UNIT 4.

SUMMARY OF DISTRIBUTION CHANNEL

I. Types & importance of Distribution Channel (DC)

1. Definition & Meaning of Distribution Channel (DC):
1) Definition: A channel is the pipeline through which a product flows on its way to the consumer. The
manufacturer puts his product into the pipeline or marketing channel and various marketing people move it
along to the consumer at the other end of the channel. – Richard M. Clewett
2) Meaning: Distribution management is the management of all activities which facilitates movement and
coordination of supply and demand in the creation of time and place utility of goods. The distribution channels
facilitate as well as create utility for – place, time, and possession convenient to the consumer. DC are nothing
but intermediaries or middlemen between the producer and the consumer. The various intermediaries are:
company owned distribution centers, consignment selling agents, C&F agents, distributors, wholesaler,
stockists, dealers and retailer, depending upon the nature of the product. Transporters, stores personnel, and
labor are also participating to make the product available to the final consumer point.

2. Importance & Functions of Distribution Channel:

1) The channel or set of intermediaries help the process of ‘exchange’ of the product or service at a certain margin
to themselves.
2) Distribution channels facilitates smooth flow of goods & services by reducing the number of touch points.
3) Products have to be made and stored at many locations closer to the point of consumption.
4) The distribution cost gets minimized as the operating expenses get dispersed over the large volume handled.
5) DC provide information to the sellers to help them manage their business better.
6) DC also helps buyers to take a better buying decision through product assortments.
7) The channel partner, may sell a product on 30 days credit to the customer but the company may give him only
a week’s credit. In this manner the DC provides credit or financial support, say through stockists.
8) They help the manufacturer to effectively run trade and consumer promotions.

3. Patterns of Distribution Channels:

There are three types of distribution intensity:
1) Intensive: This strategy is to make sure that the products are available in as many outlets as possible so that anywhere
the consumer goes, he should be able to get the product of his choice. This system helps increase coverage and hence
sales. FMCG giant HUL operates 3 million outlets. Automobile manufacturer’s concern is intensity of distribution for
their spare parts.
 2) Selective: Only a few select outlets will be permitted to keep the company products. The outlets are carefully
selected to by the company in line with the image it wants to project about itself and its exclusive products. This may
be dictated by the value of the product. Ex: Tanishq Jewellery.
3) Exclusive: This is acutely selective. Only one outlet in a market may keep the product. In addition, outlets set up by
the companies for their own products could also be counted among these. Ex: BATA outlets or Titan Showrooms.

4. Different Kinds/Types of Distribution Channels/Networks:

Short Note on various kinds of distribution channel networks:
a) Industrial Products: As industrial products are generally technical in nature and mostly B2B, the channels need to be
shorter. The simplest network would be direct form the producer to the customer.
b) Consumer Products: Consumers are millions in number and companies can use every possible route to reach them.
Hence, the network could have all the channel members – C&FAs, distributors/dealers/stockists, wholesalers and
retailers.
c) Consumer Durables: The network here can be similar to that of FMCG except that durables also need to be
‘maintained’ in a properly operating condition throughout their life. For this, the producer has to rely on service back-
up which could be run by the company itself or through a franchise route.
d) Chemicals & Fertilizers: The channel network in the case of chemicals & fertilizers is quite simple. Apart from the
regular distributors/dealer/stockists, there could be additional channel members like wholesalers in feeder markets
where the farmers may be buying most of their agri-inputs.

II. Channel Strategy; Major domains across which channel strategy is framed
The overall strategy and direction for the company is spelt out in its corporate strategy. The marketing strategy outlines how
this overall company strategy will be achieved using the company products and its distribution network. Organizing and
managing the distribution function forms the part of the distribution strategy.
The distribution strategy could be looking at some of these factors:
1. Defining customer service levels. This is the most critical factor in designing the channel strategy. The customer service
level is what the customer is most interested in and hence requires extra care in defining:
The nature of the industry in which the company is operating, its products and services, its market share and the nature
of the competition help define the level of customer service the firm can promise its customers Sometimes the
affordability also dictates the service level. Companies could even think in terms of categorizing their customers into
A, B & C (Pareto’s Law) to decide different levels of service.
2. Defining the distribution objectives to achieve these service levels; setting distribution objectives:
Apart from the firm’s decision on the service levels to be provided, the customers also have certain expectations from
the company and its channel partners. For example, selling HUL products would want the company and its distributors
to service them in such a way that they hold minimum stocks and at the same time never run out of stocks.
3. Outlining the steps or activities required to achieve the distribution channel objectives; Set of Activities:
 This part of distribution strategy defines the manner in which the company and its channel partners go about actioning
the customer service objectives set earlier. This task is normally performed jointly by the company sales personnel
along with the channel partners.

