness)
and minimise operating costs (efficiency)
Buy goods for resale, keep inventory, take risks of
price changes, negotiate terms, procure orders,
deliver and extend credit.
Definition
Wholesaling is concerned with the activities of
those persons or establishments that sell to
retailers and other merchants and / or
industrial, institutional and commercial users
but do not sell in large amounts to consumers
US Bureau of Census
Delivering Value
Functions of Wholesalers
Varies in degree between free-lance, company
distributors and stockists / agents
Sales and promotion of chosen company products
Buying the assortment of goods
Breaking bulk to suit customer requirements
Storage and protection of goods till sold
Functions of Wholesalers
Grading and packing of commodities
Transportation of goods to customers
Financing the buying of customers
Bearing the risks associated with the business
Collecting and disseminating market information to both
suppliers and customers
Types of Wholesalers
Full service: stocking, selling, offering credit, delivery
and business assistance (company distributors,
wholesale merchants)
Limited service: range of service is limited (examples
include Metro C&C, mail order)
Merchant w/s: independent businesses
Brokers and agents: bring buyer and seller together
do not take possession of goods
Others: agri business, auction companies etc
Limitations of Wholesalers
Some of them do not give complete information to
suppliers for selfish reasons
Cannot be relied on to do equitable distribution
At times, do not want company and customers to
meet
Tend to hoard goods and influence pricing
Consumers have no say in pricing or quality in a w/s
dominated system
Favourable Factors
Companies have limitations in market / outlet
coverage. Wholesalers are required to fill the gaps
Hundreds of small companies who cannot afford to
set up distribution networks need to depend on
wholesalers
In food grains, fruits and vegetables hardly any
organised distribution network. Wholesalers help
move goods from farm gate to consumers
Favorable Factors
Big companies also need wholesalers to get big volumes
W/s extend credit to customers. Companies cannot
match this
Retailers have to visit w/s markets to buy food grains,
cereals and pulses buy a lot more.
Unfavorable Factors
Companies coverage focus on retailers and institutions
through their distributors
Using modern retail formats as wholesalers
More outlets like Metro C&C being encouraged
Enforcing strict price control so that w/s do not sell below
company prices.
Distributor
Is a wholesaler nominated by a company to
exclusively re-distribute the company products to its
customers in a designated territory. He does not deal
in competitors products. Does not sell from his
premises. Extends credit selectively.
A redistribution stockist for HLL
A distributor for Philips lighting division
A distributor for L&T engineering division
Dealer
Role similar to a distributor but
May not have a clearly defined territory and may sell both in
the market and from his shop
May deal with competitive products also
Extends credit selectively.
Dealers in industrial products may have better defined roles.
Examples:
Dealer for an edible oil company
A dealer for garment brands
Stockist
May be working for a company with a designated
territory but does not re-distribute the stocks. Sells from
his premises. Extends credit selectively.
A stockist for paper products
A stockist for automobile spares
Managing Distributors
The principles are similar across industry verticals. FMCG
is the most complex.
Has the capacity to maximize sales and market shares.
Has to ensure buying goods from the company and redistribution to the trade
Managing Distributors
Distributor responsibilities include:
Buying adequate quantities by Stock Keeping Unit (SKU) for
redistribution
Ensuring full market coverage of all customers in the territory
assigned to him
Help finance the operations pays for the goods upfront but
extends credit to his customers
Maintaining inventory of company products adequate at all
times to service the market
Assist company in its promotional efforts
Cost of Servicing
Cost benefit of using distributors to be assessed
Logistics cost of serving the market
The number of customers to be covered by category
wholesalers, retailers, institutions
Frequency of visits to markets and outlets
Sales revenue estimate from each visit
Markets to be covered with ready stocks or order booking
for later delivery
Likely collections during each visit gives an idea of the
credit requirements
Retailing
Sales and Distribution Management
What is Retailing?
