10

Distribution Decisions

“Distribution provides a number of opportunities for the marketer that may normally be associated with other elements of the marketing mix

 

—Sam Walton”

INTRODUCTION

The distribution strategy is concerned with the product or service placement at the right time to customer at the right place. In distribution there are two categories of issues and decisions which need to be handled while designing the distribution strategy. These are management of marketing channels and management of physical supplies.

In supply chain channel decisions refer to the managerial decisions on the selection of best routes or paths for moving goods from the producer to the consumer. Channels of distribution are concerned not only with the physical movement of goods but also with their promotion, selling and marketing control. An example is Colgate-Palmolive whose toothpaste is sold in large quantities in the Indian market has distributor's network of 1,00,000 spread over 3,500 towns and cities in India.

Channels of distribution help movement of goods from one place to another to create place utility, time utility and create convenience value. They make it possible for the consumer to obtain goods at a price he is willing to pay and under conditions which bring him satisfaction and pride of ownership and thus create possession utility.

The alternative to indirect distribution is to establish own retail stores, for example, Bata Ltd. that has established its own retail stores throughout the country, while Raymond's has franchised a number of retailers to sell their products to the consumers.

For a business firm it is important to make a wise, informed decision about how extensive the business's distribution channel should be. For achieving wider distribution, services of intermediaries are used by a majority of manufacturers as they are unable to sell directly to customers cost-effectively. As a thumb rule, for low unit-priced mass distributed products, the services of middlemen are used but for high priced technically complex products, the manufacturers use their own sales force to market the products. For a soft drinks marketing company, distribution of products beyond 120 km will be a costly proposition. This is because the cost of distribution of soft drinks increases exponentially beyond 120 km distance.

Hence, most of the concepts surrounding distribution are related to costs. Many of the practical matters relating to distribution channels, however, have to do with customer control. In general, business firms think that by selling their product through the distribution channel, their role has come to an end. But in order to be effective, it is vital for businesses to take a market-oriented approach and manage every level of their product's distribution until it arrives at the end user.

Depending on the product and markets there are three levels of channel distribution structures as follows:

• Intensive distribution: Wherein a business firm engages large majority of the resellers are stockists. The products are having low unit prices and used for daily consumptions. The availability, rather than brand loyalty is a major criteria for purchasing the product.
• Selective distribution: Wherein suitable and selected resellers are selling the product. The unit price of the product is higher and customer takes time in arriving at final buying decision. Normally consumer durables (TVs, freezers, washing machines and air conditioners) are sold through selective outlets.
• Exclusive distribution: In which only selected resellers are permitted to sell the product—that is, usually one seller per geographical region. The unit price is considerably high. The customer may purchase the product once or twice in his lifetime. Examples are expensive cars, diamond jewellery, high-priced wristwatches, etc.

An important element of supply chain management is the management and monitoring of the distribution channels. Just like a company's own sales and distribution departments have to be taken care of, each level of the distribution chain will have to be managed in a similar way. However, in practice, the companies use a mixture of different distribution channels. The mixture of channel, in fact help a direct sales team, call on bigger accounts, work with agents, or help to take care of smaller accounts and prospects.

The trend in distribution management is the concept of vertical marketing wherein the producers, wholesalers and retailers are united into one integrated channel. This happens as a result of one of the members of the distribution chain owning the others outright. It may be due to company's business strategy of forward or backward integration. For example, McDonald operates via franchising model; similarly Wal-Mart have integration with their suppliers. The other approach is via a contractual system often dictated by retail or wholesale cooperatives.

A firm's marketing goals and distribution objectives are highly related. The exclusive and high end market distribution will generally have less intensity and lesser reach. Hence, the firm has to look for trade-off against speed of delivery and intensity. The consumer behaviour study shows that consumers will prefer to switch soft drink brands rather than walking from a vending machine to a convenience store. This shows the importance of intensity of distribution. For consumer durables, consumers are willing to travel few departmental/discount stores/dealers to choose amongst the premium brands. Decisions on channels are dependent on the buying behaviour of the customers. Hence, the marketers should take into consideration the following factors such as:

• Customer involvement (time devoted) in purchasing given category of product
• Number of brands compared
• Comparable substitutes
• Availability of similar products nearby

DISTRIBUTION: CHANNELS AND LOGISTICS

Distribution involves getting the product from the manufacturer to the ultimate consumer. Thus, distributors add efficiency by:

• Breaking bulk
• Consolidation and distribution
• Carrying inventory
• Financing
• Promotion

