Sales and Distribution Management

MBAM 562

UNIT SIX: PHYSICAL DISTRIBUTION - POLICY AND PLANS

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 6.1 Concept and its importance of Physical
distribution
In the field of marketing, channels of distribution
indicate routes or pathways through which goods
and services flow, or move from producer to
consumers. We can define formally the
distribution channel as the set of interdependent
marketing institutions participating through which
a commodity, in the marketing activities involved
in the movement or the flow of goods or services
from the primary producer to the ultimate
consumer.
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Definition:-
•American Marketing Association “A channel of distribution
or marketing channel is the structure of intra company
organization units and extra company agents and dealers,
wholesalers and retailers through which commodity,
product or services is marketed”. The above definition
includes two aspects.
•The firm’s internal marketing organization units and the outside
business units which a firm uses in its marketing work, and
•The channel structure of the individual firm and the entire
channel complex available to all firms. The channel is also
described as grouping of intermediaries from first owner to the
last owner, who take title to a product during the marketing
process.
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• The word channel has its origin from the French
word “canal”. The route through which goods move
from the place of production to the place of
consumption is called channels of distribution.
• Philip kotler “ Distribution channel is a set of
independent organization involved in the process of
making a product or services available for use or
consumption by the customer or industrial user”.
• William. J. Stanton “A channel of distribution of
product is the route taken by the title to the goods as
they move from the producer to the ultimate
consumer or industrial user”
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Characteristics of Channels of distribution: -
1. Route or pathway: - Channel of distribution is a route
or pathway through which goods and services flow from
the manufactures to consumers.
2. Flow: - The flow of goods and services is smooth and
sequential and usually unidirectional.
3. Composition: - It is composed of intermediaries, such
as wholesaler, retailers, agents, and distributors etc., also
called middlemen who participate in the flow voluntarily.
4. Functions: - The intermediaries perform such functions
which facilitate transfer of ownership, title and
possession of goods and services from manufacturers to
consumers.
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5.Remuneration: - The intermediaries are paid in the form of
commission for the services rendered by them. The same is
compensated by the manufacturer in the form of commission allowed
by the manufacturer or added in the price of the goods sold.
6. Time Utility: - As they bring goods to the consumers when
needed.
7.Convenience Value:- As they bring goods to the consumers in
convenient shape, unit, size and package.
8. Possession value: - As they make it possible for the consumers to
obtain goods with ownership titles.
9.Marketing tool:- As they serve as vehicle for viewing the
marketing organization in its external aspects and for bridging the
physical and non-physical gaps which exist in moving goods from
the producers to the consumers.
10. Supply demand linkage: - As they bridge the gap between the
producers and consumers by resolving need. Here, the distribution
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work is link between the demand and supply. 6
 6.2 Need for the channel of Distribution
In an ever-widening market, particularly in consumers
goods market, distribution channel have a distinctive
role in the successful implementation of marketing plans
and strategies.
1. The searching out of the buyers and sellers
2. Matching goods to the requirements of the market
3. Offering products in the form of assortments or
packages of items useable and acceptable by the
consumers or users.
4. Implementing the pricing strategies in such a manner
that would be acceptable to the buyer and ensure
effective distribution.
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5.Looking after all physical distribution functions
6.Participating actively in the creation and
establishment of market for a new product.
7. Transfer of new technology to the users along
with the supply of products and playing the role of
change agents.
8.Providing feed back information, marketing
intelligence and sales forecasting services for their
regions to their suppliers.
9. Offering credit to retailers and consumers
10.Risk-bearing with reference to stock holding
/transport
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 6.3 Objectives
A. To ensure availability of products at the point of
sale.
B. To build channel members loyalty
C. To stimulate channel members to put great selling
efforts
D. To develop managerial efficiency in channel
organization
E. To identify your organization at the buyer level
F. To have an efficient and effective distribution
system, to make your products and services
available.
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Functions of Distribution channel: - There are THREE
1.Place utility:- The place utility facilitates transportation
of the product form the manufacturers place to a
convenient location, which is easily accessible to the
buyers and thus creates place utility.
2.Ownership Utility:- The middle men purchase the
products from manufacturer and ultimately exchange them
for money with consumers who, after buying them gain their
title. Thus ownership utility is created at the time of transfer
of title from the channel members to the consumers.
3.Time utility: - Marketing channels create time utility when
they make products available for the sale at a time when the
consumer wants to purchase them. For this purpose, they
store the products with them
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 6.4 Factor influencing channel choice