Any business entity selling to consumers directly is
retailing in a shop, in person, by mail, on the
internet, telephone or a vending machine
Retail also has a life cycle newer forms of retail
come to replace the older ones the corner grocer
may change to a supermarket
Includes all activities involved in selling or renting
products or services to consumers for their home or
personal consumption
Retailing
Term retail derived from French word retaillier meaning
to break bulk
Characteristics:
Order sizes tend to be small but many
Caters to a wide variety of customers. Keeps a large assortment
of goods
Lot of buying in the outlet is impulse- inventory management is
critical
Selling personnel and displays are important elements of the
selling process
Strengths in availability and visibility
Targeted customer mix decides the marketing mix of the retailer
Retailing
Retail stores are independent of the producers not
attached to any of them
A survey shows that only 35% of purchases are preplanned.
The rest are impulse- greatly influenced by quality of
the merchandising efforts
Functions of Retailers
Marketing functions to provide consumers a wide variety
Helps create time, place and possession utilities
May add form utility (alteration of a trouser bought by a
customer)
Helps create an image for the products he sells
Functions of Retailers
Add value through:
Additional services extended store timings, credit, home
delivery
Personnel to identify and solve customer problems
Location in a bazaar to facilitate comparison shopping
Kinds of Retailers
Type of
retailer
Characteristics
Specialty store
Department
store
Supermarket
Convenience
store
Discount store
Kinds of Retailers
Type of
retailer
Characteristics
Corporate
chains
Voluntary chain
Retailer co-ops
Consumer coops
Franchise
organisation
Retailers Strengths
Choice of merchandise is their prerogative put
pressure on producer suppliers
Many new products on offer. Can charge penalty if
products do not do well
New developments in IT help them run operations
optimally and keep track of loyal customers. Also
helps them identify profitable store locations.
Trading Area
Catchment area from where most of the customers of
a retail store come
Corner grocery store caters to the locality in which it is
situated
Discount stores have a wider area. Subhiksha locations for
consumers in 2 km radius
Specialty stores have a much wider trading area MTR,
Shoppers Stop etc
Retail Strategy
Positioning of the retailer
Merchandising
Customer service
Customer communication
Positioning Strategy
Wide range with a high value add Lifestyle brand of
stores
Limited range but a high value add Tanishque jewelry
store
Limited range with a limited value add Bata stores
Wide range of goods but a limited value add a Food
World outlet
Merchandising
A set of activities involved in acquiring goods and
services and making them available at the places,
times and prices and the quantity that enable a
retailer to reach his goals
The most critical function in retail
Directly effects the revenue and profitability of the
store
Also takes into account the assortment of goods and
their quality
Customer Communication
The manner in which the retailer makes himself
known to his customers. Has two parts to it:
The messages which the retailer sends to his customers and
prospects
The word of mouth support which satisfied customers give
to the retailer by talking to others
Pricing Strategy
Premium and indicating high value
Reasonable pricing with good value
Low pricing but high value for money
All strategies are focused on giving value to the customer
Product Differentiation
Feature exclusive national brands not available in
competing retailers unlikely
Exclusivity of products specialty stores
Mostly private labels Westside
Feature, big, specially planned merchandising events
Kemp Fashion sows
Introduce new products before competition - -again
unlikely
Franchising
Franchisor is the firm which wants to sell its goods or
services
Franchisee is the firm or group that are willing to sell the
products or services on behalf of the franchisor
The first party gives advice and help to the second to find good
locations, blue prints for a store, financial, marketing and
management assistance
Benefits to Franchisor
Faster expansion
Local franchisee pays lower advertising rates than a
national firm
Owners motivated to work more hours than mere
employees
Local taxes and licenses are responsibility of franchisees
Benefits to Franchisee
Quick recognition among potential customers
Management training provided by principal
Principal may buy ingredients and supplies and sell to
franchisee at lower prices
Financial assistance
Promotional aids, in-store displays etc
E-tailing Issues
Logistics support to selling
Payment gateway
Customer product returns
Conflicts with Brick &Mortar overcome by selling
separate products
Customer Needs
Lot size most convenient pack size which the
consumer can buy at a time
Waiting time time elapsed between the desire to
buy the product and the time when he can actually
buy it should be almost zero
Variety choice of products, brands, packs
Place utility choice of buying where he wants. For a
consumer product it has to be at a location closest to
his residence
Segmentation
Putting customers in similar clusters based on their
needs
Doctors who prescribe medicines
Chemists who dispense medicines
Hospitals and nursing homes who use them
Positioning
Defines the channel element required to service each
of the segments
The sales manager decides the channel partner who is
ideal to meet the expectations of the segments.