4. Deciding on the structure of the network to implement these activities to achieve the distribution objectives. These could
be a combination of inside resources like the sales personnel and the outside resources like C&FAs, distributors and
others; The distribution organization:
This step will help define the organization structure to support the entire strategy. Decision points here could be:
1) Extent of in-company support (own sales team) and outsourcing (use of channel partners).
2) Own sales team (based on affordability) may mean higher fixed costs whereas a bigger outsourced network may
mean higher variable costs if the volume goes up.
3) Selecting the channel partners including C&FAs and distributors, stockists or agents.
4) Setting clear objectives for each of the channel partners and systems to monitor the activities and measure the
performance of the channel partners.
5) Ensuring the correct and agreed level of financial investments by the channel partners in the company business
5. A clearly defined policy and procedure for the network to carry out its daily activities to achieve the objectives. Most
companies cover this through an operation manual for the field operations so that there is no ambiguity or difference
in interpretation:
Companies clearly define policy and implementation guidelines in their operating manuals which are in the custody of
the salespeople. The operations manual is capable of answering any query on procedure which the sales people or the
channel partners may have on what action is to be taken in a given situation.
6. Stating the key performance indicators. This is only to check that the strategy is working well. This has to be worked
out separately for each channel member:
The effectiveness of strategy can only be judged if the company has agreed on certain measurement criteria with its
channel partners. It is obvious that these KPIs will all revolve around the promises service levels to the customers. If
the service levels as perceived by the customer are being consistently achieved, the strategy and the implementation
plans are working well.
7. Understanding the critical success factors to make the distribution strategy effective:
Like any strategy, the distribution strategy also will be successful if it has the support and backing of the top management
of the company. This can be achieved by involving them in the formulation of the strategy.

III. Market Logistic: Definition, Scope & Objectives;

I. Definition of Logistics:
A business planning framework for the management of materials, service, information and capital flows. It includes the
increasingly complex information, communication and control systems required in today’s business environment. –
Logistix Parners, Helsinki
 II. Key Tasks or Objectives of Logistics Management:
i) Planning: indicates a carefully thought out process that has critical implications on the operations of the company.
The plan may get generated by Logistics but has the input and support of other functions like purchase, marketing,
production and commercial.
ii) The focus: is on the flow of materials, services and information. Obviously a running operations is not ‘static’ but is
‘moving’ and logistics has a major role in this ‘movement’.
iii) Implementing: clearly indicates that it is a ‘happening’ exercise and not just a ‘concept’. Logistics is clearly ‘action
oriented’. The function does not just generate plans but has to get them implemented so that the customer service
objectives of the company are achieved.
iv) Controlling: would mean that all the action, and operation has to be done within certain feasible business parameters.
These parameters could include speed, reliability, consistency, efficiency and effectiveness. Even customer service
has a ‘limit’ to it and cannot ever be ‘at any cost’.
v) Communication: is another key component of logistics function and all players involved need to be kept ‘informed’
about what is happening so that they can in turn plan their activities better. These players could be suppliers,
production staff or even customers.

