Session-

11
 CAUSES OF CHANNEL
•
CONFLICT
Role incongruities
– Set of prescription defining what the position
member should be
• Resource scarcities
– Frequently the manufacturer may decide to
keep some higher volume retailers
• Perceptual difference
– Manufacturer perceives POP display material as
valuable promotional tool, retailer may think it’s
junk
• Expectational difference
– Channel member makes a forecast on a decision
taken by manufacturer takes action based on
predicted outcome. Eg. Extended warranties
 CAUSES OF CHANNEL
CONFLICT
• Decision domain disagreements
– Eg. McDonald’s provides detailed manual
specifying the allocation of decision
making responsibilities
• Goal incompabilities
– Member of marketing channel have their
own goals,
• Communication difficulties
– Manufacturers making changes in policies
do not inform channel members
 CHANNEL EFFICIENCY
“Degree to which the total investments in the various
inputs necessary to achieve a given objective can be
optimized in terms of output”

Eg. Suppose a manufacturer sets a distribution

objective of getting 80% of its wholesalers to
carry a new product line and in the process
encounters strong resistance in persuading a
wholesaler in carrying the stock as they are
having too much inventory. The resulting conflict
could cause the manufacturer to direct its sales
force to spend an extraordinary amount of time
and effort to convince the reluctant wholesaler
to carry the new line and the extra input (time &
effort of sales people) can be measured in terms
NEGATIVE EFFECT- REDUCING
EFFICIEMCY
Wholesaler (W) carries similar
Channel product from two manufacturers
efficienc (M1 & M2)
y •M1 purchases ↓
•M1 has to regain previous volumes
from W
•Level of input M1 uses will
determine channel efficiency
•M1 learns M2 purchases are↑
•M1 gets angry and cuts of other
products which W finds profitable
•W reduces M1 purchases further &
concentrates on M2 more

Conflict
0
level RB-11
NO EFFECT- EFFICIENCY REMAINS
CONSTANT
Channel
efficienc
y

Characterized by
high level of
dependency and
commitment
amongst channel
members

Conflict
0
level RB-11
POSITIVE EFFECT- EFFICIENCY
INCREASED
Channel
efficienc
y

Wholesaler (W) very profitable

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

Conflict
0
level RB-11
 CONFLICT AND CHANNEL
EFFICIENCY – GENERAL CURVE
Channel
efficienc
y

C1 C2 Conflict
0
level RB-11
 MANAGING CHANNEL
CONFLICT
• Conflict is an inherent behavioral dimension
in the marketing channel
• Given the numerous causes from which
conflict may stem, it is a pervasive
phenomenon in marketing channel
• Conflict can effect channel efficiency
• Various level of conflict may have both
positive and negative effects on channel
efficiency, or possibly no effect
 RESOLVING CHANNEL
CONFLICT
• Establish channel committee for periodic
evaluation of emerging problems
• Joint goal setting by the committee which
takes into account the goal and special
capacities of the various channel members,
the needs of consumers and environmental
constraints
• Create position of distribution executive for
each major firm in the channel who will be
responsible for exploring the firm’s
distribution related problems
 CONFLICT RESOLUTION
High Cooperativeness

ACCOMODATION COOPERATIVENESS Collaborati

•More focused on •Compromising on or
other’s goals than repeatedly Problem
•Concern for the solving
one’s own- keeping
peace other party’s •Win-win
• Encourages outcome approach
•Suited for minor
reciprocation Compromi
conflicts
se

Low High
Assertiveness Assertiveness

AVOIDANCE
•Passive channel ASSERTIVENES
Competitio S
member or in a
n or •Concern for
weak position
Aggressio one’s own
•Wanting to save
n outcomes
time &
unpleasantness Low Cooperativeness Coughlan
•Aggravates
 A FLOW CHART OF CHANNEL
DESIGN
(1)
DECISION
•Developing a new product / product line
Recognize need for •Existing product at anew target market
channel design •Major change in the marketing mix (Wheel)
decision •Starting new firm from scratch
•Opening up new geographic market
(2)
•Environmental change
Set and coordinate
•Occurrence of conflict
distribution objectives
•Reviewing & evaluating
(in sync with objectives
& strategies of the firm)
(3) (7)
Specify the distribution Select the channel
tasks member
(Warranty/ service/
credit) (6)
(4)
Choose the best channel
Develop alternative
structure (calculate exact
channel structure (no.
payoff associated with each
of levels/ intensive/
alternative)
selective/ exclusive)
(5)
Evaluate the relevant variables
(market/ product/ co./ RB-12
 ZERO BASED CHANNEL
A. Meets the target market segment’s demand for service
outputs
B. At minimum cost of performing the necessary channel flows
that produce those service outputs
– Spending too little will result in insufficiently low provision of
service outputs. Competition may take advantage of the hole
in the service output provision by offering a superior
combination of product plus service outputs
– Spending too much will produce a higher level service
outputs than the target market value and will unnecessarily
increase the cost thus reducing profitability
– Achieving the right balance is a continuously demanding task.

