CHAPTER 8

INDUSTRIAL DISTRIBUTIOIN CHANNELS

AND

MARKETING LOGISTICS

INDUSTRIAL : Chapter 8 1  Understand alternative channel structures

 Know types of industrial intermediaries

 Understand steps involved in designing a channel

 Learn how to manage channel members

 Understand concepts of supply chain management,

Logistics, and business logistics system

 Learn the tasks of physical and total

distribution cost

INDUSTRIAL MARKETING: Chapter 8 2 Alternative Channel Structures Industrial channel structures include both direct and indirect channels. Direct Channels  Examples are direct selling through company sales force and through on-line marketing, telemarketing and direct mail. Direct channels are used typically when (i) Transaction value is large, (ii) Technical & commercial negotiations are held at various levels (iii) Buying process takes a long time (iv) Buyers want to buy directly from manufacturers. Indirect Channels  Consists of intermediaries like distributors / dealers, manufacturer’s reps / agents, value-added resellers (VARs), brokers and commission merchants.

 Indirect channels are generally used when (i) Value of transaction / sales is low, (ii) The manufacturer’s resources are limited, (iii) Customers are geographically dispersed, (iv) Buyers purchase many items in one transaction.

INDUSTRIAL MARKETING: Chapter 8 3 Types of Intermediaries

1. Industrial Distributors / Dealers  They perform many functions like buying, storing, promoting, financing, selling, transporting and servicing certain geographic market, & are given discounts.

 Major categories are (i) General – line distributors, (ii) Specialized distributors, and (iii) Combination house.

2. Manufactures’ Representatives / Agents  They perform functions like promoting manufacturers’ products / services, getting orders, and colleting market information. They are independent business firms, representing various manufacturers whose products complement one another but are not competitive.

 They are paid commission on the value of sales or orders booked. They do not buy, store or finance transactions.

INDUSTRIAL MARKETING: Chapter 8 4 3. Value-added Resellers (VARs) They are new type of intermediaries from computer industry. They deal with computer hardware and software companies, customize the same to solve specific problems of buying firms. They are paid discounts.

4. Brokers They bring together buyers and sellers, when information is not available completely. They represent either a buyer or a seller, and their relationship is short term. They do not buy products & services and are paid on commission basis.

5. Commission Merchants They represent sellers / manufactures, mostly with bulk commodities like raw materials, to perform functions like arranging inspection, transporting, negotiating and selling. They are paid commission on the value of sales.

INDUSTRIAL MARKETING: Chapter 8 5 CHANNEL DESIGN It includes developing new channels and modifying the existing channels The procedure / steps are as follows; (i) Developing channel objectives; (ii) Analyzing channel constraints; External environment, Competition, company,product characterstics & customers. (iii) Analyzing channel tasks; (iv) Identifying channel alternatives. These include the following issues : (a) Types of intermediaries (b) Number of intermediaries – selective distribution, Intensive distribution, Exclusive distribution (c) Number of channels (v) Evaluating the channel alternatives. The criteria used are: (a) Economic factor (b) Control factor (c) Adaptive factor (vi) Selection of the channel (s)

INDUSTRIAL MARKETING: Chapter 8 6 MANAGING CHANNEL MEMBERS

It includes :  Selecting Intermediaries – location, experience,financial standing & infrastructure  Motivating Intermediaries (a) Partnering relationships (b) Reasonable discounts and commission (c) Distributor councils (d) Other motivational tools

 Controlling Channel Conflicts (a) Sources of channel conflicts (b) Controlling conflicts by (i) Effective communication network; (ii) Joint goal – setting; (iii) Diplomacy; Mediation; Arbitration (iv) Vertical marketing system (VMS) Evaluating Channel Members

INDUSTRIAL MARKETING: Chapter 8 7 Concept of Supply Chain Management (SCM)

SCM includes activities of moving goods from raw material through operations to final consumers, as shown in “SCM Framework” below:

Information Flow

Cash Flow

Product Flow

Suppliers Business Production of Planning Distribution Customer Customers R Ms & & Purchase or & Components Forecasting Service or Operations Logistics End Users

INDUSTRIAL MARKETING: Chapter 8 8  Main aims of SCM are (i) Reduce cost per unit, (ii) Reduce waste & duplication, (iii) Minimize order to delivery cycle, and (iv) Ensure superior delivery service. Firms adopting SCM gain competitive advantage.