III. Scope or Key Activities of Logistics Management:

i) Customer Service – consistent provision of ‘time’ and ‘place’ utility.
ii) Demand Forecasting – decisions on how much to order from suppliers and when and how much to produce for
customers.
iii) Distribution Communications – need for information on distribution, which could be complex, automated and fast.
iv) Inventory Control – this is a trade-off between the level of inventory to maintained and the expected service levels to
be provided to the customers.
v) Materials Handling – movement and storage of raw and packaging materials, work-in-process and finished goods.
vi) Order Processing – getting orders in time from customers, checking the status of execution and delivery.
vii) After sales parts & service support – this is very critical for all technical products, engineering goods and consumer
durables.
viii) Plant & Warehouse Site Location – at optimized cost to the company.
ix) Procurement – purchase of materials and service from outside organizations to support the firm’s operations including
selection of vendors, price negotiations, terms and supplier quality assessment.
x) Packaging – primary purpose is that it is a form of advertising and marketing support.
xi) Returned Goods Handling – in case of a problem with the product or the consumer.
xii) Reverse Logistics – getting back materials for disposal, re-use, reprocessing or recycling purposes.
xiii) Salvage & Scrap Disposal – of all materials not usable in its original form or for its original purpose.
xiv) Traffic & Transportation – adds place utility to the product.
xv) Warehousing and Storage- to support the time and place utility.
IV.Planning customer-oriented inventory / Customer Service Elements related to Logistics
Planning customer-oriented inventory
The starting point is obviously the customer requirements, which then drives all the planning and execution:
Identify customer service needs
Define customer service objectives
Design the logistic system
This has been further explained in terms of the type of service level relevant to four different kinds of products. All product
can easily be classified into these four categories:
High volume and high profitability – the availability has to be high so that no opportunity is missed out
Low volume but high profitability – deliveries to be JIT (just-in-time)
High volume but low profitability – important contributors to the top line. The bottom-line or the profitability has
to be strengthened by cost reduction efforts
Low volume and low profitability – need a review if the product or line has to be retained
A similar classification based on products and customers can be made:
High value products and high-volume customers – key products and accounts – need to be protected for growth
High value products and low volume customers – customers need to be developed into doing more business with
the company
Low value products and high-volume customers – need to be maintained so as not to lose out to competitors
Low value products and low volume customers – need a review
Logistics can then plan the customer service level along with marketing for each of these categories of customers.
Customer Service Elements related to Logistics;
The marketing function decides the elements of the customer service policy of the company. However, it is seen that a lot
of activity related to logistics ultimately impacts the customer service as can be seen from the list given below:
i) Frequency of delivery – the more often the better.
ii) Time from order to delivery – order cycle time. The customer is not willing to wait and hence this has to be low.
iii) Consistency and reliability of delivery – every order has to be executed with the same efficiency.
iv) Emergency deliveries when required – after all, every order cannot always be properly planned.
v) Stock availability and continuity of supply. There should be no excess stocks or stock-outs.
vi) Order status information – simple and quick communication of when deliveries will be made.
vii) Advice on non-availability. This is one of the most common grouses of buyers against vendors. The buyers are not told
that stocks are not available and there could be a delay in supply.
viii) Convenience of placing orders – that it has been received and is being processed.
ix) Quality of outer packaging – so that the contents do not get damaged in transit.
x) Quality on inner packaging for in-store handling and display.

V.Inventory Management Decisions; Categories, & Reasons; Handling, Control & Costs
Inventory Management;Objectives, Functions, & Categories;
Objectives of Inventory Management:
Businesses manage their routine operations of manufacturing and marketing with the help of inventory. This could take the
forms of raw materials, packing materials (to support production), work-in-process on the production shop floor and finished
goods (to support marketing). The key objectives of inventory include:
1) To maximize customer service – inventory holdings ensure availability of stocks when and where required.
Inventory is a protection against any kind of uncertainty. For example, if a competitor is not able to service the
market with his products for any reason, the company should have enough inventory to fill the gap in the market.
2) Help minimize the cost of plant operations – production can happen in economic batches. If production has to get
these economies, it has to pack lot sizes of different SKUs as per a schedule and build up stocks.
3) Minimum investment to deliver the agreed customer service.
Inventory therefore, supports production, operational and customer service requirements, acts as a hedge against market
place uncertainty and assists purchase in getting order quantity discounts.

Functions of Inventory Management:

Inventory acts as a buffer between:
i) Supply and demand – both in terms of quantities and the timing.
ii) Customer demand and finished goods – again in terms of quantities and the timing of the demand.
iii) Requirements for an operation and the output from the previous operation – on the shop floor.
iv) Parts and materials to begin an operation and the suppliers of the materials.

Categories/Types of Inventory:
Inventory could be of following categories:
i) Anticipation: This has been built in anticipation of future requirements. Examples could be of inventory meant
for peak season demand, build up expecting a strike or inventory meant for a sales promotion.
ii) Safety or Fluctuation: This part of the inventory is meant to cover random, occasional, unpredictable
fluctuations in supply and demand and lead time. Examples could be of inventory meant to prevent disruption
in operations, delivery problems and so on.
iii) Lot-size: The need for this inventory is normally driven by the vendors who insist on a certain price or discounts
only on fixed quantities, which may not be immediately required for production.
 iv) Transportation: This is mostly inventory which needs to be ‘in transit’ as it normally takes a certain time to
move inventory from one point to another. This is also known as pipeline or movement inventories. An example
could be factory to a distribution centre or C&FA.
v) Hedge: There are a number of materials which are ‘commodity’ based where the prices fluctuate every day –
like edible oils, precious metals like gold. Companies that do business in these materials would prefer to buy
more when the prices are more favorable and stock for a ‘rainy day’ – when prices are not so favorable.
vi) Maintenance, Repair and Operating Supplies: The term ‘consumables’ is also used to describe these kinds of
materials in stock. As the name indicates these materials are meant to support operations or maintenance.
Examples could be cutting tools, spare parts, consumables and lubricants.