Distribution channel helps in creating time and place utilities of the product, which are important for customer satisfaction. The channel will help the firm to make the product available at the right place and the success of channel efficiency and effectiveness is greatly dependent on the logistics operation of the firm to fulfil the demand. However, the logistics will help in movement of the product to make it available in right quantity whenever there is a demand by customers. Hence, the logistics network needs to be integrated with the distribution channels of the firm. The distribution channel is the place of transaction for the firm's products and it acts as an interface between the customer and the firm. However, the effectiveness of this interface is greatly dependent on efficiency of the logistics operations to move the products in required quantity and variety at speed. In fact, logistics programmes have to be tuned to the needs of the channel members to reduce the loss of sales opportunity. The basic role of logistics in distribution channel is to ensure smooth movement of products to make it available at distribution outlets as and when, it is required by the customer. It is not a so easy task as it involves great degree of planning, for material availability and movement at the lowest cost and with speed.

The channel structure is referred to the group of channel members to which a set of distribution task has been allocated. The channel structure plays a vital role in the physical distribution of the products. The channel structure (Figure 10.1) primarily facilitates the product flow from the manufacturer to the end consumer through hierarchy of channel members. The typical distribution channel for consumer goods company is a multilevel structure, while a company manufacturing capital goods may sell its products directly to the user without involving any channel member. Depending on the product and the other marketing variables, the manufacturing company opts for or designs the particular structure (Table 10.1), which fits into its marketing philosophy and policy. But the major considerations are the cost of distribution, wider coverage and maximum market penetration. However, the most common channel structure being adopted by the manufacturers.

 

 

 

The consumer goods companies have a long and dense channel structure because the end customers are very large in numbers, they are spread over wide geographical areas, the unit price of the product is low and the frequency of purchase is more. Under these circumstances the manufacturer prefers to have more outlets for product distribution to meet the customer needs.

On the other hand, the industrial machinery manufacture prefers to deal directly with the customer because of the product complexities, high unit price, and service requirements both pre- and after- sales. In such circumstances, manufacturer may sometimes appoint an agent to strike the deal. In each of the above cases, different channel members have been allocated certain distribution tasks and have different roles to play. The width and the depth of the risk at each level is different and depends on the financial involvement and the control on the next lower level.

The channel structure facilitates product flow from manufacturer to the end customer. However, the physical movement of the product is taken care of by the logistics. The place and the time utility of the product are not possible without the close coordination between channel task and the logistics operations.

The information flow in the channel structure is two-directional. The manufacturer sends the information on the order status like material availability, shipping dates, transportation mode, payment dues, etc, while channel members sends the information on customer requirements like sale forecast, warranty claims, competition activities, requirements scheduling, etc. For the movement of goods from the manufacturer to the channel members, the logistics department acts as the traffic cop in supply chain. The logistics activities such as order registration, order processing, inventory planning, order picking, packaging, and the transportation requires continuous flow of information to service the channel members by making the ordered material available to them in the required quantity at the right time. In fact, the information flow in the channel structure is the basic input in logistics to activate the material flow from the manufacturer to the customer via channel members.

The channel structure facilitates the transfer of ownership title (Table 10.2) of the goods as it passed from the manufacturer to the customers. The communication for advertising, sales promotion, exhibitions, personal selling is part of the information flow through the channel structure. The timely flow of the funds from channel members to the manufacturers is important to keep the operation going.

 

Table 10.2 Channel Member’s Functions

Channel Member's Functions	Functional Details
Exchange	Buying Selling Title transfer Negotiation
Logistical	Storage Transportation Requirement scheduling Inventory management
Facilitating	Credit financing Payment collection Promotion After-sales service Market information

There are several tasks that have to be accomplished as part of physical distribution. These are as follows:

Location of manufacturing facilities The basic decisional parameters would be the availability of basic raw material and the location of the market. It may be decided to locate the manufacturing facility nearer to the source of supply and ship the finished outputs to the markets or to erect the production facility near to the geographical market to be served and arrange the shipment of the inputs accordingly. Location of the Mathura Refinery was based on the latter's concept while the super-thermal power plants of the National Thermal Power Corporation are based on the former. The basic consideration involved obviously is the relative costs of transporting inputs and outputs, including the rates of different modes of transportation which may be used to transport raw materials and finished products. For example, transporting gas via pipeline is more cost-effective than distributing fertilizer through the normal modes of surface transport. The decision regarding the number of facilities to be created will be influenced by the geographical distance among various sub-national markets to be served, the available product line, and the scale economies of production, among other factors.

Location of warehouses One important consideration in this context is the nature of the product being sold. If the product is a household consumption item, such as tea packets, soaps or toothpaste, the retail outlets will be at the bottom of the distribution channel. Success of the distribution system would depend upon ensuring the availability of the product at that level. This obviously would need an organizational structure with number of central/regional warehouses, a larger number of company depots, field sales staff and an elaborate system of delivery vans for transportation. A manufacturer of capital equipment, on the other hand, can have only one centralized warehouse for the main product but has to maintain a number of service centres to stock spare parts.