Coughlan
 LINKAGE BETWEEN CHANNEL
DESIGN & CHANNEL OBJECTIVE
CHANNEL OBJECTIVE CHANNEL DESIGN
• Concentrate on urban • Establish outlets close to
target buyers
market to fall in line
with segmentation/ • Go for large white goods
dealers and large format
positioning strategy stores
• Proximity to • Go for shop-in –shop in
customers super stores
• Maintain an edge • Have a 3 – tier system to
over competition by cater to smaller white
competing on quality, goods dealers other
service image & retailers
value
 REALATIONSHIP BETWEEN
CHANNEL CLOSENESS AND
DISTRIBUTION INTENSITY
Degree
Very close
of
closen
Close ess

Medium

Loose

Distribution
intensity
Very
loose
Intensive Selecti Exclusive
ve RB-181
CUSTOMER MARKETING
CHANNEL 1- LEVEL
Manufactur CONSUME
er 2- LEVEL R
Manufactur RETAILER CONSUME
er 3- LEVEL R
Manufactur WHOLESAL RETAILER CONSUME
er ER R
Manufactur WHOLESA JOBBER RETAILER CONSUME
er
4- LEVEL LER R
BUSINESS MARKETING
CHANNEL 1- LEVEL Industrial
Manufact
Customer
urer
2- LEVEL Industrial Industrial
Manufact
Distributor Customer
urer
Manufactur
Manufact er’s Industrial
urer representat Customer
ive of sales
branch
Manufactur Industrial
Manufact Industrial
er’s Distributor Customer
urer
representat
 THE SALES PROCESS
• Price
• Tax MIS
• Schemes Report
• Payment Terms Generatio
• Credit check n
• Minimum Order Payment Customer
• Billing Collection Order

Production
•Fans
•Appliances Ware-house Sales Office Customer
•Sewing M/c (Wholesaler)

• Delivery/Despatch Retailer Consumer

• Freight
Direct Sales

• Account Statement
• Credit Notes Sales/ Defective
• Account Block Returns
KEY CRITERIA TO CONSIDER WHEN
SELECTING CHANNEL MEMBERS
Credit
& Sales
financi stren
Size
als gth

Produ
Attitu ct
de lines
Prospecti
ve
channel
Mgmt Reput
.
member
a-tion
abilit
y

Mark
Mgmt. et
success Sales
perfor cove-
ion age
m-
ance
RB-13
 DISTRIBUTION COST APPROACH
1 125 Sales Man @ Rs.10,000 Rs.1,250,000
2. 1 Field Manager per 10 sales men @ 156,000
Rs.12,000
3. 5 Branch managers @ Rs. 15,000 75,000

4. Warehouse & office help, inventory, 2,000,000

interest on inventory and buildings
5. Total selling cost for direct selling (1- Rs.3,481,000
level)
6. 30% Gross Margin on sales would Rs.3,481,000/
require in sales to cover this cost 0.3
=
Rs.11,600,000
Suppose retailers (2- level) were used with following
different margins allowed on the level of sales
7. If 15%, then 11,600,000 x 0.15 Rs.1,740,000
RB- 224
 DIRECT VERSUS RETAILERS
COST COMPARISON
15% 10% 5% Margin
Margin Margin Assumptio
Assumptio Assumptio n
n n
Direct Rs.3,481,00 Rs.3,481,00 Rs.3,481,00
(1- level) 0 0 0

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

(2- level)

Savings Rs.1,741,00 Rs.2,321,00 Rs.2,901,00

RB- 224
Session-
12
 PHYSICAL
DISTRIBUTION
MANAGEMENT
 LOGISTICS MANAGEMENT
Completing the marketing transaction once the buyer and
the seller come to terms and enter into a contract of
sales- process of planning, implementing and controlling
the efficient, cost effective flow and storage of raw
materials , in-process inventory, finished goods and
related information from point of origin to point of
consumption for the purpose of confirming to customer’s
requirement Inbound Outbound
SUPPLIER Production CUSTOMER
Logistics Logistics