The number of each category of intermediary is also decided
based on the number of customers to be serviced in each
segment.
The service objectives and flows for each channel partner
are also frozen
Focus
It may not be possible to meet the needs of all segments
cost and practicality considerations (the managerial
talent available for instance)
The sales manager has to firmly decide which of the
segments he will service
The competitive scenario also helps in this decision
Development
At this stage the channel system is being put in place
to achieve the objectives
Select the best of the alternatives
Comparison with the most successful competitor could be a
good benchmark
Channel Objectives
Defines what the channel system is supposed to do to
support customer service.
Customer needs could include:
Lot size convenience
Minimum waiting time
Variety and assortment
Place utility
Channel Alternatives
Are planned after deciding the customer segments to
be serviced and the levels of service
Business intermediaries currently available like C&FAs,
distributors, dealers, agents wholesalers and retailers.
The number and type of intermediaries required
Developing new channel types
Roles of each channel member
Evaluation Critieria
Cost:
Evaluation Criteria
Ability to manage and control:
Distribution network being an extended arm of the company,
the channel partners have some obligations
Operating guidelines specify these rules
The channel system should help the company enforce these
rules fairly to all channel partners
Some of the operating rules are
Selection Criteria
Qualitative: willingness, confidence in company products,
willingness to abide by company rules, building company
image, innovativeness etc
Quantitative: financial status, infrastructure, location,
present businesses, customer relationships, market
standing etc
Power of Motivation
Reward positive support
Coercion- threat of punitive action
Referent positive effects of association
Legitimate enforcing a contract
Expert support of special knowledge
Support additional benefits for performers
Competition pitting against peers
French & Raven
ROI as a Measure
Leading FMCG companies feel that an ROI of 30% for
a distributor is healthy and is a fair indication that he
is performing well.
If the ROI is more, additional tasks are given
If the ROI is less, the company may provide additional
support
Performance Evaluation
On pre-agreed tasks only. No surprises.
Specific targets on periodical basis are set.
Targets on volume and outlet productivity could be for a
week or a month
Targets relating to increasing market shares or total outlet
coverage could be for 6 months
Different weightages could be given for each of the
parameters for evaluation
Non-store Retailing
Selling door-to-door
Vending machines
Tele-shopping networks
Selling through catalogs
Other forms of direct selling
Electronic channels
Vertical Integration
This means owning the channel. The company does the
work of production, branding and distribution.
Downstream integration means the producer of the
goods also does the distribution Eureka Forbes, Bata
Vertical Integration
Upstream integration means the seller also produces the
goods private labels of modern retailers.
If the organization does the work of production, branding
and distribution, it is said to be vertically integrated.
Vertical Integration provides better control over the
distribution function
Outsourcing Distribution
Is the most prevalent situation as:
The reach is better
The cost may be lower
The company can exploit the core competence of its
channel partners, which is distribution
Channel Management
Channel system has a set of players:
Not equally motivated to implement the ideal channel
design
Whose expectations from the system differ
Is in three broad phases:
Use of power bases
Identifying and resolving channel conflicts
Channel co-ordination
Countervailing Power
Balances the power exerted by one channel member.
It is not a one-sided equation.