Transportation mode and method The choice is quite wide for optimal transportation which includes road, rail, air or even post parcel (in the case of mail-order) transport, which is becoming popular in India, especially in the field of designer garments and accessories. The factors to be considered include the relative costs of the alternative modes of transportation, speed, reliability and appropriateness, keeping in view the product attributes such as perishability, hazardousness, human consumptions (food products), gases, liquids, etc.

A company may decide to own a fleet of delivery vehicles, hire an outside transport company or lease the vehicles from a leasing company. Alternatives are to be evaluated taking into account the cost of capital in case of company-owned vehicles and the cost of managing the fleet, and the charges to be paid to the leasing firm or to the outside transporter.

Inventory decisions Bulk of the total distribution cost, which generally account for 5–25 per cent of the product costs, is incurred on the physical distribution and costs of holding inventories. Since inventory holding costs are always on the rise due to all round increase in prices. A careful attention has to be paid on how much inventory should be maintained, of what items and where. Many of these decisions have to be taken keeping in view the broader corporate objective of service reliability, that is, the capacity of the firm to deliver on time.

FLOWS IN DISTRIBUTION CHANNEL

There are five flows involved in the distribution channel. These flows provide the links between channel members and other service providers together in the distribution of goods and services. These flows are:

• Product flow
• Negotiation flow
• Ownership flow
• Information flow
• Promotion flow

The product flow is the actual physical movement of the product from the manufacturer through all of the parties who take physical possession of that product, from its point of production to final consumers. This involves the usage of various modes of transportation such as road, rail, water, air and pipelines.

The negotiation flow represents the exchange in the buying and selling function associated with the transfer of title of products. The transportation firm is not included in this flow because it does not participate in the negotiations.

The ownerships flow shows the movement of the title to the product as it is passed along from the manufacturer to final consumers. Here again, the transportation firm is not included because it does not take title to the product or become actively involved in facilitating its transfer. It is only involved in the transportation of the physical product itself.

The information from the manufacturer to consumers is two-directional. All parties participate in the exchange of information, and the flow can be either up or down. Without proper information flow the products cannot be made available at the right place and at the right time.

Finally, the promotion flow refers to the flow of communication in the form of advertising, personal selling, sales promotion and publicity.

The concept of channel flows provides another basis for distinguishing between channel strategy and logistics management. In the context of the channel flows concept, channel strategy and management involve planning for and managing all of the flows, whereas logistics is concerned almost exclusively with the management of the product flow.

CHANNEL STRATEGY

Channel structures vary somewhat by the nature of the product. The technically complex and customs build products are shipped directly to the customers. The examples are aircrafts, heavy engineering machinery, higher capacity power plants, etc. The FMCG (fast moving consumer goods) are shipped through a chain of middlemen like distributors, wholesalers and retailers wherein the goods are handled more efficiently along with other products from many different suppliers. Several layers of middlemen may exist, depending on the product. In many cases, the middlemen provide a number of services—inspection, installation, insurance services, commissioning, warranty claim settlements, etc. The manufacturers would prefer to have their wider geographical distribution of their products. This is especially the case for convenience products where the customer has little motivation to go to a less convenient retail outlet to get his preferred brand. Cooking salt would be an example here. However, different parties involved in the marketing of products tend to have different, and often conflicting, interests such as full service retailers dislike intensive distribution, manufacturers may be tempted toward intensive distribution and service requirements differ by product category, etc.

For the manufacturers it is generally more economical to go through intermediaries rather than selling directly to the customer. For FMCG products it is more appropriate because customers are dispersed over wider geographical areas. In case of business-to-business markets, buying enterprises prefer to buy goods from manufacturer because of large volumes and technical complexity.

The cost is not the only consideration in deciding the channels structure. For example, channels for perishable products are short, but the additional cost is temperature-controlled storage and transportation to keep the products in fresh condition.

The design of the logistical programme to serve the given channel structure depends on the channel strategy of the enterprise. The channel strategy is broad principles by which the firm expects to achieve its distribution objectives for its target market. Depending on the nature of the product, the industry practices and the market trends, the enterprise may formulate the channel strategies to serve the end customers. The channel strategy decision can be examined through the following views.

Channel Length

This is more related to the levels of the channel structure. The decision is whether the sales are directly made to the customer or through a number of intermediaries. The decision is based on the market reach, distribution cost and degree of control on the channel members. The firm may have its own channel outlets, wherein the investment on infrastructure is limited. However, there is full control on the distribution activities when firms own their own distribution channels. Showrooms (Raymonds, Nike) and retail chains (Wal Mart, Pantaloon) are examples of captive distribution channels where the activities are under full control. Here, the logistics can be pre-planned and executed in close coordination to control the inventory channel.