MATERIALS PHYSICAL
MANAGEMENT DISTRIBUTION

LOGISTICS
MANAGEMENT MK 287
 MAJOR ELEMENTS OF
DISTRIBUTION LOGISTICS
1. RECEIVING
2. STORING
3. ORDER TAKING
4. DISPATCH
The warehouse function performs a role beyond
providing simple subsidiary service to another
function. The warehouse adds value in a no. of
ways:
•Breaking bulk
•Creating bulk
•Smoothing/ Assembling
 WAREHOUSING PRIVATE VS
VARIABLES
PUBLIC
PRIVATE PUBLIC
Owned Leased
Fixed Very high Moderate No fixed
investment investments
Unit cost High if High if volume Low
volume is low is low

Control High High Low management

control
Adequacy to Highly Moderately May not be
production adequate adequate convenient
line

Flexibility Low Low High: Termination of

usage can be easily
arranged
MK 290
 CONSIDERATIONS FOR
WAREHOUSING &
•
TRANSPORTATION
How many warehouses to have?
• Where must they be located?
• What should be the type of
1. ownership?
General warehouses- handles variety of goods
2. Specific warehouse- limited line of goods

t
an e o to te ns n nd f

h
3. Bonded warehouses- regulated by govt. laws,

m ett eh is ca io tio a l o

e
lle e ua s. rd on d ei
b ar d ti at za on ve

m er th
insured against loss

ce ag r q se wa d c an , fr
w en his lid ri ti le

er w l,
y p fe o
4. Bulk storage warehouses- liquid goods

tr p so te iza r
so n pu n he

n me lit It s tr

s
it
co m ha ig
5. Refrigerated warehouse- for keeping in cool or

c o ec h h
frozen state
m it
W
6. Field warehouse- owner’s own plant
Transportation

ic d
rv a n
e
• Railways

se t
u

n
• Road
• Air

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

Consumption Customer Retailers Wholesalers Manufacturers Suppliers

Coughlan
Session-
13
PHYSICAL DISTRIBUTION MANAGEMENT
BASED ON SYSTEMS CONCEPT & TOTAL
COST APPROACH
Transportation

Materials Managemen
Managem
Handling t attempts
ent views
to minimize
PD as a
the cost of
system of
Order using the
interrelat
Processing components
ed
taken as a
componen
Inventory whole
ts
control

Warehousi
ng

Packaging
RB 397
 BASIC COMPONENTS OF
PHYSICAL DISTRIBUTION
Transportation: SYSTEM
Most fundamental. Choosing optimum mode of transportation to
meet customer service demands
•Own carriers vs common carriers
•Different rates available
Materials handling:
Placement and movement of products in storage areas.
•How to minimize the distances products are moved within
warehouse during course of receiving
Order processing:
Key component of physical distribution
•Relationship with order cycle time
Warehousing:
Holding products until they are ready to Packaging:
be sold Relevant as a component of PD
•Location system
•No. of warehousing units •Type of transport can affect
•Size of the units packaging and packaging costs
•Layout and internal systems
 ORDER PROCESSING
Order processing function is very important
•
as it involves entering, processing and
tracking customer orders.
Organizations must have a standard
procedure for handling orders.
Distribution logistics manager must check
customer's credit and stock availability, back
order management, automatic pricing and
discount calculation.
Proper order processing can affect customer
INVENTORY HANDLING
1. How much to order?
2. When to order?

EOQ = √ 2DS /IC

Where
Q = Order quantity in units
D = Annual demand in units
S = Order processing costs
I = Annual inventory costs as
percentage
C = Cost per stock
MK 295
 ECONOMIC ORDER QUANTITY
MODEL
Cost Invent
per ory
unit of Total Cost Carryin
invent g Cost
ory

Orderi
ng
Cost

Order
Size
RB 401
TYPICAL FMCG DISTRIBUTION
PARADIGM
FACTORY

C & F AGENT WHOLESALE

(2% - 3%) (3%)

STOCKIST/
DISTRIBUTOR RETAILERS
(4% - 6%) •SMALL
RETAILERS •UPCOUNTR
(8% - 12%) Y
MARICO’S DISTRIBUTION
NETWORK
32 DEPOTS

