Study Notes on Distribution & Supply

Chain management
TOPIC I - Supply Chain Management
A supply chain is a network of facilities and distribution options that performs the
functions of procurement of materials, transformation of these materials into intermediate
and finished products, and the distribution of these finished products to customers.
Supply chains exist in both service and manufacturing organizations, although the
complexity of the chain may vary greatly from industry to industry and firm to firm.

Traditionally, marketing, distribution, planning, manufacturing, and the purchasing

organizations along the supply chain operated independently. These organizations have
their own objectives and these are often conflicting. Marketing's objective of high
customer service and maximum sales dollars conflict with manufacturing and distribution
goals. Many manufacturing operations are designed to maximize throughout and lower
costs with little consideration for the impact on inventory levels and distribution
capabilities. Purchasing contracts are often negotiated with very little information beyond
historical buying patterns. The result of these factors is that there is not a single,
integrated plan for the organization---there were as many plans as businesses. Clearly,
there is a need for a mechanism through which these different functions can be integrated
together. Supply chain management is a strategy through which such an integration can
be achieved.

Supply chain management is typically viewed to lie between fully vertically integrated
firms, where the entire material flow is owned by a single firm, and those where each
channel member operates independently. Therefore coordination between the various
players in the chain is key in its effective management. Cooper and Ellram [1993]
compare supply chain management to a well-balanced and well-practiced relay team.
Such a team is more competitive when each player knows how to be positioned for the
hand-off. The relationships are the strongest between players who directly pass the baton,
but the entire team needs to make a coordinated effort to win the race.

Supply chain management through Operations

management Framework
Traditional Conversion methods tell us that inputs are transformed to outputs.
The most important inputs are :-
 Man
 Machine
 Money
 MaterialsProcesses
 Methods
The most important methods of transformations are :-
  Assembly
 Blending
 Storing
The most important outputs are :-
 Tangible products and Intangible products
 Direct and indirect products.

OM: Transformation Types

 Transformations can be:

– Physical – conversion of iron ore to steel

– Location – Wheat after harvesting is transferred to warehouses
– Physiological – A patient gets cured in a hospital
– Informational – Challans are sent along with goods to the customer.

Characteristics of Manufacturing Environment

 Increased product diversity – Customers demand a wide range of products from the same
organization.
 Reduced product life cycles – Due to intense competition and rapid innovation products
are replaced very fast in the market eg Pagers were replaced by mobiles.
 Increased awareness of the environment
– impact of products & manufacturing systems
 Difficulties of estimating the costs and benefits
 Changing social expectations

Manufacturing System Views

 Closed System
– Manufacturing is seen as an internal function buffered from suppliers, customers,
and other functions
 Open Systems
– Manufacturing is seen as closely linked to suppliers, customers and other
functions 
 A Closed System View

R&D Marketing

Customer
Suppliers Finance Manufacturing Service Customers

Distribution
Purchasing Personnel
& Logistics

© 2004 Prentice-Hall, Inc. 1-6

An Open System View

External
Suppliers Manufacturing Customers

Other Functions

© 2004 Prentice-Hall, Inc. 1-7

Evolution From OM to Supply Chain

Over a period of time there was a migration from the Operations management point of
view to the supply chain management point of view.
OM View Supply Chain View

 Closed System  Open System

 Manufacturer Orientation  Customer Orientation
 Local Optimization  Global Optimization
Technology (hardware, software, multimedia, etc.)
 Local System Capabilities  Enterprise System Capabilities

Changing Basis of Competition

Basis of Competition

Manufacturing company
Yesterday versus
Manufacturing company

Manufacturing company and it’s supply

chain
Today versus
Manufacturing company and it’s supply
chain

Customers
 Consumers
– Pay for your company’s final product .They are the final members of the supply
chain
 External customers
– Receiving outputs from your company.Anybody not employed but served by the
company falls into this category.
 Internal customers
– Receiving outputs from you to others within the company.The production
department of a company is the internal customer of the purchase department while the
marketing department is the internal customer of the production department.
 \
Logistics Management : Definition
That part of supply chain management that plans, implements, and controls the efficient,
effective forward and reverse flow and storage of goods, services, and related
information from the point of origin to the point of consumption in order to meet
customers’ requirements.

 Council of Logistics Management

Logistical Mission
• The logistics of an enterprise is an integrated effort aimed at helping create customer
value at the lowest total cost.
• Logistics exists to satisfy customer requirements by facilitating relevant manufacturing
and marketing operations.
• At a strategic level ,logistics managers seek to achieve a previously agreed upon
quality of customer service through state of the art operating competency.
• The challenge is to balance service expectations and cost expenditures in a manner that
achieves business objectives.

Logistical Competency
• It is a relative assessment of a firm’s capability to provide competitively superior
customer service at the lowest possible customer cost.
• When a firm decides to be competent in logistics it seeks to outperform competitors in
all facets of operations.
• This typically means that logistical performance is dedicated to supporting any or all
marketing and manufacturing requirements in a manner that exploits delivery
capability.
• In short, the strategy is to provide superior service at a total cost below industry
average.
• Logistical competency is achieved by coordinating :-
• 1) Network Design :-Number service & Geographical relationships of facilities
directly affect service capabilities & cost.
• It is the process to determine the number & location of facilities to perform logistics
work.
2) Information
Deficiency in quality of information creates
operational problems. Deficiency fall in two broad
categories
Forecasting errors. .
Inaccuracy in order processing.
Control concepts like JIT(just in time), QR(quick
response) and CR(continuous replenishment) are
logistical controls by application on information accuracy.
3. Transportation
It is the most visible cost.
Three forms of transport are private, contract and common carriage.

Three factors are fundamental to transport

performance : cost, speed and consistency.

4. Inventory
Requirement depends on network structure and customer service levels.

Objective-
desired customer service, minimum
inventory commitment , lowest total cost.

• Warehousing, material handling and packaging

• Integral part of all other four logistic functions.
• Activities essential for logistical process are
• performed when goods are warehoused.
• Examples sorting, sequencing, order selection,
• transport consolidation and in some cases, product modification and assembly
Inbound Logistics
• It is concerned with purchasing and arranging inbound movement of
materials,parts.and/or finished inventory from suppliers to manufacturing or assembly
plants, warehouses or retail stores.
• The process of acquisition is called as :-
• Purchasing in manufacturing
• Procurement in Government circles.
• Buying in wholesaling & retailing
• Material stands for inventory going into manufacturing.
• The term product is used to identify inventory available for customer purchase.
Outbound Logistics
• Also called as physical distribution.
• Concerns movement of finished product to customers who is the final destination of a
market channel.
• The availability of a product is a vital part of each channel’s marketing effort.
• Unless a proper assortment of products is efficiently delivered when & where it is
needed, the marketing effort can be ruined.