VI.Inventory Management; ABC classification of inventory management;

Inventory Management; ABC classification of inventory management;
There could be hundreds of items in inventory in industries like automobiles, pharmaceuticals and FMCG which needs to
controlled and monitored on regular basis. Some details on the most popular classification of inventor – ABC – Always
Better Control, is given below:
This is based on Pareto’s Law which says that in any business situation generally,
1) 20% of items contribute to 80% of the revenues or account for 80% of the value – theses could be the ‘A’ items
2) About 30% of the items contribute to 15% of the revenues or account for 15% of the value – these could be the ‘B’
items
3) The balance 50% of the items contribute to 5% of the revenues or account for 5% of the value of usage – these are
the ‘C’ items.
For each of the three categories certain rules are then followed:
1) A items – high priority
2) B items – medium priority
3) C items – lowest priority
Inventory Management Decisions; Handling, Control & Costs;
Inventory Handling Decisions:
In spite of proper classification and exercising regular controls, in any industrial situation, there is always the possibility
that some stocks get built up and do not move fast enough. The MSD (moving, slow moving and dead) system of stock
classification helps ‘in deciding action on slow moving stocks.’
 All stocks regularly being consumed and in stock for less than 6 months could be considered as moving.
 Slow moving stocks are those which are in stock for more than 6 months but less than 2 years.
 To further classify, into critical and non-critical, purchase orders on non-critical are stopped straightaway.

Inventory Control Decisions:

Inventory adds to the cost of operations and has to be minimized without sacrificing the efficiency of the operations. Some
of the steps taken for this control exercise include:
a) Continuous review of the excess and obsolete inventory (excess inventory can be known if the permitted inventory
norms are already clearly defined)
b) Part simplification and re-design – to use industry standard parts wherever possible
c) Review safety stocks and forecasting techniques, and
d) On-site supplier managed inventory

Inventory Costs Decisions:

The cost of inventory is basically the interest cost of the inventory held, the storage costs and any losses on account of
damages or deterioration in quality. A list of costs related to inventory is given below:
1) Items or unit cost – basic value of item carried
2) Carrying costs – capital, storage, risks which could be damage, deterioration, pilferage, obsolescence
3) Ordering costs of materials – mostly relating to follow-up with vendors but could also include generating and
sending a material release, transport or any other acquisition costs
4) Stock-out costs – back-order costs, lost sales or lost customers
5) Quality costs associated with non-conforming goods
6) Other costs could include duties, tooling, and exchange rate differences

Some inventory control methods in use are listed below:

1) Two bin system – used on shop floor for C type of items. At the start there are two bins which are full of the items.
Every time one bin gets empty, it is filled up. In the meantime, production uses the items in the other bin.
2) Perpetual inventory record system – to count the physical stocks against the book stocks almost on a daily basis.
3) Periodic review system – a stock check at pre-agreed intervals.
4) Defining target level inventory or stock norms which are based on consumption rates, lead times for receipts, safety
stocks and lot order quantities.
5) Inventory turn-over ratio
6) Number of day’s inventory

VII. Transportation Decisions: Transportation Selection Criteria; Types of Transportation Modes; Selection of Right
Transportation Mode
TRANSPORTATION DECISIONS: Modes/Types of Transportation:
1. RAIL FREIGHT TRANSPORT: In India the rail transport system is state run and believes in the two principles of
value of service on the demand side and cost of service on the supply side. The freight rates do not have a linear
relationship with tonnage or distance but keep in mind social obligations and financial viability. For example, it
 may be for essential commodities like food grains over long distances any time in large quantities at highly
subsidised freight rate considerations.
Rail Freight considerations include:
i) Speed of delivery desired
ii) Distance covered
iii) Ability to pay principle
iv) Nature of the commodities
v) The freight rates also depend on the extent to which the consignor is willing to share the risk in transit.
vi) Depending on the demand and supply of wagons and the frequency of service required by the customer
vii) For special wagons like those which are closed or refrigerated or shock-absorbing
The advantages of rail transport are that it is economical over long distances and it is reliable in all weather
conditions. However disadvantages, rail transport is uneconomical for small shipments over short distances. Nor is
it suitable for remote locations or highly perishable goods. The terminal handling facilities are costly and the time
schedules of the railways are not flexible.