The other option is the contractual system like franchising, wherein high degree of control can be exercised on the channel activities and the logistics programmes can be organized to support them accordingly. In both of the above systems, the firm is directly in contact with the end customers. The limitations of the above systems are the investment in setting up the infrastructure and limited coverage of the market. The third option is to employ the independent intermediaries like the wholesalers, stockists, distributors, dealers, agents and retailers. The advantage is that the firm gets readymade infrastructure to operate from, without any investment. They are widespread and wider market coverage is possible. They are easily accessible but the firms will lose their degree of control. Firms do not have direct interface with the customers in this system and will have to think of a system for information linkage with the customers. The degree of control on the channel inventory is loose as compared to the earlier two systems. The failure probability of the logistical programmes designed for this distribution system is more, due to absence of cohesive linkages in channel structure.

Channel Breadth

This decision on the breadth of channel depends on the market coverage. Consumer goods, packed foods, newspaper, confectionary, garments are mass consumed items which need wider distribution channel for building a market share. The profits are generated through the volume sales, which is possible if products are available at the point of demand, which has both time and the place convenience.

The decision on the channel breadth depends on the frequency of purchase of product, ease with which customer wants to acquire the product, market coverage to build market share, and buyer behaviour, etc. The logistics programmes to support wider channel networks require logistics support to coordinate activities like order processing, warehousing, packaging, transportation, inventory management, etc. The control becomes more complex for mass distributed consumer products covering the national and international markets. Information technology and modern communication means play a significant role in efficient and effective control of such complex activities.

Marketing Strategy

This is another dimension to select channel, particularly the breadth of the channel. For building market share, wider market coverage is required and hence an intensive distribution will help support the objective. However, to support differentiation-based marketing strategies for specific customer groups, exclusivity in distribution channel will help the firm to exercise full control on the distribution task and logistical activities. It will also help in offering customized pre-and after-sales service to focused customer group to build trust and confidence in the product and the firm. In the exclusive channel structure, there is a need and scope of customized logistics programmes as the firm's marketing resources are deployed for the focused group of customers who bank on the service rather than the price.

The effectiveness of the channel depends on the following two things:

• Degree of control on intermediaries
• Backup supply efficiency

The degree of control is directly proportionate to the compensation the channel members are getting for the distribution task they are performing for the firm. This is to be backed up with efficient supply of goods by making goods available in desired quantity as and when required. This may involve frequent deliveries in small lots. This may increase the transportation cost but will be offset by significant reduction in incidence of inventory carrying cost on the system.

CHANNEL MEMBERS

Marketing channel structure consists of a variety of intermediaries performing distribution tasks, but they may be different in terms of financial involvement, relationship with manufacturer (place and time context) and the functions performed.

Brokers

They take neither possession nor acquire ownership of the goods but only serve to bring the buyers and sellers together. They negotiate purchase and sale of goods on behalf of other parties. Their task is over as soon as the buyer and the seller come to terms in respect of the purchase or sale of the goods. The broker works for a certain percentage of commission on the business transacted on behalf of his principal. Their role is to facilitate the sales/purchase deals. They do not permanently represent either the buyer or the seller; neither do they involve in handling the products. Their function is to organize the negotiation meetings of the two parties and facilitate the deal. They do not provide services like financial assistance, payment collection, inspection, etc. Their relations with buyers and sellers are limited to a particular transaction. For their services, both the parties have to pay the brokerage. Generally, services of brokers are quite common in stock markets, scrape selling/purchasing and organizing the auctions, etc.

Commission Agents

They sell goods on behalf of the sellers. They not only negotiate the sale of goods but also take possession of the goods and make arrangements for the transfer of title to the goods. The commission agent has to perform the functions of warehousing, grading, packing or sampling in addition to assembling and dispersion. For their services, the commission agents get a certain percentage of commission on the sales. A few commission agents are authorized to sell on credit and agree to bear the risk of bad debts for some additional commission.

Wholesalers

The wholesalers are quite common in consumer goods industry. They operate as full-fledged marketing organizations. They purchase the goods from the manufacturers in large quantities. They have network of marketing offices supported by their sales staff to market the products. They also have a network of the warehouses to store the goods at different locations. They collect orders from retailers and also large customers (institutional) and operate on volumes. They are important communication links for manufacturer about the market information. They are the dominant source of supply for the retailers in mass distributed consumer products. Their logistical needs are large quantity consignments at regular intervals as per schedules. They prefer freight consolidation for lower per unit transportation charges. They work on the scale economics.