Manufacturing Support
• It concentrates on managing work in process inventory as it flows between stages of
manufacturing.
• The primary logistic responsibility of manufacturing is to participate in formulating a
master production schedule and to arrange for timely availability of materials,
components and work in process inventory.
• The overall concern of manufacturing support is not how production occurs but rather
what, when & where products will be manufactured.
• The separating of manufacturing support from from outbound & inbound logistics
provides opportunity for specialization & improved efficiency.

Supply Chain: Definition

 Supply chain is a network of interconnected organizations or organizational
entities developed with the goal of getting the right product to the right place at the right
time

 Figure 13.6
– The Supply Chain of a Manufacturing Company

© 2004 Prentice-Hall, Inc. 13-13

History of Supply Chain Management

 1960’s - Inventory Management Focus, Cost Control
 1970’s - MRP & BOM - Operations Planning
 1980’s - MRPII, JIT - Materials Management, Logistics
 1990’s - SCM - ERP - “Integrated” Purchasing, Financials, Manufacturing, Order
Entry
 2000’s - Optimized “Value Network” with Real-Time Decision Support;
Synchronized & Collaborative Extended Network
Why Is SCM Difficult?
 Uncertainty is inherent to every supply chain
– Travel times can never be predicted with surety.
– Breakdowns of machines and vehicles is a common occurence
– Weather, natural catastrophe, war is out of any manager’s control
– Local politics, labor conditions, border issues cannot be controlled by any
manager.

 The complexity of the problem to globally optimize a supply chain is significant

– Minimize internal costs
– Minimize uncertainty
– Deal with remaining uncertainty

Supply Chain: Scope

 Supply chain encompasses every effort involved in producing and delivering a
final product, from the supplier’s supplier to the customer’s customer
– Efforts include managing supply and demand, sourcing raw materials and parts,
manufacturing and assembly, warehousing, information management, distribution and
delivery to customers
Supply Chain: Flows (1)
 The following flows have to be managed in a supply chain:
– Materials
– Information
– Cash
 Supply Chain: Flows (2)

Material, Information, Invoicing

Suppliers Manufacturers Distributors Customers

After-sales support, Recycling, Order information, Payments

© 2004 Prentice-Hall, Inc. 1-18

Supply Chain: Elements

 Supply chain consists of elements internal and external to the company
 These elements range from material producers to the customers
 All supply chain elements must be appropriately integrated for a company to be
able to effectively compete in chosen markets

What is a Supply Chain?

 All stages involved, directly or indirectly, in fulfilling a customer request
 Includes manufacturers, suppliers, transporters, warehouses, retailers, customers
 Within each company, the supply chain includes all functions involved in
fulfilling a customer request (product development, marketing, operations, distribution,
finance, customer service)
 Customer is an integral part of the supply chain
 Includes movement of products from suppliers to manufacturers to distributors,
but also includes movement of information, funds, and products in both directions
Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers
All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)

The Objective of a Supply Chain

 Maximize overall value created
 Supply chain value: difference between what the final product is worth to the
customer and the effort the supply chain expends in filling the customer’s request
 Value is correlated to supply chain profitability (difference between revenue
generated from the customer and the overall cost across the supply chain)
 Supply chain incurs costs (information, storage, transportation, components,
assembly, etc.)
 Supply chain profitability is total profit to be shared across all stages of the supply
chain
 Supply chain success should be measured by total supply chain profitability, not
profits at an individual stage
 Sources of supply chain revenue: the customer
 Sources of supply chain cost: flows of information, products, or funds between
stages of the supply chain
 Supply chain management is the management of flows between and among
supply chain stages to maximize total supply chain profitability

• How does Logistics differ from SCM?

• Logistics management is primarily concerned with optimizing flows within the
organization.
• Supply chain management deals with integration of all partners in the value chain.
• Logistics is essentially a framework that creates a single plan for flow of products
and information through a business.
• Supply chain builds upon this framework and seeks to achieve linkage and
coordination between processes of other entities in the pipeline i.e. suppliers and
customers, and organization itself.
Globalization of supply chain
Through the past decades we have seen an increasing rate of globalization of the
economy and thereby also of supply chains. Products are no longer produced and
consumed within the same geographical area. Even the different parts of a product may,
and often do, come from all over the world. This creates longer and more complex supply
chains, and therefore it also changes the requirements within supply chain management.
This again affects the effectiveness of computer systems employed in the supply
chain.
A longer supply chain will often involve longer order to delivery lead times, the
consequences of longer lead times will often be;
less dependable forecasts as these have to be made earlier,reduced production flexibility,
i.e. greater difficulties to adjust to order changes,higher levels of inventory.
The evident answer to the problem of longer lead times is to speed up the supply chain.
But a limit is often reached beyond which further effort to shorten lead times are futile,
especially in international supply chains. Another approach is to restructure the supply
chain. This simply means to reconsider the strategic level decisions priorly made. A third
approach is changing coordination: The order, forecasting, procurement, and information
sharing procedures among the members of the supply chain. We will dwell on the issue
of coordination in the next section.
Globalization also brings foreign competition into markets that traditionally were local.
Local companies are thereby forced to respond by improving their manufacturing
practices and supply chain management.
Attempts have focused, among others, on reduction of inventory levels, and
increased flexibility through reduced lead times. Yet again we see how industry focuses
on the issues of
• inventory management and flexibility to maintain high levels of customer
satisfaction.

Supply Chain Decisions

We classify the decisions for supply chain management into two broad categories --
strategic and operational. As the term implies, strategic decisions are made typically over
a longer time horizon. These are closely linked to the corporate strategy (they sometimes
{\it are} the corporate strategy), and guide supply chain policies from a design
perspective. On the other hand, operational decisions are short term, and focus on
activities over a day-to-day basis. The effort in these type of decisions is to effectively
and efficiently manage the product flow in the "strategically" planned supply chain.

There are four major decision areas in supply chain management:

1) location,

2) production, or operations

3) inventory, and

4) transportation (distribution), and there are both strategic and operational elements in
each of these decision areas.