URBAN RURAL

TOWNS/ CITIES TOWNS/ CITIES

3200 (135 Sales 11,000 (35 Sales
territories) territories)

850 115

DISTRIBUTORS SUPER
DISTRIBUTORS

9,50,000
7,50,000
RETAILERS
RETAILERS
TP-1
 DISTRIBUTION NETWORK -
ets = Detergents HUL
P= Personal Products URBAN Selling Price of HUL=
S= Redistribution Stockist Rs.100
(Through C&FA) Selling
U2= Lakme, Axe,
Home & Price
Kotex, Huggies, FOODS
Personal Dove
to
Care (HPC) trade
=
Urban Rs.105
U2
1
Bevera
Dets U 2 RS Foods
PP RS ges
RS
8% - 10%
Margin
Pan
Moder
Big Kiosk shops,
n
Bazaar Marginal
Trade
outlets
Wholes Mass Kiosk= Marginal outlet
ale Retail coverage
(10 SKU & < Rs.5000/- pm
 DISTRIBUTION NETWORK -
HUL
RURAL
(U1+Foods)
elling price of HUL = Rs 98 Selling price of HLL = Rs 98
hrough C&FA Through C&FA

RD CIDC LAB

SS Shakti
Selling price to trade
Selling price to trade = Rs 100*1.05
2% incentive given
= Rs 98*1.07 borne by HLL
RD = Rural Distributor, services large scattered areas where cost of
transportation is high & is given an additional 2% margin
CIDC = Complete Indirect Coverage, services large rural markets on
an order taking basis
LAB = Leadership Across Business (Combined TO of less than 1 cr.
 EXERCISE
• XYZ is a company with small beginnings. It sells products in
markets very far from the manufacturing plant. Very small t/o.
It increased sales through product dev, proper distribution and
greater market coverage. It used to send own salesmen to
distributors and dealers to collect orders.
• Sometimes there was a shortage of goods, order cycle was as
much as 20 days. Billing and payment was through banks.
Dealers were keen to place orders as there was demand. And
the number of direct sales contacts had increased
tremendously. This put a heavy load on staff at HO.
• What were the problems being faced? What should be done?
Why? (individual vs exclusive dealers, too many contact points,
loss of control using exclusive distributors)
Session-
12
 ANATOMY OF OF CHANNEL PRICING
STRUCTURE FOR SET OF GUITAR STRINGS
WITH A LIST PRICE OF Rs.1000/-

Cost to produce string = MANF. Rupee gross margin

Rs.250/- received by
manufacturer on sale of
Wholesale trade discount = 66% strings to wholesaler
Cost of strings
Rs.90/-
to wholesaler = Rs.340/-
WHOLESAL Rupee gross margin
Retail trade discount = 50% ER received by
Cost of string wholesaler on sale of
to retailer = Rs.500/- strings to retailer
Rs.160/-
RETAILER
Rupee gross margin
Consumer discount = 25% received by retailer on
Cost of string sale of strings to
to consumer= Rs.750/- consumer
CONSUMER Rs.250/-

(All discounts to wholesaler, retailer, consumer are RB-342

 SCHEDULE OF CHANNEL PRICING
STRUCTURE FOR A SET OF GUITAR
STRINGS WITH A LIST PRICE OF
RS. 1000/-
Pricing Trade Cost Rupee Gross Gross
data Discoun s Margin Margin
t mark on on Cost
Channel up Selling
particip Price
ant
Manufactur Rs. Rs. 90 26.5% 36%
er 250
Wholesaler 66% Rs.340 Rs.160 32% 47.1%

Retailer 50% Rs.500 Rs.250 33.3% 50%

•Retail discount offered by retailer based on
competitive conditions: RB-343
Consumer* 25% Rs.750
 MARGINS AND OTHER OPERATING
DATA OF SELECTED RETAILERS
Type of Retailers Gross Operating Net Profit
Margin Expense before Taxes

Automobiles 14.1% 13.3% 1.1%

Dairy products 34.9% 33.0% 2.2%
Department 36.4% 34.4% 1.4%
stores
Drugs 31.0% 27.6% 2.7%
Groceries & 22.5% 20.9% 1.5%
meats
Furniture 40.1% 37.2% 2.5%
Household 31.3% 29.1% 1.5%
appliances
Restaurants 56.7% 52.7% 2.7%
Sporting goods 34.8% 30.6% 3.2%RB-
DISTRIBUTION MARGINS IN
INDIA
Types of Stockist’s Retailer Cash
Products / Margin Discounts
Distributor
’s Margin