Wholesalers are those middlemen between the primary producers, manufacturers or importers, on one side, and retailers or industrial consumers, on the other. They buy goods and commodities in large quantities with a view to selling them to retailers in smaller quantities. They assemble merchandise from many sources, warehouses and regroup the goods for convenient buying by retailers. Thus, wholesalers make it possible for the manufacturer to sell to a large number of retailers to whom the merchandise cannot be easily sold directly from the factory.

The wholesaler performs the following important functions of marketing, assembling, dispersion, warehousing, transportation, financing, risk-assuming, grading and packaging. In a nutshell, wholesalers render valuable services to both the manufacturers and the retailers.

Retailers

This is last link in the distribution network before consumer. They are quite common in the mass distributed consumer products. They buy the material form the wholesalers in small quantities. The have very limited financial capacity for investment in the business. They purchase the goods from wholesaler on credit or against cash depending on the relationship and the prevailing trends in the industry. The logistics requirement is a frequent supply in small quantities. They do not want to stock the inventory because of their limited financial capacity.

The retailer is the last link and the most important intermediary in the chain of distribution. Mass production in the present day set-up is geared to the requirements of the ultimate consumer. Retailers are directly and personally in touch with the ultimate consumers and thus occupy a strategic position in the whole chain of distribution. The basic feature of retail trading is the purchase of goods from wholesalers and selling it in small lots to consumers. Thus retailing includes all activities directly related to the sale of goods to the ultimate consumers.

Van Dealers

A van dealer is totally a different type of concept in the distribution system. They are neither the authorized dealers nor the distributors of the manufacturers. They distribute different brands of the same product. They often buy the products from authorized wholesalers and sell the product in their areas. They some times sell the products at lower price than the company's authorized dealers. They manipulate the prices based on the discounts offered to them by the wholesalers. Van dealers are quite common in electrical industry in India. Their investments risk is distributed over several brands. They do not keep the inventory. They buy on daily basis on cash terms. They can reach to remote places where the company's authorized dealer finds it uneconomical.

Selling Agents

They are appointed on contractual basis for selling the company's products to the clients in lieu of an elaborate sales setup. They are contracted not to sell the competitor's products. However, they can sell the complementary products. They are deployed for collecting outstanding payments from the clients. They extend services like organizing loans and offering credit facilities to the clients. They are compensated for their services by way of commission on the sales. The sales agents are quite common in the textile industry.

Manufacturer's Agents

These intermediaries are appointed on a contractual basis for selling of industrial goods. They represent the manufacturer in creating awareness of the product, technical discussion, commercial negotiation and liaising with the clients. The manufacturing agents are former employees with technical background and know the technical intricacies of the product. They are compensated on case-to-case basis. They do not have any organization for marketing. They are mostly involved in pre-sales activities and finalizing on sale deals.

C&F Agent

C&FA is basically a carrying and forwarding agent. His job is to store the material on behalf of the company and forward it to further entities in the channel structure as per the delivery order of the company. He is a custodian of the material and not the owner because material from the head office will be stock transferred (without invoicing) to C&FA for further distribution to other channel members. The services expected from the C&FA are safe storage, proper dispatch, maintenance of inventory accounts, compliance of local taxes etc. He gets compensation for his services by way of commision from the company.

Dealers/Stockists

They carry the stocks/products of the company for sales on a consignment basis. The stocks are transferred to (with the time frame to sale) the dealers/stockists. The payment has to be made to the manufacturer at the end of the agreed credit period. They have a full-fledged marketing set up including backup facilities of warehousing. As the manufacturer realizes the payment of the inventory from dealers/stocks after the stipulated credit period this transaction is reflected in the accounts books of the company. Exclusive dealers do not deal with products of the competitors.

DISTRIBUTION CENTRES

Distribution is the heart of the logistical system and there are many obvious reasons why distribution centres (DCs) need a critical focus for management of its operations, as follows:

• Maximizing space occupancy.
• Operating cost-effectiveness.
• Enhancing the assets productivity.
• Optimizing secondary transportation costs.
• Sourcing for order replenishments.
• Inventory managements
• Vehicle scheduling.

Most often the distribution system will simply slip away from the optimum arrangements, as the market and the products change. For example, if a company has not looked at its distribution system for more than 4 years, it could well be paying 200 per cent more than what is expected. It is always worthwhile managing a distribution system, not only to control that part of the business but also to ensure that the system is serving the needs of the company efficiently.