Location Decisions
The geographic placement of production facilities, stocking points, and sourcing points is
the natural first step in creating a supply chain. The location of facilities involves a
commitment of resources to a long-term plan. Once the size, number, and location of
these are determined, so are the possible paths by which the product flows through to the
final customer. These decisions are of great significance to a firm since they represent the
basic strategy for accessing customer markets, and will have a considerable impact on
revenue, cost, and level of service. These decisions should be determined by an
optimization routine that considers production costs, taxes, duties and duty drawback,
tariffs, local content, distribution costs, production limitations, etc. (See Arntzen, Brown,
Harrison and Trafton [1995] for a thorough discussion of these aspects.) Although
location decisions are primarily strategic, they also have implications on an operational
level.
 Production Decisions
The strategic decisions include what products to produce, and which plants to produce
them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets.
As before, these decisions have a big impact on the revenues, costs and customer service
levels of the firm. These decisions assume the existence of the facilities, but determine
the exact path(s) through which a product flows to and from these facilities. Another
critical issue is the capacity of the manufacturing facilities--and this largely depends the
degree of vertical integration within the firm. Operational decisions focus on detailed
production scheduling. These decisions include the construction of the master production
schedules, scheduling production on machines, and equipment maintenance. Other
considerations include workload balancing, and quality control measures at a production
facility.

Inventory Decisions
These refer to means by which inventories are managed. Inventories exist at every stage
of the supply chain as either raw materials, semi-finished or finished goods. They can
also be in-process between locations. Their primary purpose to buffer against any
uncertainty that might exist in the supply chain. Since holding of inventories can cost
anywhere between 20 to 40 percent of their value, their efficient management is critical
in supply chain operations. It is strategic in the sense that top management sets goals.
However, most researchers have approached the management of inventory from an
operational perspective. These include deployment strategies (push versus pull), control
policies --- the determination of the optimal levels of order quantities and reorder points,
and setting safety stock levels, at each stocking location. These levels are critical, since
they are primary determinants of customer service levels.

Transportation Decisions
The mode choice aspect of these decisions are the more strategic ones. These are closely
linked to the inventory decisions, since the best choice of mode is often found by trading-
off the cost of using the particular mode of transport with the indirect cost of inventory
associated with that mode. While air shipments may be fast, reliable, and warrant lesser
safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much
cheaper, but they necessitate holding relatively large amounts of inventory to buffer
against the inherent uncertainty associated with them. Therefore customer service levels,
and geographic location play vital roles in such decisions. Since transportation is more
than 30 percent of the logistics costs, operating efficiently makes good economic sense.
Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling
of equipment are key in effective management of the firm's transport strategy.

Process View of a Supply Chain

 Cycle view: processes in a supply chain are divided into a series of cycles, each
performed at the interfaces between two successive supply chain stages
 Push/pull view: processes in a supply chain are divided into two categories
depending on whether they are executed in response to a customer order (pull) or in
anticipation of a customer order (push)

Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
© 2004 Prentice-Hall, Inc. 1-31

Cycle View of a Supply Chain

 Each cycle occurs at the interface between two successive stages
 Customer order cycle (customer-retailer)
 Replenishment cycle (retailer-distributor)
 Manufacturing cycle (distributor-manufacturer)
 Procurement cycle (manufacturer-supplier)
 Figure (see previous power point)
 Cycle view clearly defines processes involved and the owners of each process.
Specifies the roles and responsibilities of each member and the desired outcome of each
process.

Customer Order Cycle

 Involves all processes directly involved in receiving and filling the customer’s
order
 Customer arrival
 Customer order entry
 Customer order fulfillment
 Customer order receiving
 Replenishment Cycle
 All processes involved in replenishing retailer inventories (retailer is now the
customer)
 Retail order trigger
 Retail order entry
 Retail order fulfillment
 Retail order receiving

Manufacturing Cycle
 All processes involved in replenishing distributor (or retailer) inventory
 Order arrival from the distributor, retailer, or customer
 Production scheduling
 Manufacturing and shipping
 Receiving at the distributor, retailer, or customer

Procurement Cycle
 All processes necessary to ensure that materials are available for manufacturing to
occur according to schedule
 Manufacturer orders components from suppliers to replenish component
inventories
 However, component orders can be determined precisely from production
schedules (different from retailer/distributor orders that are based on uncertain customer
demand)
 Important that suppliers be linked to the manufacturer’s production schedule
Push/Pull View of
Supply Chain Processes
 Supply chain processes fall into one of two categories depending on the timing of
their execution relative to customer demand
 Pull: execution is initiated in response to a customer order (reactive)
 Push: execution is initiated in anticipation of customer orders (speculative)
 Push/pull boundary separates push processes from pull processes

Push/Pull View of
Supply Chain Processes
 Useful in considering strategic decisions relating to supply chain design – more
global view of how supply chain processes relate to customer orders
 Can combine the push/pull and cycle views
 The relative proportion of push and pull processes can have an impact on supply
chain performance
 TOPIC – II Physical Distribution
Physical distribution is the movement of right product to the right customer at the right
time,at right place and at the right price.
It involves planning,implementing and controlling the physical flow of materials & final
goods from point of origin to point of use to meet customer requirements at a profit.
The aim of physical distribution is to manage supply chains from suppliers to the ultimate
users.
The main players involved are the company & its distribution network which is made up
of :-
Direct company to consumer
Company to CFA/distributors to retailers to customers.
Distributor to wholesaler to customer.
All these intermediaries help in the process of exchange of goods.
Distribution Management
Management of all activities which facilitate movement & coordination of supply and
demand in the creation of time and place utility in the goods.
It is basically the art and science of determining requirements, acquiring them,
distributing them, and finally maintaining them in an operationally ready condition for
their entire life.
Distribution Channels
Distribution channels can be defined as sets of interdependent organizations involved in
the process of making a product or service available for use or consumption.

Reasons why distribution channels are required is :-

1)Producers cannot reach all their consumers
2)It multiplies reach and provides efficiency to the marketing process.
3) Facilitate smooth flow and create time, place & possession utilities.
4)They posess core competence
5)They can provide contacts,specialization,experience & scales of operations.