Both the channel member and the principal can have
influence on each other.
Results from interdependence within the channel
system.
Company exerts power on the distributor to get its
coverage and revenues
Distributor has enough influence on his customers and this
is critical for the company also
Weaker partners do get exploited ancillary units
Channel Coordination
Channel system is well coordinated if each member
understands his role correctly and performs it to help
the system achieve its customer service objectives.
In a coordinated channel:
Interests of all channel members are protected
Actions of all are in line with overall objectives
Flows are streamlined to desired customer service
objectives
Channel Conflict
Situation of discord or disagreement between
partners in the same channel system has negative
connotations and is driven more by feelings than
facts
Conflict is part of any social system getting
disparate entities to work together as in a channel
system is also one such social unit
If any member feels that another is working in a
manner as to affect him, conflict results
Channel Conflict
CHANNEL CONFLICT
GOAL
DOMAIN
PERCEPTION
PERCEIVED
FELT
MANIFEST
LATENT
Types of Conflicts
Latent Conflict:
Perceived Conflict:
Types of Conflicts
Felt Conflict:
Manifest Conflict:
Resolving Conflicts
Understanding nature and intensity
Tracing the source of the conflict
Understand the impact of the conflict
Strategy and plan of action for resolution
Avoidance
Aggression
Accommodation
Compromise
Collaboration
Avoidance
Used by weak channel members.
Problem is postponed or discussion avoided.
Relationships are not of much importance.
As there is no serious effort on getting anything done,
conflict is avoided.
Aggression
Also known as a competitive or selfish style.
It means being concerned about ones own goals
without any thought for the others.
The dominating channel partner (may be the
principal) dictates terms to the others. Long term
could be detrimental to the system.
Accommodation
A situation of complete surrender.
One party helps the other achieve its goals without
being worried about its own goals.
Emphasis is on full co-operation and flexibility in
approach. May generate matching feelings in the
receiver.
If not handled properly, can result in exploitation
Compromise
Obviously both sides have to give up something to meet
mid way.
Can only work with small and not so serious conflicts.
Used often in the earlier two stages.
Collaboration
Also known as a problem solving approach
Tries to maximize the benefit to both parties while
solving the dispute.
Most ideal style of conflict resolution a win-win
approach
Requires a lot of time and effort to succeed.
Sensitive information may have to be shared
Channel Policies
Defines how the channel is required to operate.
Normally framed by the channel principal to guide
the operations of the channel system
If not framed properly could prove the starting point
of channel conflicts.
Some subjects of channel policies could be as seen in
the next slide:
Channel Policies
Markets to be covered
Customer coverage
Pricing
Product portfolio to be handled
Selection, termination of channel members
Ownership of the channel
5 Characteristics of Services
They are intangible can only be felt. No visual
features like size, style.
They are inseparable from their service providers a
3P cannot deliver
They cannot be standardized custom made and
delivered
Customers are involved to a great degree define the
services
They are perishable cannot be stored for delivery
later. Salvage value of an unsold service is zero.
Channels Used
Shorter channels than for products
Some channels used are:
Direct from service provider to user
Agents or brokers to bring buyer and seller together
Franchisees or contractors
Electronic channels
CIS Purpose
CIS is Channel Information Systems
CIS is the orderly flow of pertinent operational data
both internally and between channel members, for
use as a basis of decision making in specified
responsibility areas of channel management
CIS is of primary use of sales managers.
Information - Advantages
Useful in marketing planning helps improve quality of
marketing decisions
Can help tap market opportunities
Provides an alert against competition
Helps spot trends favourable or otherwise
Helps develop action plans for growth
Gives feedback on consumer needs
Classification of Information
Based on the use made of it by marketing planning,
operations, decision making or control
Based on subjects consumers, products,
competition, channels, promotions, pricing, sales
volume, value etc
Operations data facts and figures
Also based on assumptions, anticipated occurrences
forecasts relating to the channel system
Information Process
COLLECTION
PROCESSING
STORAGE
USE
Information Process
Collection: acquiring and placing raw data monthly
sales by each territory
Processing: analyzing data to get meaning out of it
arranging, modifying and interpreting the data by the
user comparison of sales between periods
Storage: keeping the information intact till it is
needed
Use: application of information for management
decision making sales data of the last 6 months to
forecast the sales of the next month.