1. Marketing conditions:-This is the starting point of

channel choice is to know your market well. By market,
we mean the following
A. Type of territory: - The extent of area, number of
customers, geographic concentration or otherwise are
considered. Where as few geographic concentration
exists, direct dealing is possible. In foreign markets
middlemen are desirable.
B. Type of customers: - All business firms are customer-
oriented. Hence channel must consider the buying
behavior of customers. Similarly the number of customers
is also important. There are only a few customers, firms
can do without channels. When dealing with highly
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specialized products like computers direct contact is
beneficial.
C. Order size: - Some times bulk orders are picked up
by a few customers like government organizations and
giant firms. Here also middlemen can be dispensed with.
2. Product conditions: - There are many characteristics of
product which influence channel selection. However, the
following attributes are the most important aspects.
A. Unit value: - Higher the unit value greater the chances
of direct sale. Sales of ship or aircraft are an example.
B. Perishability:-Such goods need direct sales or
employing channel having shorter lengths.

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C. Specialized products: - Examples are
industrial/business products like nuclear power plant.
Here direct sales are preferred.
D. Consumers’ goods: - Consumer goods on the other
hand prefer channel sales.
3. Company characteristics:-
A. Product capacity- regarding the product
B. Financial strength- According to finance the
production comes to the market
C. Managerial ability- Efficient and effective staff is
required to the organization
D. Role of assigned to middlemen etc

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4. Attitude of middle men:- Channel selection is
influenced by attitude of middlemen. Some demand
exclusive dealership, some insist producer to meet certain
conditions like quantum of advertisement and or product
provenances before accepting their products. Other
aspects are service conditions, commission, storage and
transport, credit terms etc.
5. Environmental conditions: - Fiscal policies,
import/export polices, technological development,
economic conditions and infrastructure availability etc.
have decisive say in channel decisions.

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 6.5 Various Channels of policies and strategies-
conflicts
A manufacturer must, therefore, constantly review his channel polices
and make sure that they are not only adequate, but are also the best in
his situation. All these lead to the conclusion that the marketing
policy can never be permanent. The ultimate test of a policy must be
the effectiveness and economy of serving the customer. FOUR
principal decisions that must be made in this context are:
1. Channel length: Whether to use wholesaling ,middlemen, retailers
or some combination
2. Channel number: How many different marketing channels to
employ?
3. Channel member types: What kinds of wholesaling middlemen
and retailers to bring in?
4. Channel width: How many outlets or individual firms to employ
at each level of the channel?
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The Andersen Consulting Distribution Strategy Pyramid

Distribution
Objectives

STRATEGY

Channel Network
Design Strategy

STRUCTURE

Intermediate Warehouses Materials

Management and Transport Management

PROCESS

IT Policies and Facilities and Channel

Procedures Equipment Management

IMPLEMENTATION
The above polices are chosen from among these THREE
alternatives
A. Intensive Distribution: This method refers to as
‘maximum expansion’. Intensive distribution methods
are usually adopted in the case of convenience goods for
example, Cigarettes, beer products etc. Almost all branded,
convenience items need intensive distribution because
buyers will not spend much effort in buying a
particular brand, they want availability.
B. Selective Distribution:- Under this policy a
manufacturer selects a limited number of wholesalers or
retail distributors and works closely with them to further
the sale of this products. This requires considerable
planning and through knowledge of the market.
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Selective distribution can be used for any type of
products, even with convince goods, but of course,
such a policy will restrict the distribution.
Selective distribution is found suitable in the case
of shopping goods which carry a higher unit price
and which are not purchased as frequently as
convenience goods. Goods which require after-
sales service are often sold through selective
distribution outlets.
This is the case with some household appliances
and office equipment like refrigerators,
computers etc.
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C. Exclusive Distribution: - The manufacturer has
to agree that he will not sell to any one else in that
territory. Here, the distributor only sells the
particular brand of goods. The policy limits only
sell the particular product; generally, these
distributors take permission from the concerned
government. Here, effective and easy maintenance
control over the channel. Fewer agencies ultimately
result in low cost of distribution. One draw back is
there it leads to monopoly. Some times no chance
to choose. Like import any goods or services
from concerned countries.
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 6.6 Channel Management & Relationships