Types of Distribution Channels

1) Sales Channel – It motivates buyers,shares information between company & its
consumers,negotiates fair bargain for its consumers and finances the transactions.
2) Delivery Channel – Takes care of the physical part of the transaction.
3) Service Channel – It performs the after sales functions.
 Criteria for selecting Channel members.
Channel members are selected based on following considerations:-
• Nature of the product
• Extent of market coverage
• The speed of demand
• Company policies
• Existing distribution pattern & competition
• Availability of suitable persons in the area.
• Reputation & business standing.
• Financial capacity
• Marketing skill
• Experience
• Capacity & capability

 Market considerations:
• Type of market – Different distribution channels are used to reach different types
of markets.
• No. of potential customers - No. of customers low, direct distribution possible
• Geographic concentration of the market – Direct distribution practical when there
is high concentration of customers in few geographical areas.
• High market concentration – Direct distribution channel : low cost of serving
market.
• Low market concentration – Indirect distribution channel : high cost of reaching
directly.
• Customer service level:
• 3 sub-factors – delivery time, lot size, product availability.
• More the need for customer service : lower deliver time, lower lot size, lower
product availability – Indirect distribution channel more desirable.
• Direct distribution economical when either size or total volume of business is
large.
 Product considerations:
• Unit value – Direct distribution possible when unit value is high.
• Perishability – Low shelf life products have to be sold through short distribution
channels.
• Technical nature of product – Highly technical products require direct
distribution.
 Company considerations:
• Desire for channel control – Producers wanting more control over their products’
distribution establish direct distribution.
 • Ability of Management – Marketing experience and ability influences channel
decisions . Inexperienced Companies would appoint Marketing Agent.
 Company considerations:
• Financial resources – Financially strong Co. would go in for direct distribution.
• Financially weak Co.s appoint middlemen.
• Availability of Working Capital: High – Direct distribution channel. Low –
Indirect distribution channel.
• Services provided by seller – Highly promoted products would have wider retail
coverage.
 Middlemen considerations:
• Services provided by middlemen – Middlemen must provide the service which
the producers are unable to provide.
• Availability of desired middlemen - The middlemen desired by a Producer may
not be available, so alternate channels would have to be considered.
• Attitude of middlemen towards Producer’s policies – If middlemen are unwilling
to join a producer’s channel because of disagreement on policies, then the
producer has fewer options.
Selecting type of Channel
 Tiers of distribution channel:
• Zero Tier: Producer à Consumer.
• One Tier: Producer à Retailer à Consumer.
• 2 Tier: Producer à Distributor à Retailer à Consumer.
• 3 Tier: Prod à Super Dist/Con.Agt à Distr à Ret à Cons.
• 4 Tier: Prod à Mktg Agt à S.D/C.A à Distà Ret à 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.

Intensity of Distribution
• Intensive – Distribution through every reasonable outlet in the market.Strategy is
to make sure that bthe product is available in as many outlets as possible.It is
preferred for pharmaceuticals,consumer goods and automobile spares.
• Selective - Distribution through multiple, but not all outlets. Lies midway
between extensive and exclusive distribution.Preferred for high value products
like Tanishq jewellery.It lowers the distribution costs.
• Exclusive – Distribution through a single outlet in the market.Highly selective
choice of outlets.Producer desires a close watch on his products and services.

Types of Intermediaries
• Marketing Agent.
• 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
• Physical possession function: Hold and distribute stocks.
• 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.
• Promotion function: Help in carrying out local promotion activities.
• Information function: Provide feedback information on Producer’s and
competitive products and activities. 
• Financing function: Could buy on advance or COD terms from Producers and sell
on credit to retailers.
 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.
 C & F Agent
• Acts on behalf of the Producer. Holds Producer’s stock. Basically provides
warehousing and 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.

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
• 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.
• 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.

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.

Channel Dynamics
• Vertical Marketing system
• In a Conventional marketing channel both producer and channel members are
independent of each otherwhile in a VMS producer and channel members are
unified.One channel member owns the others or franchises them or has so much power
that they all cooperate.VMS produces economics of scale through their size and
elimination of duplicated services.
There are three types of VMS :-
• A) Corporate system.
• It combines successive stages of poduction and distribution under single ownership.
• Eg :- A bakery like Monginis & Merwaan produces & dustributes own bakery items.
• Companies having stores at factory gates like Raymonds,Century & Pidilite.

• B) Administered System :-
• It coordinates successive stages of Production & distribution not through common
ownership but through size & power of brands.
• Eg;_ Colgate & Pepsi & Coke get unusual cooperation from channel members wrt
shelf space.

• C) Contractual :-
• The channel members enter into informal contract with retailers to use common
name.to provide common or same facilities etc to prevent competition within the same
channel.

Horizontal marketing system

• Readiness of two or more non related companies to put together resources or programs
to exploit an emerging marketing opportunity.
Multichannel Marketing System
• When a single company uses two or more marketing channel to reach one or more
marketing segments.
Channel Conflicts
• Channel conflict occurs whenever channel members have distinctly different
opinions or perceptions about distribution channel affairs. If no interdependence
exists, there would be no basis for conflict. Mutual dependence creates the basis
for conflict.
• There are three types of conflicts :-

• A)Vertical Channel Conflict:-

• Conflict between company and dealer about type of service pattern, pricing and
advertising. Eg Coco cola's partner Parle marketing own brand.

B)Horizontal Channel conflict

• Conflict between members at the same channel level within the channel.eg one dealer
of Samsung offering discount of 1200/- while another dealer is offering Rs 800/-.
• C) Intertype
Occurs amongst different intermediaries at the same level in a channel.
Differs from horizontal in that it occurs among dissimilar institutions.

Multichannel conflicts
• Manufacturer establishes two or more channels that compete with each other in selling
to the same market.
Causes of channel conflicts
• Goal incompatibility – Though channel members share the common goal of
maximising their joint effectiveness, each is a separate legal entity.
• Each has its own employees, owners and interest groups who help shape goals
and strategies, some of which may not be totally compatible with those of other
channel members.
• This incompatibility may be the underlying cause of stress, ultimately creating
conflict.
• Position, Role and Domain Incongruency – Changes in specification of position
or poorly defined roles may cause conflict.
• Incompatibility develops within channel arrangements as roles and methods of
operation change.
• Conflict also arises when there is lack of agreement concerning appropriate
domain of members.
• Communication Breakdown – Often is the reason for channel conflict. Could
occur in 2 ways:
• 1) When a firm fails to exchange vital information with other channel
members.
• 2) Through noise and distortion
• Different Perceptions of Reality – Conflict occurs when different channel
members differ in methods of achieving mutual goals or have different solutions
to a mutual problem.
• Even when they have a strong desire to cooperate, conflict can result from
different perceptions of the facts.
• Ideological Differences – Are similar to those resulting from differences in
perceived roles and expected behaviours. Can result from big-business and small-
business perceptions of the appropriate role of management.