Use of Information
Planning: sales forecasts or distributor indents
Control: expenses against budget
There is always a cost of collecting information.
If data collected is not used properly, the data
provider will hesitate to give the information.
The channel MIS works at the sales operational level.
It has very little strategic intent.
Sources of Data
Reports (oral and written) and records of channel
members, sales people
Letters, statements and market research
Any other info collected by the sales people and the
channel members from the market
External sources like business publications, magazines,
newspapers, trade journals.
In a dedicated channel system the collection of info is
well streamlined in the JC meeting
With use of IT enabled systems collection and processing
has become simpler.
Element Importance
In a good channel MIS, it is necessary to define upfront
for each element of the MIS, the following:
Purpose of the info
Source of the info
Action possible
Impact on customer service
Competition Tracking
Purpose
Source
Action
possible
Impact on
service
Materials Management
Materials forms the largest single cost item in most
manufacturing companies needs to be carefully
managed
Materials management function includes planning
and control, purchasing and stores and inventory
control
Materials management is the precursor to logistics
and supply chain management
Logistics Defined
Logistics means having the right thing, at the right
place, at the right time
The procurement, maintenance, distribution and
replacement of personnel and materials Websters
Dictionary
The science of planning, organizing and managing
activities that provide goods or services Logistics
World, 1997
Logistics
Functions: planning, procurement, transportation,
supply and maintenance
Processes: requirements determination, acquisition,
distribution and conservation
Business: science of planning, design and support of
business operations of procurement, purchasing,
inventory, warehousing, distribution, transportation,
customer support, financial and human resources
Scope of Logistics
Choice of markets
Procurement
Plant location and layout
Inventory management
Location and management of warehouses
Choices of carriers, mode of transport
Packaging decisions
Relevant to all enterprises: manufacturing,
Government, Institutions, service organizations
Natural
Resources
HR
Finance
Information
Customer service
Demand forecasting
Distribution
Communications
Inventory control
Materials handling
Order processing
Parts and service support
Plants and warehouse selection
Procurement
Packaging
Return goods handling
Salvage and scrap disposal
Traffic and transportation
Warehouse and storage
Output
Marketing
Orientation
(competitive
Advantage)
Time and Place
utility
Efficient move
to customer
Customer
Lead Firm
Supplier
Suppliers
supplier
Support
Activities
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Primary Activities
Operational
Focus on financial
performance
Target optimum service levels
Manage the details
Leveraging logistics volumes
Measure and react to
performance
Alling & Tyndall
Operations related
Plant and warehouse site
location
Procurement
Inventory control
Materials handling
Salvage and scrap disposal
Traffic and transportation
Warehousing and storage
Order Fulfillment
Storage &
Transportation
Integrated
Supply Chain
Management
Manufacturing/
Re-manufacturing/
Assembly
Inventory Management
and control
Materials
Management
Functions of Inventory
Inventory serves as a buffer between:
Supply and demand
Customer demand and finished goods
Requirements for an operation and the output from the
previous operation
Parts and materials to begin an operation and the suppliers of
the materials
Categories of Inventory
Anticipation built in anticipation of future demand
peak season, strike, promotion
Fluctuation (safety) to cover random, unpredictable
fluctuations in supply and demand and lead time to
prevent disruption in operations, deliveries etc
Lot-size to take advantage of quantity discounts,
reduce shipping, set up and clerical costs also called
cycle stock
Categories of Inventory
Transportation pipeline or movement inventories
to cover the time needed to move from one point to
another factory to distribution point for example
Hedge for materials where prices are volatile
Maintenance, repair and operating supplies (MRO)
to support M and O spare parts, lubricants,
consumables etc
Types of Inventory
Obvious.