1. Designing a Distribution Channel.

2. Types of Intermediaries and Functions of Intermediaries
3. Identification & Selection of Channel Partners.
4. Appointment & Training of Channel Partners.
5. Evaluating & Motivating Channel Partners.
6. Causes of Channel Conflict.
7. Resolution of Channel Conflict
1. Designing a Distribution Channel
• Specifying the role of distribution channel.
• Selecting type of distribution channel.
• Determining the intensity of distribution channel.
• Choosing specific channel members.
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• Specifying the role of distribution channel
• Channel strategy to be proportional to a Co.’s marketing
objectives, and roles assigned to the rest of the marketing
mix. Co to decide whether distribution will be used
defensively or offensively.
• Defensive approach – Distribution as good as a
competitor.
• Offensive approach – Gain competitive advantage by
having better distribution.
• Planning the distribution Channel
• To decide on:
– Channel structure
– Channel tiers
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A. Channel Structure
a. Direct, Indirect.
b. Vertical, Horizontal.
c. Multi-channel
•Direct: Producer  Consumer
•Indirect: Producer  Intermediary  Consumer
•Vertical Marketing Systems (VMS)
- Corporate VMS : A firm at one level of channel owns
firm at the next or subsequent levels. High degree of
control for Producer.
- Administered VMS : Dominant brand owners are able to
secure strong trade support from intermediaries.
- Contractual VMS : Producer exercises control through
contractual terms – exclusive dealers.
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•Horizontal Marketing Systems (HMS) – two or more
unrelated Cos. join together, so as to have pooled resources
to exploit an emerging marketing opportunity. This
system takes place when a Co. lacks financial resources or
marketing know how and is afraid to take risks on its own.
•Multi-channel Marketing Systems (MMS) – MMS
occurs when a Co. uses different channels to reach
same/different market segments, to ensure availability of
right product at right time.
B. Selecting type of Channel
Tiers of distribution channel:
• Zero Tier: Producer  Consumer.
• One Tier: Producer  Retailer  Consumer.
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• 2 Tier: Producer  Distributor  Retailer  Consumer.
• 3 Tier: Prod  Super Dist/Con.Agt  Distr  Ret 
Cons.
• 4 Tier: Prod  Mktg Agt  S.D/C.A  Dist Ret 
Cons.
Tiers of distribution channel:
• More widely dispersed the customers – Greater the tiers.
• Zero tier & 1 tier – Specialised products, technologically
advanced products, industrial products, consumer
durables, branded garments.
• 2 Tier – Consumer durables, branded FMCG.
• 3 & 4 tier – Smaller/unbranded FMCG.

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2. Types of Intermediaries
a.Marketing Agent.
b. C&F Agent/Consignee Agent/ Super Distributor.
• Distributor/Stockist.
•Wholesaler/Semi-wholesaler.
•Retailer – General Merchant, Chemists & Druggist, Grocer,
Dept. Store, Exclusive Outlet, Cooperative Stores, Food
Products Store, Pan Bidi Shop.
Functions of intermediaries
1.Physical possession function: Hold and distribute stocks.
2.Retail function: Buy in large quantities and sell in small
quantities. Cover local market in absence of Producer’s
salesmen. Supply retail orders booked by Co. salesman.
3.Promotion function: Help in carrying out local promotion
activities.
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4. Information function: Provide feedback information
on Producer’s and competitive products and activities.
5. Financing function: Could buy on advance or any terms
conditions from Producers and sell on credit to retailers.
A. Marketing Agent :-Provides full function sales and local
promotion support to Producer. Stocks received could be
purchased or on “stock transfer” basis. If stocks purchased,
then income is on basis of commission on sales, otherwise
could be on cost plus basis. Producer does not employ own
sales force.
B. C & F Agent :-Acts on behalf of the Producer. Holds
Producer’s stock. Basically provides warehousing and