Managing channel conflict

The different methods of resolving conflicts are :-
1)Avoidance
They are used by weak channel members where problem is postponed or
discussion avoided.
Relationships are not of much importance.
As there is no serious effort on getting anything done,conflict is avoided.

2) Aggression
Also known as a competitive or selfish style.
It means being concerned about one’s own goals without any thought for the
others.
The dominating channel partner (may be the principal) dictates terms to the
others. Long term could be detrimental to the system.
3) Accommodation
A situation of complete surrender.
One party helps the other achieve its goals without being worried about its own
goals.
Emphasis is on full co-operation and flexibility in approach.
May generate matching feelings in the receiver.
If not handled properly, can result in exploitation
4) Compromise
Obviously both sides have to give up something to meet mid way.
Can only work with small and not so serious conflicts.
Used often in the earlier two stages.
5) Collaboration
Also known as a problem solving approach
Tries to maximize the benefit to both parties while solving the dispute.
 Most ideal style of conflict resolution – a win-win approach
Requires a lot of time and effort to succeed.
Sensitive information may have to be shared

Distribution equity
Any distribution system normally takes into account the four cost parameters:-
Cost of reaching markets
Cost of servicing them
Cost of shelf space
Cost of merchandising
Why did coco cola purchase Parle brands at Rs 120 crores?
Why did Heinz purchase Glaxo at Rs 210 crores?
Why did BBLIL capture Cadbury's ice creams Dollops & Kwality at Rs 75 crores?
The logical answer is to create distribution equity.
If Brand equity means brands preference , distribution equity means preferring own
distribution system.
Why distribution equity is more important than brand
equity?
• In a product & price parity situation , the brand that sells more is the one that reaches
the highest number of customer.
• Out of 5.13 million outlets ,HLL itself owns 3 million outlets and hence commands
high distribution cum brand equity. In India where climate .life style ,languages differ
at every 500 km distance ,brand loyalty is not going to help to tackle above aspects.
Retail space is growing at a slower rate than number of brands
• .In last 5 years washing powder brands have increased by 200 %,packed goods by 100
%, whereas retail space increased only by 8 %
• Distributors measure performance of brands on the basis of “Turn over per square
feet". Hence only fast moving items will be stocked.
• Hence new product launcher must own his channels initially.
How to create Distribution equity?
• Use IT to slash wastage at every point. Divert stocks to where it is required rather than
referring to the factory if stocks do not move from certain godowns.
• Cultivate relationship beyond short term business interests with retailers as he is your
ultimate salesman as you cannot be present at the procurement point.Such people can
be motivated through meetings with top people in the organization.
• Provide techno commercial training to retailers which provides confidence in them to
achieve targets.
• Own road carriers or hire courier services for better control over transport and
improve efficiencies.
Use of selective and intensive distribution must be tactical to yiels maximum benefit
on case to case basis.
• Go to rural markets which is untouched and contribute 40 % to national markets.
• Use of selling environment as a product differentiator.
 New channel members
• Vending machines

• Mail orders
Vending machines
One of the major inventions after the second world war.
• Mainly used for low value consumer non durables like soft drinks,newspapers,
cigarette etc.
• Normally installed in densely populated areas like railway stations,cinemas,offices etc
ATM is a great example of a vending machine
Unpopular in India
• Cheap labor available in plenty hence preferred over machines for distribution
purpose.
• Public awareness is not adequate about machine utility and hence full utilization is not
done.
• Initial heavy capital expenditure is required.
• Shortage of coins.

• Advantages of Vending machines :-

• Fully automatic
• 24 hrs shopping is possible
• Self service
• Unhandled merchandise.

• Disadvantages :-
• Requires frequent stocking as vending machines in crowded areas will be frequently
used.
• Frequent breakdowns as it is a delicate equipment.
• High pilferage
• Merchandise cannot be returned.
• Expensive channel as prices are 10 – 20 % higher than other channels.

Mail orders
This method of distribution uses “mails” for the distribution purpose
• Advantages :-
• High selectivity of target customers.
• Personalized communication possible,
• Flexibility in purchase decisions
• Measuring effectiveness of system is much easier.
Mail orders
• Disadvantages :-
• High commission to middle men.
• Poor after sales by middle men
• Reluctance of middle men due to lack of info of track record of product.

Training Channel Members

Channel members have to be trained at the start from recruitment onwards and also
from time to time regarding:
Company policies and products.
Latest marketing strategies adopted by Co. and also competitors.
Changes in the environment.

Training has to be given to the Channel member owner and his staff too.
Since market views channel member always as part of the company – he has to behave in
a like manner – hence training assumes significance`
Training could be on the job, field training or classroom training.
Training is an ongoing process.
Subjects for Training
Field training on how the markets are to be worked to achieve sales, collect payments and
ensure the right kind of merchandising`
Class room training on company products,competition and how to tackle it to gain market
shares`
Special meetings for new product launches`
Submitting reports and maintaining records`Statutory compliance
Care of company products
Technical specifications and answering FAQs ofcustomers
`For technical and industrial products – recognition ofspecs, installation procedure, repair
and maintenanceand effective demonstrations
`Servicing of automobiles and other engineeringproducts

 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.

Motivating Channel Members

Ambitious volume and growth targets – continuous motivation required to achieve

Motivation includes:
`Capacity building programs
`Training`
Promotions support`
Marketing research support`
Working with company personnel`
incentives

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.
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.
2 types of motivation:
Monetary – Reward motivator (positive reinforcement).
Non-monetary
Coercion (negative reinforcement).
Expert knowledge.
Identification basis
Legitimate power motivator

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.
Non monetary motivators:
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.
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.

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.
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.

Channel Members Evaluation

Effectiveness of the distribution channel determines the success of the company`
Company would like its channel partners to perform at the highest standards possible`
Need to constantly evaluate performance on sales targets, coverage, productivity,
inventory holdings, attending to servicing requests etc
Evaluation is an on-going exercise.
Constant evaluation and fine tuning required to keep up with 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.