Raw materials
Work-in-process
Finished goods of primary concern to marketing
Maintenance, repair and operating (MRO) supplies
In-transit, pipeline
Performance Measures
Inventory turns = Annual cost of goods sold /average
inventory in value
Days of sales = inventory on hand / average daily sales
Types of Classification
ABC category most common for all
HML - high, medium, low - similar
FSND fast moving, slow moving, non-moving, dead
spare parts / FG
SDE scarce, difficult, easy to obtain procurement /
Spares
GOLF govt, ordinary, local, foreign source
procurement / Spares
VED vital, essential, desirable spare parts / FG
SOS seasonal, off-seasonal - commodity
Functions
Warehouses
Material handling
Customer Service
Receive goods
Identify goods
Sort goods
Dispatch to storage
Hold inventory
Recall, select goods
Marshal the shipment
Dispatch the shipment
Prepare records and advices
Information Transfer
Storage Function
Temporary
Permanent
Purpose of Warehousing
To provide desired level of customer service at the
lowest possible total cost
It is that part of the firms logistics system that stores
products (RM, Packing Materials, WIP, FG) at and
between point of origin and point of consumption
and provides info to management on the status,
condition and disposition of items being stored
Distribution warehousing relates mainly to FG
Cost related
Warehouses
Support manufacturing
Mix products from multiple facilities for shipment to a
single customer
Break-bulk
Aggregate
Used more as a flow-thru point than as a hoarding
point
Distribution Warehousing
The objective is to set up a network of warehouses
closest to the customer locations to service markets
better and minimise cost
Could be C&FA s, depots or distribution centers
Macro location strategies:
Market positioned
Production positioned
Intermediately positioned
Distribution Center
Warehouse designed to speed the flow of goods and
avoid unnecessary costs
Speeds bulk-breaking to avoid inventory carrying costs
Helps to centralise control and co-ordination of logistics
activities
Products can also be cross-docked (one vehicle to
another)
Market Positioned
Warehouses located nearest to the final customer
Factors influencing are:
Order cycle time
Transportation costs
Sensitivity of the product
Order size
Levels of customer service offered
Production Positioned
Warehouses located close to the production facilities
or supply sources
Not the same level of customer service as the earlier
one
Serve as points of aggregation / collection for
products made in a number of plants
Factors influencing are:
Perishability of raw materials
Number of products in the product mix
Assortments ordered by customers
Transport consolidation rates ex; FTL
Intermediate Positioned
Mid point locations between the final customer and
the producer
High customer service levels possible even if products
made in number of units
Other macro approaches look at cost minimisation or
cost and demand elements to maximise profitability
Transportation
Very important in the Logistics function:
Movement across space or distance adds value to products
Transportation provides time and place utility
Transportation Principles
Continuous flow
Optimise unit of cargo - stackability
Maximum vehicle unit capacity utilization
Adaptation of vehicle unit to volume and nature of
traffic
Standardisation
Compatibility of unit load equipment
Minimum of dead weight to total weight
Maximum utilization of capital, equipment and
personnel
Cost Factors
Can be product related or market related.
Product related: density, stowability, ease or difficulty
of handling and liability
Market related: competition, location of markets,
Government regulations, traffic in and out of the
market, seasonality of movements and impact on
customer service
Five prominent modes:
Road, rail, air, water and pipeline.