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stock delivery facility in state where he is based. Distributes
stock to market level distributors. Receives income on
cost plus basis. Is appointed to avoid payment of L.S.T.
Producer deploys own sales force.
• Consignee Agent/ Super Distributor
• Functionally both are same. Super Distributor buys stock
on “C” Form by paying full CST. Consignee Agent buys
stock on “F” Form. Both hold stocks bought from
Producer and distribute it to area level distributors.
Income from commission on sales.
• Identification of Channel Partners Purchases stock from
CA/SD/C&FA or directly from Co. In turn distributes
stocks to area level retailers. Income from commission on
sales.
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3. Identification of Channel Partners
• Prospecting for Agents/Distributors
 Advertisements – Newspapers/T.V/Cable.
 Word of mouth publicity through retail trade
 References from retail trade.
 References from sales staff of other Companies.
 References from friends and acquaintances.
 Reference from tertiary sources – Banks, Suppliers, etc.
• Selection of Channel Partners
• Criteria of selection for Agents/Distributors
• Management strength
• Financial standing:–
– Whether overtrading.
– Terms of business with other Cos.
– Terms of business with retail trade
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• Infrastructure:–
– Office set up: location, space, computers, telephone/fax,
etc.
– Godown: Space, location, security, etc.
– Delivery vehicles: mechanised – 3,4 wheelers, manual.
• No. of years in business, Reputation/goodwill.
• Criteria of selection for Agents/Distributors
• Manpower
– Office staff, numbers and expertise.
– Salesmen, number and expertise.
• Market coverage and relations.
• Other businesses, turnover.
• Reputation of other Agencies handled.
• Willingness to work.
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4. Appointment of Intermediaries
• Prospective appointees contacted by Co. salesman who does initial
appraisal and also discusses Co. terms and conditions. Fills up
Appraisal Form.
• If initial appraisal is positive, and prospective appointee also agrees
with terms, then a second appraisal is carried out by a superior
officer.
• Both sides agreeing, an Appointment letter is then issued by the Co.
• Training of Intermediaries
• Channel members have to be trained at the start and also from time
to time regarding:
– Company policies and products.
– Latest marketing strategies adopted by Co. and also
competitors.
– Changes in the environment.
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• Training Methods
• If just one or two distributors are being appointed at
the time, then the training is provided by senior company
personnel at the place of business.
• If more are being appointed at the same time, then a
separate training session is organised by the Company.
• Training sessions:
• Provide a platform to the parties involved to
communicate and understand each others point of view.
• A forum where a manufacturer can understand the needs
of the dealers and gather information about the market.
• Makes the intermediary feel valued.
• Combined with a holiday package are used as reward
motivators by the Cos.
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5. Evaluating Channel Members and motivating channel
members
•Evaluation is an on-going exercise.
•Constant evaluation and fine tuning required to keep abreast
of changes in market place, nature of competition, etc.
•Producers should also evaluate coherence between product
and channels, as requirements may change over period of
time.
• Evaluation Criteria:
•Achievement of targeted sales and growth generated.
•Adherence to payment norms.
•Maintenance of average inventory levels.
•Treatment of damaged and returned goods
•Co-operation in promotional and training programmes.
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Channel member relationship life cycle:
•Birth – Exciting stage. Members work together getting to
know each other, but if things are not working out, they should
get out immediately.
•Growth – Dictates hard work for both parties. Energy should
be directed towards solving problems.
•Maturity – Watch for trouble, as the only way to go is down.
Parties required communicating as it is the key to efficiency.
•Death – Too many problems kill efficiency. So get out fast.
Motivating Channel Members
• Motivation is a continuous activity.
• A Producer has to exert power to motivate the members to
take into consideration a macro perspective and work
together.
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•Power is the ability of Producer or a channel member to get another
channel member to do what otherwise they would not have done.
•Power is an essential ingredient required to motivate and direct
efforts of non-identical organisations and individuals.
•A Producer uses power to elicit cooperation: coercive, reward.
legitimate, expert and referent.
•However, ultimate motivator is the creation of an atmosphere of
mutual trust that understands the mutual goals of network
partnerships.
There are two types of motivation:
• Monetary – Reward motivator (positive reinforcement).
• Non-monetary
– Coercion (negative reinforcement).
– Expert knowledge.
– Identification basis
– Legitimate power motivator
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A. Monetary motivators:
• Reward motivator – Based on channel member’s belief that the
other party has an ability to give something of value to him. This
reward will be available to him only if he adheres to the wishes of
the other party. Known as positive reinforcement as reward is used
to motivate the individual to repeat the behaviour.
• Reward motivators:
Granting larger margins.
Higher promotional activities/allowances.
Functional discount schemes.
Easier payment terms.
Faster settlement of claims.
Granting exclusive territories or large individual accounts.
Sales force compensation/incentive schemes.
Lower inventory holding norms.
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B. Non monetary motivators:
1. Coercive power – Refers to power of one
intermediary over another, when a member expects
punishment for his failure to comply with the
wishes of the former party. Opposite of reward
motivators, Should be adopted only when all other
tools fail to bring about the desired changes in the
channel member, as it can act as a de-motivator.
Main tools are:
– Reduction in margins.
– Withdrawal of rewards previously granted.
– Slowing down of supplies.
– Tougher operational norms.
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2. Expert knowledge – When a channel member
perceives Producer to have some specialised
knowledge, it results in Producer having control over
the intermediary. Expert knowledge provides the
Producer with knowledge leverage to manipulate
behaviour of the intermediary. Tools include:
– Managerial counselling.
– Sales training for employees.
– Sales promotion counsel.
– Advice on sources of items not stocked by
intermediaries.