Controlled 8% -10% 16% •Manufacturer

drugs -20% 5% - 10% to
stockists (free
packs)
•Stockists – 2%
to retailers
Consumer 5% 15% - Manufacturer
durables 20% 2% - to
distributors
 PRICING STRUCTURE OF BAJAJ
APPLIANCES
PRICE (RS.)
LIST PRICE 100
RETAILER DISCOUNT (10%) 90

RETAILER INCENTIVE (5%) 85.5

DISTRIBUTOR DISCOUNT 81.2
(5%)
CASH DISCOUNT (3%) 78.7
ANNUAL INCENTIVE
Authorized (2%)receive additional
service Dealers 77.1
2% for providing after sales service
DISTRIBUTOR PRICING STRUCTURE
OF BAJAJ WATER HEATER WITH
OFF-SEASON DISCOUNT
15 LITRES 25 LITRES
BASIC (RS.) 3330 4692
LESS:- OFF-SEASON 250 500
DISCOUNT
NET AFTER DISCOUNT 3080 4192
ADD: - VAT (12.5%) 385 524
TOTAL 3465 4716
LESS: CD (3%) 104 141
COST TO DISTRIBUTOR 3361 4575
MRP 4499 5100

Authorized Service Dealers receive

additional 2% for providing after sales service
21.A customer buying a branded
product from a low-priced
distributor likely is:
a. Getting a counterfeit product
b. Buying in gray market
c. From an unauthorized dealer
with high-volume operating
economics
d. Purchasing from a free rider
e. There is no way to tell from the
information given
Answer to question 21:
‘e’
GRAY MARKET AND FREE
RIDING
• GRAY MARKET
– Sale usually at very low prices, of brand- name products
by unauthorized distributors or dealers
• FREE RIDING
– Behavior of distributors and dealers who offer extremely
low prices but little if any service to customers
– Gray market and free riding phenomena are related when
products sold by free riders are obtained from gray market
• NET EFFECT
– Unhappy channel member retaliate by “foot-balling” the
product or “if you can’t beat ‘em join ‘em’ approach and
become gray market or free riders themselves
Session-
13
 COSTS & SCOPE OF PRODUCT
RETURNS
• The value of returned goods is closed to $60- 100 billion
annually
• Web returns alone had a value between $1.8 and $2.5
billion in 2002
• Estimates are that the costs of processing those web
returns is twice as high as the merchandise value itself!!
• US companies are estimated to spend from $35 billion to
more than $40 billion per year on reverse logistics
• The average company takes 30-70 days to move a
returned product back into the market
• The estimated no. of packages returned in 2004 is 500
million

Coughlan
 REVERSE LOGISTICS
Poor quality product ships as
spare parts to manufacturers
Return for
sale MANUFACTU
MANUFACTU Reparable
RER-RUN
RER Inspect, product
RETURN/
grade
Return

SORTING
credit

REPAIR/
for

Inspect, grade FACTORY REFURBISHM

THIRD-PARTY
ENT FACTORY
Inspect, RETURNS/ Reparable
RETAILER
grade REVERSE product
LOGISTICS
FIRM
Return for
refund

SECONDARY
High quality MARKET,
product
BROKER,
JOBBER
CONSUMER CHARITY

Solid line denote product to be salvaged for

subsequent revenue. Dotted lines denote non- Coughlan
TOOLS FOR SALES
MANAGEMENT
 POSE THE FOLLOWING
QUESTIONS TO THE
CHANNEL MEMBER
– Do channel members hold inventories?
– Do they make purchases in large or small quantities?
– Do they provide repair service?
– Do they extend credit to customers?
– Do they deliver?
– Do they help train customers’ sales force?
 COMPONENTS OF
• LOGISTICS SYSTEM
Transportation
– Deciding on the modes of transport to be used
• Materials handling.
– The range of activities and equipment involved in the
placement and movement of products in storage areas
• Order processing
– The procedures and “paper work” needed to fill orders
• Inventory control
– The process of managing inventory levels so as to have
the products desired by customers while minimizing
inventory levels
• Warehousing
– The holding of products until they are ready to be sold
• Packaging
– How products are protected for shipment and storage as
it relates to other components of a logistics system
RB (Instructor)- 13