ROI as a Measure
Leading FMCG companies feel that an ROI of 30% for a distributor is healthy and is a
fair indication that he is performing well.
`If the ROI is more, additional tasks are given`
If the ROI is less, the company may provide additionalsupport
Post evaluation tasks include counseling, retraining`and motivating.
In extreme cases it may result in termination.
Performance Evaluation
On pre-agreed tasks only. No surprises.
`Specific targets on periodical basis are set.
`Targets on volume and outlet productivity could be for a week or a month`
Targets relating to increasing market shares or total outlet coverage could be for 6
months`
Different weightages could be given for each of the parameters for evaluation
The performance appraisal is open and transparent
Steps for Modifying Networks
Service level desired and willing to deliver`
Activities required to deliver service level, who will do it and at what cost
`Derive ideal channel structure and compare with existing to know gaps by evaluating
based onstandard parameters relating to effectiveness andefficiency`
Action to bridge the gaps and put modified channelsystem into place
`Define key performance indicators

Channel Comparison Factors

 Efficiency
 Effectiveness
 Flexibility
 Consistency
 Reliability
 Integrity
Use of Channel Power
 Channel members are dependent on each other.
 `The power equations between them keep them working together.
 `There are basically 5 types of power bases –reward,coercion, expert,
referenceandlegitimacy.
 `2 more can be considered in Indian context assupportandcompetition.
 `Extent of dependence defines the power base which is appropriate

“Power” (Bases) of Motivation

Reward–incentives for good performance
Coercion`–threat of punishment for non-performance
Referent`–benefit of sheer association with a strong company
Legitimate`– arising out ofa contract
Expert`–specialized knowledge
Support`–additional benefits for better performers only
Competition`–createdbetween channel partners

Countervailing Power
Balances the power exerted by one channel member.
It is not a one-sided equation.
`Both the channel member and the principal can have influence on each other.
`Results from interdependence within the channel system.
`Company exerts power on the distributor to get its coverage and revenues
`Distributor has enough influence on his customers and this is critical for the company
also
`Weaker partners do get exploited – ancillary units

Channel Coordination
Channel system is well coordinated if each member understands his role correctly and
performs it to help the system achieve its customer service objectives.
`In a coordinated channel:`Interests of all channel members are protected`
Actions of all are in line with overall objectives
Flows are streamlined to desired customer serviceobjectives
Channel co-ordination is an on-going effort`

TOPIC – III Channel Information Systems

 CIS is Channel Information Systems
 CIS is the orderly flow of pertinent operational data both internally and between
channel members, for use as a basis of decision making in specified responsibility
areas of channel management
 `CIS is of primary use of sales managers.

Information - Advantages
`Useful in marketing planning – helps improve quality of marketing decisions
Can help tap market opportunities
`Provides an alert against competition`
Helps spot trends – favourable or otherwise`
Helps develop action plans for growth`
Gives feedback on consumer needs

Classification of Information
`Based on the use made of it by marketing – planning, operations, decision making or
control
`Based on subjects – consumers, products, competition, channels, promotions, pricing,
sales volume, value etc
`Operations data – facts and figures
`Also based on assumptions, anticipated occurrences– forecasts relating to the channel
system
Information Process
`Collection: acquiring and placing raw data – monthly sales by each territory
`Processing: analyzing data to get meaning out of it –arranging, modifying and
interpreting the data by the user – comparison of sales between periods
`Storage: keeping the information intact till it is needed
`Use: application of information for management decision making – sales data of the last
6 months to forecast the sales of the next month.

Use of Information
`Planning: sales forecasts or distributor indents
`Control: expenses against budget
`There is always a cost of collecting information.`

If data collected is not used properly, the data provider will hesitate to give the
information.
`The channel MIS works at the sales operational level.
It has very little strategic intent.

Sources of Data
`Reports (oral and written) and records of channel members, sales people`Letters,
statements and market research
`Any other info collected by the sales people and thechannel members from the
market`External sources like business publications, magazines,newspapers, trade
journals.
`In a dedicated channel system the collection of info is well streamlined – in the JC
meeting
`With use of IT enabled systems collection and processing has become simpler.

A Good Channel MIS…

`Integrated system to handle all regular data
`Useful decision support system` reflects the style of the marketing organization
`User friendly and user oriented`
Convincing to the providers of the info as to its purpose`
Be cost effective`
Not need for verification from other sources
`Be fast and totally reliable

Element Importance
 `In a good channel MIS, it is necessary to define upfront for each element of the MIS,
the following:
 `Purpose of the info
 `Source of the info
 `Action possible
 `Impact on customer service

Competition Tracking
 Purpose :- Plan day to day corrective action to protect market shares and shelf space
 Source :- Trade, channel partners and sales people
 Action:- Spot action while in the market and taken by possible channel partners or
sales people
 Impact on Timely action to provide better support to the service trade and retain
 their goodwill

TOPIC – IV INVENTORY
Inventory is an unused asset, which lies in stock without participating in value adding
process.
Unused equipment, raw material, WIP and Finished goods, consumables, spare parts,
bought out parts, tools and tackles, gauge and fixtures etc.
In India 9 to 12 months of sales quantity lies in the form of Inventory [R/M, WIP,
Bought out parts and Finished goods] as against a few days in Japan and a month in
the US and Europe
If we look around in our facilities we find stocks lying unused for years catching dust
and rust in the form of plant and equipment, raw material, WIP and Finished goods.
In our country inventory is always viewed as asset , in fact, though it is called an
asset, it is a big liability
Reluctance to scrap useless inventory on time is one of the reasons why we carry
huge stocks
Inventory is biggest source of waste
 Functions of Inventory
Inventory serves as a buffer between:`Supply and demand
Fulfill urgent customer demands by supplying finished goods
Supplies requirements for an operation and the output from the previous operation is
stored as inventory for further operations.
Supplies parts and materials to begin an operation .

Categories of Inventory
`Anticipation – built in anticipation of future demand during – peak season, strike,
promotioninal activities etc
`Fluctuation (safety) – to cover random, unpredictable fluctuations in supply and demand
and lead time – to prevent disruption in operations, deliveries etc
`Lot-size – to take advantage of quantity discounts,reduce shipping, set up and clerical
costs – also called cycle stock

Categories of Inventory
`Transportation – pipeline or movement inventories –to cover the time needed to move
from one point to another – factory to distribution point for example
`Hedge – for materials where prices are volatile
`Maintenance, repair and operating supplies (MRO) –to support M and O – spare parts,
lubricants,consumables etc

Types of Inventory
Manufacturing:
1) Raw materials – The valuation of raw materials inventory depends on the cost of
acquiring raw materials & the pricing of RM issued for production.
2) components
3) WIP :-Inventory in between processing stages is called as work in process.The
valuation depends on the manner in which fixed overhead costs are treated.
F/G – This is the inventory of the salable product made & duly packed which is
ready to be sold to customer

Wholesale inventory: Wholesalers stock large quantities and sell in small quantities
to retailers.
Products with seasonal demand, products to satisfy assorted, small and urgent needs
of retailers are stocked.
As the product line expands risk of retailers increases and the risk becomes wider and
deeper.