2. ROAD TRANSPORT:
This is the most popular and commonly used form of transport of goods in India. It is possible to hire vehicles for
any destination and the trucker will ensure safe transit and responsibility of the goods when in his possession. When
contracts are in operation, the trucker can have dedicated trucks for specific customers or even trucks with special
equipment – refrigerated trucks, trucks with hydraulic tail gates, booms, trailers and so on.
Advantages of Road Transportation:
i) There is thorough movement of the goods from the consignor to the consignee without any trans-shipment.
ii) The company has the flexibility of deciding the drop points, the routes and these can be changed to suit changes
in off-takes. Normal transport contracts ensure that these are kept flexible.
iii) The operation can be 24 x 7. It is a known fact that long distance trucks run in the night.
iv) As most of the truck transport is on contract, the risk of industrial action is minimized.
v) Insurance, claims on truckers are in practice and are quite streamlined.
vi) For schedules in operation for quite some time, the truck turn-around is fast.

3. AIR CARGO: This is the most expensive but the fastest of the transport modes. Air transport is most suitable for
high value small volume goods that need to be transported quickly such as lifesaving medicines, perishable goods,
live animals etc. Domestic air cargo rates are based on available capacity, market requirements and the operational
economies. International air cargo tariff is based on different pricing concepts within the tariff structure,
rationalization in terms of routes, competition and any bilateral trade agreements between the countries.
Advantages of Air Transport:
i) Fastest mode of transport
 ii) Inventory cost can be controlled
iii) The service range is world-wide
iv) The capacity is being built both in domestic and international sectors

4. WATER TRANSPORT: Domestic water transport is limited to coastal areas only. For example, cement is
transported from Gujarat plants to Kerala. Water transportation is normally used for low value to weight ratio items
like timber, iron ore, coal, chemicals and cement. Commodities, which are bulky but low value where the items are
not required in a hurry, are most suitable for water transport. The C&FA forwards the goods to the dock in case of
Cargo booking by sea. At the dock the goods are delivered to the stevedores of the ship designated to transport the
goods. The shipper gives a mate’s receipt after paying the port charges. The shipment has to be done within the 7
days of the BOL to avoid any demurrage.
Advantages of Sea Transport:
i) Movement of bulk quantities are possible
ii) Lowest freight cost in rupees per ton-kilometer
iii) Long distance movement of low-value commodities

5. PIPELINE MOVEMENT: The entire pipeline will be owned by the company using it and is suitable for the products
of the company running the pipeline. Pipeline movement is only suitable for transporting continuously large
quantities of liquids and gases over long distances. This mode is normally used for petroleum products, gases, slurry
(coal, iron ore, limestone, copper) and crude. Indian examples include Gauhati – Barauni, Ankeswar – Baroda, and
Mathura – Virangam pipelines.
The advantages of pipeline movement are:
i) It is a reliable, continuous and all-weather transport
ii) Low cost and the energy consumption is low
iii) Low maintenance and operating costs
iv) As the pipeline can be laid underground, there is no problem of space
v) The transit losses are minimum
vi) It can be used in a difficult terrain also

Factors influencing Transportation Cost: Factors influencing the transportation costs could be product or market related.
Product related transport costs are dictated by density of the product, ease or difficulty of stackabiltiy/stow ability, ease or
difficulty of handling and liability on loss or damage.
Market related transport costs could be dictated by:
i) Location of the markets as it decides the distance.
ii) Balance of freight into and out of the market concerned.
 iii) Seasonality of product movements. During mango season or orange season or wheat harvest in North India trucks
are difficulty to get and road freight costs go up.
iv) Impact on customer service – frequency, load size and so on.
v) Degree of intra-mode and inter-mode competition.
vi) Any government regulations for transporters like permits required by road transporters in many states.

Transportation Selection Criteria:

The five prominent modes of transport available to any business are: road, rail, air, water and pipeline. Broadly the selection
criteria can be grouped under the four heads:
i) Transport rate related variables – assuming that the movement is from door-to-door (company premised to its
client premises) and the willingness of the transporter to negotiate rates on open facts.
ii) Customer service capabilities in terms of door-to-door transit time and reliability and consistency of pick up
and delivery. In the case of road transport there should be no trans-shipment of the goods.
iii) It is assumed that the transporter delivers the items to the end point without any damages or losses. Even if
there is some damage or loss in transit, there is a provision made for claiming the value from the transporter.
The procedure for raising the claims and recovering it from the transporter should be simple and full-proof.
iv) For some products like heavy equipment movement or products needing refrigerated movement, the transporter
should be in a position to provide the right handling equipment. The transporter should not only have the right
equipment but also the trained personnel to operate it without damaging the goods.