The considerations of distribution site selection revolve around the two major factors: service and cost. The product availability can be greatly enhanced by locating the DC near to the market place. The smaller and frequent deliveries, which nowadays the customer prefers, can be organized. This will enhance customer confidence in the supplier. However, the transportation cost, which is the major element in logistical cost, is dependent on the location of the DC. The other factors affecting the selection of sites are as follows:

• Infrastructure: Availability of proper infrastructure such as connecting roads, utilities (water, electricity, communication), and labour has a great effect on the efficiency and the effectiveness of warehouse operations. For cold storage warehouses, availability of electric power is a major factor influencing the site selection. Non-availability of proper road or rail siding facility will have an effect on the operations of warehouses and as a result the transportation cost may go up considerably. Lack of infrastructure such as wagon platform, material-handling equipment may pose problem in loading and unloading of materials and special provisions may cost more.
• Market: Distribution warehouses are planned in proximity to the markets or consumption centres for offering better service to the customers. The frequent deliveries with small quantities as required by the customers can be organized due to limited geographical area coverage.
• Access: The location of the warehouse has greatest effect on the primary transportation cost. The difficulty in access will have an influence on the transportation cost.
• Primary transportation cost: The transportation cost is the largest component in the product cost, particularly for low unit-priced products. The location of the warehouse will have greatest influence on the primary transportation cost. The product demand pattern will influence transportation cost in two ways, one on frequency of truck trips and two on loading patterns (full or partial) of the transportation vehicles.
• Availability: Availability of warehousing space in the urban area particularly in metros at cheaper rate is a remote possibility. In such cases, the site has to be shifted beyond the municipal city limits where the storage space is available at considerably cheaper rate. However, this arrangement may add to the transportation cost.
• Product: The type of product will have a profound effect on number of warehouses and their locations. For example, perishable products need to be delivered to the customer within its expiry period and hence, it should be located near the consumption centres. Warehouses with delivery limitation and geographical reach should be small and numerous. Warehouse service has a common storage room for many street shops fits into the above category.
• Regulations: For certain types of products (explosives, hazardous chemicals, and radioactive materials), which can cause damage to human life, the storage site selection is guided by the government regulations. In such cases, very little options are left with the firms to choose the site from.
• Local levies: Depending on the sales tax and the octroi charges in the region, the location of the warehouse is planned. Due to non-uniformity of sales tax across the Indian states, the marketers invariably plan the warehouse to avail the benefits of the local sales tax disparities.

DISTIBUTION CENTRE SITE SELECTION

It will involve single depot or multiple depot systems for a given product-market configuration with the objective of wider area coverage and product availability at the retail outlets.

Single Depot Location

The distribution system of a firm normally consists of multiple warehouses located at various places. However, location of a depot for the particular geographical area is decided using the following principles:

Centre of gravity of area model   A map of marketing areas may be drawn and the sheet representing the area may be balanced. The point where the sheet gets balance is the site for warehouse location. This point is expected to be at minimum average distance from all the locations in the area.

Centre of gravity of load model   This may be illustrated visually by imagining a sheet having the holes representing the customer locations and their demand load of annual purchases. A weight is hung at each hole in proportion to the demand load. The point at which the model sheet gets balanced gives the centre of weights. This is the proposed point where the warehouse may be located.

Centre of gravity of tonnes-kilometres model   This model takes into consideration both loads and distances to arrive at the optimum transportation cost. The final solution is arrived after lot of trial and error method.

Multiple Depot Network

The cost of warehousing per unit of inventory is directly proportional to the number of warehouses in the given marketing territory. If the total sales is divided into more number of warehouses, the sales handled by each individual warehouse decreases and warehousing cost per unit sold increases. This can be offset by increasing the sales per warehouse. For planning the chain of warehouses, the management will have to do the cost-benefit analysis. The factors influencing decision on planning optimum numbers of warehouse are:

• Market size
• Area coverage by each warehouse
• Product type
• Demand pattern—continuous or seasonal
• Customer service level
• Competition
• Establishment and operating cost

The warehousing cost is directly proportional to the number of warehouses, while the transportation (primary and secondary together) cost goes down with the increase in warehouse numbers as shown in Figure 10.2.

 

 

Invariably, many manufacturing companies hold too many inventory stocks in many warehouses spread across wider geographical areas. The reasons are wrong procurement policies, complex transportation system, and historical ownership pattern, and leniency to customer satisfaction. However, due to cost pressure, the firms are trying to find out the trade-off. For cost reduction, firms may try to move towards the centralized warehouse system, but the decision is depending on the nature of the product and its movement through the supply chain. For auto manufacturing companies, the centralized warehouse for the spare parts is an ideal system but this is not applicable for FMCG products, which need to be moved in large quantities and with speed, wherein the system of scattered warehouse is the right solution.

The criticality of the demand and the cost of serving the customer determine the boundary served by the product. If the products are at par on quality and the customer is not deriving any specific advantages using the particular brand of product, then the choice of supplier is based on the landed cost he has to pay for.