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3. Identification basis – Whenever dealer prides
himself with dealing with a certain Producer, this
results in referent power for the Producer. This can
be used as a motivator by those Producers who
have earned a high degree of customer loyalty.
4. Legitimate power motivator – When a Producer
uses its agreements to modulate the behaviour of
a channel partner, it is called legitimate power.
It is usually used as a referent power – avoiding a
channel member from behaving in a manner which
could be detrimental to the goodwill of the
Producer.
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 6.6 Channel conflicts
There are two channel conflicts are there
A. Horizontal conflict:-When the conflicts occur between
channel members of same level, we refer this as the
horizontal conflicts. Some of horizontal conflicts are as
follows
1. Conflict between multiple channel outlets:-Examples
are sales of PCs through computer stores, departmental
stores, professional clubs/associations and those sold
etc.
2. Intermediaries of same type:- Conflicts between
wholesalers Vs Wholesalers, and those between
retailers Vs retailers, comes under one category.
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3. Different types of intermediaries on the same level:-
Conflicts can occur between dissimilar intermediaries within
the same level. There are different types of wholesalers like
agents and distributors. Similarly there are different types of
retail out lets like manufacturer’s outlets and retailers or
departmental stores. Conflicts can occur between them.
B. Vertical conflicts:- There are several conflicts in the
vertical.
A. Producer Vs Wholesalers:- Conflict occur on disagreement
about their terms and relationships . Disagreement about their
terms and relationships.
B. Producer Vs Retailers:- This is the case when manufacturer
and retailer disagree on various terms which sour their
relationship.
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Causes of vertical conflict
Causes of Conflict between Producer Vs Wholesaler
(A)Producer’s complaint
1. Wholesaler’s does not promote properly or adequately.
2. Wholesaler’s does not hold sufficient stock
3. Wholesaler’s service charges are high
(B) Wholesaler’s compliant
1. Producer’s expectation is too much
2. Producer does not understand the wholesaler
obligations about customers
3. Producer bypasses wholesaler deals some times
4. Producer does not respond to either warranty or
guarantee
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Producer Vs Retailer
(A)Producer’s complaint
1. Retailers in take are irregular and low.
2. Retailer reduces committed order quantities or delays the
off take.
3. Refuse delay delivery often.
(B) Retailer compliant
1. Producer expectations are high
2. Retailers know costumer needs and wants better.
3. Producer bypass the retailers some times.
Remedies:-
A) Options for Producers
1.Sell directly to customers through door-to-door or mail order
2. Sell directly to retailers without involvement of wholesalers
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(B ) Options for wholesalers
1. Improve internal management like space, location,
equipment etc.
2. Provide managerial assistance like own advertisement
etc.
Options for Producers:-
• Build consumer loyalty
Options for Retailers:-
• To develop the consumers loyalty.
• To maintain good relations with customers like credit
facilities etc.

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6.7 Performance Evaluation of channels of distribution
Channel distribution is an organized network of agencies and
institutions which in combination, perform all activities, required
to link producers with users and users with producers to
accomplish marketing task. Each member of a channel is a link
in a distribution network of organizations that extends from
producer to end users of product or services. Each member of
the network perform a number of activities and channel
functions such as storage, transportation, sales promotion,
negotiations, control, sorting, handling, dividing, repacking,
buying and selling. When we talk about performance
evaluation of channel, it means evaluation of individual as well as
collective efforts of all members of channel i.e. the producers,
wholesalers, and retailers as well as their supporting and
facilitating organizations like, banks, transports companies
etc.
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1.Managerial Functions:-
A. Defining the channel system in terms of participants
interrelationship, functions and flows
B. Setting objectives in terms of sales targets, market share, costs,
CSL(Customer satisfaction level), and the like
C. Fixing criteria of measurement of actual performance against
laid down polices
D. Ascertaining constraints and restrictions and pre-determining
allowance there of.
E. Collection of data on sales, costs, CSL and others.
F. Carrying out analysis of data based on scientific methods and
realistic assumptions.
G. Indentifying and quantifying performance shortfall and reporting
these to top management based on the “Principles of management
by exceptions” based on proactive management information
systems.
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2. Analysis: - Typically channel analysis is concerned with
sales and cost performance in connection with the
results of various types or research on attitude,
performance and opinion surveys conducted among
channel participants.
3. Market change: - Distribution channel must be
responsive to the changing needs and wants of
customers. It must also monitor the changes in the
channel design and decisions of competitors for the
purpose of bench marking and adopt changes which
are desirable in our own channel network. This is
necessary to attain and sustain competitive advantages.

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4. Continuous process: - Performance evaluation
of channel is a continuous process. Marketing
manager must incorporate changes to improve
the performance of the distribution network to
match the changing conditions and potential
marketing opportunities. Channel changes are
more frequent in consumer sector products,
changing fashion and tastes of consumers and
complexity of channel network.
THANK YOU

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