Sixth one is use of Ropeways
Reverse Logistics
Movement of goods from the market or customer
back to the company
The need:
Increased awareness of the environment
Stringent legislation
For some it is part of the business
Profitability of dealing with scrap, surplus
Advantages of Rail
Economy more so for goods over long distances
Efficiency of energy
Reliability not affected by weather conditions
Disadvantages
Uneconomical for small shipments and short distances
Not suitable for remote stations
Costly terminal handling facilities
Inflexible time schedules
Disadvantages
Susceptibility to weather and road conditions in
spite of the best protection
Unsuitability for heavy loads rail transport more
economical for bulk loads
Unsuitability for long distances again the rail
telescopic rates are more favourable
Water Transport
Advantages:
Mass movement of bulk
Lowest freight cost
Preferred for long haul of low value commodities
Disadvantages:
Not for quick transit
Suitable for certain types on commodities only
Pipeline Movement
Advantages:
Ropeways
Advantages:
In hilly or inaccessible areas
Long and circuitous routes with streams / deep valleys
For commodities capable of movement in ropeway buckets
Short haulages of less than 50 kms
Areas where other carriers are uneconomical
Disadvantages:
Heavy investments
Limitations on size and quantity of haul
Carrier Selection
Traffic Related
Length of haul
Consignment weight
Dimensions
Value
Urgency
Regularity of shipment
Fragility
Toxicity
Perishability
Type of packing
Special handling required
Shipper related
Size of firm
Investment priorities
Marketing strategy
Network of production
and distribution
Availability of rail
sidings
Stockholding policy
Management structure
System of carrier
evaluation
Service related
Speed (transit time)
Reliability
Cost
Customer relationship
Geographical coverage
Accessibility
Availability of special
vehicles / equipment
Monitoring of goods
Unitisation
Ancillary services bulk
breaking, storage
Weightage
Rail
Road
Air
Water
Pipe
line
Rope
way
Speed
30
Versatility
10
Reliability
20
Availability
10
Continuity of
service
10
Distribution cost
20
Total score
10
5.4
6.7
5.1
5.1
5.1
4.0
Overall ranking
10
Why International?
The WTO agreement has resulted in opening up of new areas
for freer trade (Textiles, Services & Agricultural products)
China, Russia, India & the East European countries have
embraced free market policies resulting in huge opening up of
underserved populations.
Domestic competition has increased especially from imports.
Outsourcing in manufacturing and services has increased due
to cost pressures & improvement in infrastructure.
Entry Strategy
Exporting through local agent
Exporting through foreign agent
Exporting to foreign importer / distributor
Setting up local office / representative
Licensing / Franchising
Setting up Joint ventures for distribution /
manufacture
Setting up wholly owned manufacturing facilities
Distribution
Distribution is a vital aspect of marketing ensuring
availability of the product in the right quantity, at the right
time and right place.
More important in international markets due to distance and
transportation time.
Importers, manufacturers and retailers are increasingly asking
for Just in Time deliveries.
Distribution strategy varies from market to market depending
on size and local conditions.
Multiple channels may be used in countries.
Distribution Options
Depends on the volume of the business
Positioning of the product
Infrastructure of distribution in the country
Local laws some countries insist on local companies
in the distribution business
Internet as a channel of sales and distribution
Role of Logistics
Very important aspect of international selling
Logistics can make up over 15% of the cost of the product
Involves multiple modes of transport land, sea and air
Considerable paperwork and formalities to be completed
in international trade
Logistics providers now offer complete one stop solution
including distribution, invoicing and collection of payment
Currency of Pricing
The US Dollar is the most widely used currency for pricing
international sales
Importers in some countries may prefer invoicing in local
currencies like Japanese Yen or Euro or Pound Sterling,
Singapore Dollars or UAE Dirhams Saudi riyals etc.
This reduces the risk of exchange rate fluctuations for the
buyer
Exchange fluctuation is a major risk for sellers and can be
managed by hedging the currency.
Market Intelligence
Secondary data is very easy to gather from various
publications, agencies like chambers of commerce, trade
bodies, embassies, trade shows, internet, banks etc
Usually secondary data is sufficient to establish the feasibility
of the market.
Care must be taken to understand the data and the measures
used before drawing conclusions.