The relation between the cost of DC operation and optimum area served by the same is best explained by the Bowman-Stewart formula. The major warehouse location criterion is its proximity to the market. However, there is no restriction for the area it may serve. The cost of delivery increases with the distance between warehouse and the place of delivery. Therefore the cost of delivery is proportional to the square root of the area covered by the stocking point. The choice of location is decided on the cost of delivery.

LOGISTICS: THE DISTRIBUTION IMPERATIVE

The most carefully designed and managed marketing channel rely on logistics to ideally deliver products to customers. The creation of time and place utilities by distribution channel and essential for customer satisfaction are mostly dependent upon logistics. The movement of the right products to the right place in right quantity at the right time, is the essence of the role of logistics in the marketing channel.

The channel structure is of critical importance in the physical distribution of the company's products. It has a deep impact on customer satisfaction and the logistical cost. Exploiting the distribution channel typically requires significant flexibility in logistical capability of the supply chain to take care of the changing needs and the problems of the channel members in the markets. Even the most carefully designed and managed marketing channel system must rely on the logistics to create time and place utilities of the product for customer satisfaction. The channel helps the firm to make the product available at the place and time required by the customer. The basic role of logistics in distribution channel is to ensure smooth movement of products to make it available at distribution outlets as and when, it is required by the customer. It involves great degree of planning for material availability and movement at the lowest cost with maximum speed. The channel strategy fits under the distribution variable of the marketing mix. Thus, channel strategy must be formulated even before logistics management can be considered.

Logistics as a systems has both fixed and variable cost components. The major cost spinners in logistics are transportation, warehousing, material handling, packaging, system integration and maintenance, and administration. These costs can be controlled through proper tuning of logistics to suit the requirements of various channel partners.

Channel management is a broader and more comprehensive element of distribution strategy than is logistics management. Channel management is involved with the administration of all of the major channel flows (product, negotiation, ownership, information and promotion), whereas logistics is concerned mainly with the product flow. For effective distribution, channel management and logistics management should go hand in hand. This requires a good degree of coordination between channel management and logistics management. To achieve this, the following major areas of interface between channel management and logistics management need to be looked into by the manufacturer:

Logistics Service Standards

Any logistics standard has its own cost. The higher the service standards offered, the higher are the costs involved. However, a well-designed logistics systems and modern technology can reduce the cost considerably. It is not possible to eliminate the cost completely. Domino Pizza is offering free pizza if the home delivery exceeds 30 minutes after placement of an order. The firm has organized its logistics based on this service standard so that not a single home deliver exceed beyond 30 minutes.

A manufacturer must cover the costs either indirectly in the price it charges for products, or by passing them along to channel members in the form of service charges. In either case, there is little point in offering logistics services that channel members do not want for higher levels of service than they desire. The key issue in offering logistics service standards is based on levels of logistics service desired by the channel members. It can be decided only after taking into consideration the views of channel partners.

Logistics Programme Designing

A logistics programme should be a part of channels strategy of the manufacturer. The following are variants and limitations (Table 10.3), which should be taken care of while designing the logistics programme for channel members:

 

Table 10.3 Logistics Program Variants and Limitations

Variants	Limitations
• Delivery frequency	• Order processing cycle
• Deliver time	• Inventory norms
• Lot size	• Transportation cost
• Packaging (loose/packed/unitized)
• Transportation mode
• Customer service norms

The design of logistics programme can be done either by the company's executives or the job can be assigned to an outside expert. For example, Gillette Company was faced with a staggering assortment of changes in its operations. Among these were diversification into a broad range of toiletry products, a shift of its main distribution channels from drug and tobacco chains, and the introduction of stainless steel blades by competitors. Gillette sought to get ‘one up’ on the competition in providing logistics service to its thousands of channel members by emphasizing speedy deliveries of its new blades.

The logistics programme designed to accomplish this was dependent upon the fastest mode of transport—airfreight. But it was turned down by many of its own employees and channel members because of the high costs and resulting lower profit margins. Gillette quickly dropped this programme and developed a new one based on the use of lower-cost surface transport programmes that are carefully designed to focus on meeting customer service requirements. From the channel members’ standpoint, the fast delivery provided by airfreight was not worth the added cost. Perhaps, if Gillette had been in a position to absorb all of these added costs by itself, the channel members might have been delighted with the system, but this would have been too expensive for Gillette. So what appeared to be a good idea on paper turned out to be unworkable in practice. Thus, programmes should be designed to be consistent with the service needs of channel members.