Retail inventory: retailers stock variety of products to satisfy demand.

But they push the volume backwards to wholesalers and reduce the depth of risk
although the risk is wide
 MRO: Maintenance, repairs and operating supplies.

Location inventory: inventory at a fixed location

Pipeline Inventory :-
It is inventory that is in the process of moving from one location in the supply chain
to another.
It consists of inventory movement from supplier to manufacturer,from manufacturer
to distributor,from distributor to retailer & from retailer to customer.
It consists of orders that have been placed but not yet received.

Types of Classification
ABC category – most common for all
It is an inventory categorization technique used in material management.
ABC analysis divides on-hand inventory into three classifications on the basis of
volume in money terms.
(Annual Rupee Volume of an Item) = (Its Annual Demand) x (Its Cost per unit)

It is also known as Pareto analysis. (which is named after principles dictated by

Pareto).
The idea is to focus resources on the critical few and not on the trivial many.
Class A items are those on which the annual dollar volume is high. They represent
70-80% of total inventory costs, but they account for only 15% of total inventory
items.
Class B items are those on which annual dollar volume is medium. They represent
15-25% of total dollar value, and they account for 30% of total inventory items on the
average.
Class C items are low dollar volume items.
They represent only the 5% of total dollar volume, but they include as many as 50-
60% of total inventory items.

HML - high, medium, low – similar

FSND – fast moving, slow moving, non-moving, dead –spare parts

Is based on the consumption figures of the items. The items under this analysis are
classified into three groups: F (fast moving), S (slow moving) and N (non-moving).
To conduct the analysis, the last date of receipt or the last date of issue whichever is
later is taken into account and the period, usually in terms of number of months, that
has elapsed since the last movement is recorded. Helps Identify active items which
require to be reviewed regularly
Surplus items whose stocks are higher than their rate of consumption; and
Non-moving items which are not being consumed.
SDE – scarce, difficult, easy to obtain – procurement /Spares

GOLF – govt, ordinary, local, foreign source –procurement / Spares

VED – vital, essential, desirable – spare parts / FG`

SOS – seasonal, off-seasonal – commodity

BENEFITS OF INVENTORY CONTROL

Ensures an adequate supply of materials
Minimizes inventory costs
Facilitates purchasing economies
Eliminates duplication in ordering
Better utilization of available stocks
Provides a check against the loss of materials
Facilitates cost accounting activities
Enables management in cost comparison
Locates & disposes inactive & obsolete store items
Consistent & reliable basis for financial statements

TOPIC – V Warehousing
Warehousing is a place to store inventory as well as it is a facility for switching the
inventory.
Typically, the warehouses received merchandise by rail or road and the materials
were moved manually to a storage area within the warehouse and piled up on the
floor in stacks manually.
Due to above, though different products were stored in the same warehouse it was
difficult to identify the merchandise with respect to a particular order.
On the receipt of the customer orders, products were handpicked and placed on the
wagons and these wagons were pushed out of shipping area.
As the labour was inexpensive, human resources were used extensively and no
consideration was given to efficiency utilization, work methods, or material handling.
Inspite of poor efficiency, warehouses continued to provide a necessary bridge
between production and marketing.
With the improved techniques of forecasting and production scheduling the need to
build up inventory was considerably reduced
Also, delays during manufacturing process reduced as the production became more
coordinated.
Seasonal products continue to require warehousing.
 The overall need to store materials to support manufacturing has been reduced.
In context of retailing, the department stores face the necessity of stocking an
increased variety of products and are unable to order in sufficient quantities from a
single supplier to enjoy the benefits of consolidated shipment.
Direct ordering from manufacturers becomes prohibitively expensive due to high cost
of transporting small shipments.
This necessitates the need for warehousing to provide timely and economical
inventory assortments.
At wholesale level, the warehouse becomes a support unit for retailing.
In context of manufacturing, companies producing products at multiple locations,
efficient warehousing becomes a method for reducing material and parts storage and
handling costs while optimizing production.
For implementing JIT and stockless production strategies warehousing becomes an
integral part of entire value chain.
As the basic objective of JIT is to reduce work-in-process inventory, manufacturing
needs to supported by highly dependable delivery.
In a country as large as India, this is possible only by having strategically located
warehouses.
The stocks can be held at a central warehouse thereby reducing the need to maintain
inventory at each assembly plant.
Using consolidated shipments, materials are purchased and transported to the supply
warehouse and then distributed to manufacturing plants as and when needed.
A fully integrated warehouse is a vital extension of manufacturing.

In context of outbound logistics, warehouses have made possible the direct shipment
of mixed/ assorted products to the customers thereby enhancing the service
capabilities.
Recently, warehouses have been able to increase productivity due to effective use of
Information Technology.

Purpose of Warehousing
To provide desired level of customer service at the lowest possible total cost
`It is that part of the firm’s logistics system that stores products (RM, Packing Materials,
WIP, FG) at and between point of origin and point of consumption and provides info to
management on the status,condition and disposition of items being stored
`Distribution warehousing relates mainly to FG

Reasons for Warehousing

Maintain source of supply
Achieve production economies
Support customer service policies
Achieve transportation economies
Meet changing market conditions
Take advantage of Quantity Purchase discounts and forward
 Reasons for Warehousing
Overcome time and space buys differentials
Least Logistics cost for a desired
Support JIT programs of suppliers level of customer service and customers
Provide customers with the right mix of products at all times
Temporary storage of materials to be disposed or re-cycled.

Role of Warehousing
Provision of strategic storage, though an effective distribution system should not have
the necessity of inventory for an excessive length of time, sometimes storage
becomes inevitable.
Acting as a switching facility
Provision of economic and service benefits.
Realization of lowest possible transportation rate.
Reduction of congestion at a customer’s receiving dock.
Manufacturing plants can use warehouse as a forward stock location or as sorting and
assembly facility.
Combines the logistical flow of small shipments to a specific market area.
A single firm may use consolidation warehousing or a number of firms may join
together and hire the consolidation service.