 The aims are achieved by a network of interdependent firms working together with partnering relationships to manage and control various activities, in order to improve flow of materials and information from suppliers to end users.

 Firms involved in SCM are suppliers of raw materials & components, transporters, distributors, material handling & information processing firms.

INDUSTRIAL MARKETING: Chapter 8 9 Logistics Management (LM)

LM plans and coordinates activities to achieve superior customer service levels at lowest costs. LM optimizes material flow within the firm, but SCM extends integration of material flow to suppliers’ suppliers and customers’ customers. For better understanding, see figure on “ business logistics system”, which has two product movement; physical supply and physical distribution.

INDUSTRIAL MARKETING: Chapter 8 10 Business Logistics System

Physical Supply Industrial Manufactuer Physical Distribution (or Marketing Logistics)

Row materials Components Materials Storage

Supplies

Manufacturing

Business Customers Finished goods Storage Distributors/ Dealers

Marketing Logistics (or Physical distribution) consists of delivering finished products to intermediaries and customers.

INDUSTRIAL MARKETING: Chapter 8 11 TASKS OF PHYSICAL DISTRIBUTION (PD)

PD tasks are : (i) Transportation, (ii) Warehousing, (iii) Inventory Control, (iv) Customer Service, (v) Packaging, (vi) Material Handling, (vii) Order Processing, (viii) Communication, (ix) Locations of factory & Warehouses.

 Total Distribution cost and customer service are balanced by (i) Minimizing total distribution cost, or (ii) Total systems approach through maximizing profits

 Total Distribution Cost = Transportation cost (Freight) + Warehouse cost + Inventory cost + Cost of lost sales due to delayed delivery.

INDUSTRIAL MARKETING: Chapter 8 12  A firm must minimize “total distribution cost”, instead of minimizing individual cost elements, to balance customer service and total distribution cost.

 Another approach, called “total systems approach or channel integration” focuses on “return on investment” (ROI). Here, a firm’s channel members work together to improve “customer service”, in order to get higher sales revenue.

Sales Revenue - Total Physical Distributor Cost = Capital Investment

INDUSTRIAL MARKETING: Chapter 8 13 CUSTOMER SERVICE

 Service Quality Gap : Gap between perceived service and expected service. A firm may have a strategy of giving superior quality service than competitors and exceeding customer’s expectations.  Factors that determine service quality by customers are : (i) Reliability (ii) Responsiveness (iii) Assurance (iv) Empathy (v) Tangibles

INDUSTRIAL MARKETING: Chapter 8 14 Strategies followed by successful customer service firms

(a) Top management commitment

(b) Setting high-standards of service quality

(c) Monitoring system

(d) Systematic approach to resolving customer complaints

(e) Satisfy both employees and customers

INDUSTRIAL MARKETING: Chapter 8 15  Developing customer service levels/ standards Neither all customers nor all products need the same level of service. Steps involved : (i) Conduct study to find which elements of customer service are important to customers (ii) Find needs / expectations of customers in quantitative standards for the service elements (iii) Get information on actual performance of the company and it’s competitors from customers (iv) Analyse variance of actual performance with standards (v) Take corrective actions to minimise the variance

 Outstanding delivery service levels are achieved by integrating logistics and through supply chain management

INDUSTRIAL MARKETING: Chapter 8 16  Managing channel members consist of selecting and motivating intermediaries, controlling channel conflicts, and evaluating channel members.

 Supply chain management (SCM) includes activities of moving goods from raw material through operations to final consumers. Logistics management optimizes material flow within the firm, but SCM extends integration of material flow to suppliers’ suppliers and customers’ customers.

 Business logistics system includes physical supply and physical distribution (or marketing logistics).

 To balance total distribution cost and customer service, a firm can use any of the approaches: (i) Minimize total distribution cost, or (ii) Maximize profits (ROI) through channel integration.

INDUSTRIAL MARKETING: Chapter 8 17 SUMMARY OF CHAPTER - 8

 Industrial channel structures include direct and indirect channels  Types of industrial intermediaries are: industrial distributors / dealers, manufacturers’ representatives (or agents), value – added resellers (VARs), brokers, and commission merchants  Procedure of channel design includes: developing channel objectives, analyzing channel constraints and tasks, identifying channel alternatives, evaluating alternatives and selection of the channel (s)

INDUSTRIAL MARKETING: Chapter 8 18 INDUSTRIAL MARKETING: Chapter 8 19