Adoption of Logistics Programme

Regardless of how good a manufacturer perceives its logistics programme, it still must convince the channel members of its value. The logistics programmes are appealing to channel members if it ensures the following:

• Reduction in out-of-stock frequent situations
• Ensures reduction in channel member inventories
• Ensures added manufacturer support for the channel

By minimizing out-of-stock situation through an improved logistics programme, lost sales will be reduced. If a manufacturer can convince channel members that the new logistics system will indeed help them to achieve growth, it will be a very potent argument for gaining an enthusiastic reception as their bottom-line and customer retention will improve. Computer-to-computer ordering arrangements and EDIs are good systems that do appear to be living up to the benefits promised. Already these systems are revolutionizing traditional ordering practices and reducing out-of-stock occurrences. The order could also pass through a third party with time-sharing capabilities. Manufacturers in ‘just-in-time’ environment if executed properly can bring dramatic results in inventory costs reduction, sometimes well over 50 per cent. JIT (just-in-time) system has been associated mainly with manufacturers, and particularly the automotive industry, but has a much wider potential application.

The logistics programme can be a potent marketing tool for building the support of channel members. Indeed, the role of better logistics management in strengthening the overall marketing efforts of channel members is growing in importance. A well-designed logistics programme offers great potential as a strategic marketing tool. But it will offer even greater potential to manufacturers who are able to extend their superior logistics capabilities to help channel members improve their logistics and marketing capabilities as well.

Cost-benefit Analysis

The logistics programme calls for deployment of firm's resources. The returns may be superior but may cause a drain on the profits. For example, for faster delivery, air transportation may be used, but the transportation cost will be unaffordable for low unit-priced products. The logistics manager has to take into consideration the implications of the proposed logistical programme on the inventory levels to be maintained by the firm. A faster order fulfilment cycle will have to be supplemented by faster procurement, manufacturing and order processing, and cash generation cycle. This may require additional resources to tune the system to logistical programme. Hence the logistical programmes have to be designed and implemented in coordination to reap maximum benefits with optimum cost. A firm desirous of introducing a new product may think of developing an elaborate logistical network only after ascertaining the product acceptance by the consumers and demand for the product. Initially, he may rely on service providers network on limited counts and may pay little higher till the sales volumes are built. The logistical programme involving the use of air transportation for distribution of fresh flowers in the European market may be justified on the grounds that it is a high unit-priced it is fetching and its short shelf life.

Programme Implementation and Monitoring

The implementation of the logistical programmes requires managerial skills. The close monitoring of the programme through regular feedback on deviations in delivery cycle time, inventory turn over ratio, service level, cost and productivity is a must, to remove the bottlenecks which were not visualized at the time of planning. A leading automobile manufacturing company earlier operating on credit sales to its dealers, changed over to ‘no credit system’ and offered higher compensation for buy, stock and sell of the products have changed the logistics programme to suit the pull system. This helped them in improvement in their cash flow, inventory levels (both at factory and in channel). The deliveries are frequent but lot size is small. Even though the transportation cost has gone up, the inventory carrying cost has reduced drastically, resulting into overall gains.

Logistics systems must be continuously monitored, both in terms of how successfully they are performing for the manufacturer and, just as importantly, how well they are meeting the needs of changing channel members. Thus, as part of an overall attempt to learn about the needs and problems of channel members, the channel manager should continually monitor the channel members’ reactions to logistics programmes.

REVIEW QUESTIONS

1. Efficiency and effectiveness of supply chain very much depends on distribution network, Explain.
2. Discuss the various logistics roles in the distribution channel interfaces.
3. The distribution channel is a function of proper logistics programme. Discuss.
4. Do ‘just-in-time’ inventory systems have any effect on the firm's logistics and channel management?
5. ‘Information technology’ has a vital role in logistics and channel management. Discuss.

INTERNET EXERCISES

1. For studying decision approaches in channel management decisions visit http://channelmarketing.com.au
2. Visit <http://www.aberdeen.com/channels/scm.asP&Gt; and find out more information on logistics design for channel management
3. Tompkins Associates provides global supply chain services, distribution operations consulting, technology implementation, material handling integration, and benchmarking and best practices. Visit http://www.tompkinsinc.com and study the distribution solutions.

VIDEO LINKS

1. Supply Chain, Logistics, Distribution –Challenges, http://www.youtube.com/watch?v=_wWHfrBz104
2. Products Distribution Network, http://www.youtube.com/watch?v=icpshe7Ywbg

PROJECT ASSIGNMENTS

1. In the post merger scenario of Gillette and P&G, the distribution network of both the companies was merged and revamped. Accordingly the logistics programme to serve a new distribution structure was also evolved. Find out the major considerations for optimization of distribution network and also study the logistics strategy to support the ‘merged’ distribution network.
2. Find out a leading manufacturing company having wider product mix and serving both consumer and business markets. Study the distribution network and the logistics programmes to serve these two distinct markets.