Mix products from multiple facilities for shipment to a single customer

Break-bulk from material received from factory and distribute it further down the
line.
Used more as a ‘flow-thru’ point than as a ‘hoarding’point

Distribution Warehousing
`The objective is to set up a network of warehouses closest to the customer locations
to service markets better and minimise cost
`Could be C&FA s, depots or distribution centers
`Macro location strategies:
`Market positioned
`Production positioned
`Intermediately positioned

Warehouses as Distribution Centers

`Warehouse are designed to speed the flow of goods and avoid unnecessary costs
`It Speeds bulk-breaking to avoid inventory carrying costs
It helps to centralize control and co-ordination of logistics activities
`Products can also be cross-docked (one vehicle to another)
 Market Positioned
Warehouses are located nearest to the final customer
The Factors which influence this are:
Order cycle time
Transportation costs
Sensitivity of the product
Order size
Levels of customer service offered

Production Positioned
`Warehouses are located close to the production facilities or supply sources
`Not the same level of customer service as the earlier one
`Serve as points of aggregation / collection for products made in a number of plants

`Factors influencing are:

`Perishability of raw materials
`Number of products in the product mix
`Assortments ordered by customers
`Transport consolidation rates ex;

Intermediate Positioned
`Mid point locations between the final customer and the producer
`High customer service levels possible even if products made in number of units
`Other macro approaches look at cost minimisation or cost and demand elements to
maximise profitability

Transportation
Transport is the activity that facilitates physical movement of goods as well as
individuals from one place to another.
In business, it supports trade and industry in carrying raw materials to the place of
production and distributing finished products for consumption.
Individuals or business firms that engage themselves in such activities are called
transporters.
Generally, transporters carry raw material, finished products, passengers, etc. from
one place to another. So it removes the distance barrier.
Now-a-days goods produced at one place are readily available at distant places.
People move freely throughout the world because of transport.
It is associated with every step of our life.
Without transport, we, as well as business units cannot move a single step.
 Very important in the Logistics function:
Movement across space or distance adds value to products
Transportation provides time and place utility

Role of transportation includes:

`Provides opportunity for growth under competitive conditions
`Deeper penetration into markets
`Wider distribution means greater demand
`Can influence product prices favorably

Transportation Principles
Continuous flow
Optimise unit of cargo – stackability
Maximum vehicle unit – capacity utilization
Adaptation of vehicle unit to volume and nature of traffic
Standardisation
Compatibility of unit load equipment
Minimum of dead weight to total weight
Maximum utilization of capital, equipment andpersonnel

The Selection Criteria of mode of transport

Environmental analysis: shipper, carrier, government regulations, public influence
Deciding objectives
Selecting mode`
Select transport type within the mode`
Define functions of transport
Evaluation and control – customer perception /satisfaction, best practice benchmarking

Cost Factors
`Can be product related or market related.
`Product related: density, stowability, ease or difficulty of handling and liability
`Market related: competition, location of markets,Government regulations, traffic in and
out of themarket, seasonality of movements and impact oncustomer service
`Five prominent modes:`Road, rail, air, water and pipeline.`Sixth one is use of Ropeways

Customer Service Factors

Consistency, dependability
`Transit time
`Coverage – door-to-door for example
`Flexibility in handling a range of products
`Loss and damage performance
`Additional services provided

Advantages of Rail Transport

`Economy– more so for goods over long distances
`Efficiency of energy
`Reliability– not affected by weather conditions
It is a convenient mode of transport for travelling long distances.
It is relatively faster than road transport.
It is suitable for carrying heavy goods in large quantities over long distances.

Disadvantages of rail transport

`Uneconomical for small shipments and short distances
`Not suitable for remote stations
`Costly terminal handling facilities
`Inflexible time schedules
It involves heavy losses of life as well as goods in case of accident.

Advantages of Road transport

`Through movement – direct from consignor to consignee, no trans shipment
`Flexibility – routes and loading routines can be easily altered, operate day and night
`Less capital costs – for own fleet + immunity from industrial action
`Fast turn-around – if articulated units like tractors and trailers are used
`Minimum delays

Disadvantages of Road transport

Susceptibility to weather and road conditions – inspite of the best protection
`Unsuitability for heavy loads – rail transport more economical for bulk loads
`Unsuitability for long distances

Air Transport Advantages

`Faster mode
`Reduction in cost particularly inventory
`Broad service range`
Increasing capabilities
Air Transport Disadvantages
High cost
`Weather affects flight conditions
`Limitations on heavy consignments
In case of accidents, it results in heavy losses of goods, property and life.

Water Transport Advantages

Mass movement of bulk
Lowest freight cost
Preferred for long haul of low value commodities

Water Transport Disadvantages

Not for quick transit
Suitable for certain types of commodities only

TOPIC VI - DISTRIBUTION COST

CONTROL
Physical Distribution Cost

Direct costs Indirect costs Overheads

Transportation Cost of capital Salaries &wages

cost
Cost of transport Administrative
Inventory cost equipment expenses
Warehousing Cost of material
cost handling
equipment
Material handling
cost
 ACTIVITY BASED COSTING

The basic purpose of activity based costing is to give managers a better perspective of
total costs associated with the performance of a specific activity.

COMPONENTS OF DISTRIBUTION COSTS

Inventory Transportation
carrying costs costs

Warehousing costs Material

handling costs
Production or
supply costs Packaging costs

Channels of Customer
distribution costs service Costs

Communication &
Data Processing Cost
 THE TOTAL COST APPROACH TO DISTRIBUTION COST

Number Will affect both service

Warehousing Type & costs
Location

Insurance This group cost

Occupancy may range from 10
Inventory
Pilferage losses to 30 per cent of
Carrying
Inventory taxes inventory value

Model changes Important cost

Inventory Style changes for companies
Obsolescence Perish ability

The decision on which plant should serve which

Production or
customers must give weight not only to
supply
transportation but also to supply and production
alternatives
cost.

Cost Distribution decisions can affect costs otherwise

concessions incurred by suppliers and customers.

The choice of distribution channels profoundly

Channels of affects its physical distribution facilities and the
distribution resultant costs.

A significant part of distribution entailing cost on

Transportation movement of goods which keep changing because of
various factors.
Communication
& data
processing