PRODUCT MIX DECISIONS
Most companies generally market several products rather than just one or two. It is necessary for them to, understand the relationship among all their products to coordinate their marketing of total group of products. Product item, product line and product mix concepts help us to understand the relationships among a company’s different products. A product item refers to a particular version of a product that is distinct such as Clinic Plus product offered by HUL. A product line is a closely related group of ‘products for essentially similar use and technical and marketing considerations. Colgate product line includes “Colgate dental cream, Colgate gel, Colgate total, Colgate herbal, etc. Product mix is the total number of products that a company markets. Product mix consistency means how closely related different product lines are in end use, product requirements, distribution etc. A company may have many product lines in its product mix. The term product mix width refers to the number of product lines a company has. Product line length means the number of product variants available in a company’s product line.
PRODUCT LINE DECISIONS
Many companies start as a single product item or product line business. After getting a taste of success and with availability of more resources, companies decide to expand their product line and/or introduce newer product lines in consonance with market opportunities or in response to competitor’s moves. For ex. for quite some time Nirma had only a single detergent brand and subsequently added a new product line by introducing a bathing soap, HUL realized the serious threat from Nirma washing powder and introduced cheaper versions of detergents.
Companies make decisions that concern either adding new items in existing product lines, deleting products from existing product lines, or adding new product lines. Another aspect relates to upgrading the existing technology either to reduce the product costs to improve quality, for stretching (downwards, upwards or both ways) or line filling.
Product Line 1
Product Line 2
Product Line 3
Product Line 4
Bathing Soaps
Laundry Products
Beverages
Cosmetics
Dove
Lux
Pears
Liril
Rexona
Lifebuoy
Breeze
Hamam
Jai
Surf
Rin
Sunlight
Wheel
501
Lipton Green Label
Brooke Bond
Red Label
Taj Mahal
Bru
Lipton Taaza
Super Dust
Fair and Lovely
Product Mix of HUL
Product managers need to examine closely, the sales and profits of each item in findings will help them decide whether to build, maintain, harvest, or divest different product lines.
Ø Line Stretching
Product lines tend to lengthen over the years for different reasons such as excess manufacturing capacity, new market opportunities, demand from sales force and resellers for a rich product line to satisfy customers with varied preferences and competitive compulsions. Lengthening of lines raises costs in many areas and decisions are based on careful appraisal.
§ Downward line stretch: Companies sometimes introduce new products with an objective of communicating an image of technical excellence and high quality, and locate at the upper end of the market. Subsequently, the company might stretch downwards due to competitor’s attack by introducing, a low end product in response to competitive attack, or a company may introduce a low end product to fill up a vacant slot that may seem attractive to a new competitor. Another possibility is that market may become more attractive at the lower end due to faster growth rate.
§ Upward stretch: In this situation, companies operating at low end may opt to enter high end because of better opportunities as a result of faster market growth, or the need to create an image of full line company. For ex. Maruti Udyog introduced its medium priced models such as Maruti Zen, Esteem, Wagon R, Alto, and Swift after it had entered the market with its low end Maruti 800 and Omni.
§ Dual or Both way stretch: Companies operating in the medium range of market, may decide to stretch product line(s) both ways for reasons of opportunities arising in different market segments.
High High High
Price Present Product New Product Present Product
Price Price
Low High Low High Low High
Quality Quality Quality
Downward Stretch Upward stretch Both way stretch
Ø Line Filling
A company may decide to lengthen the existing product line (s) by adding more items. The possible objectives leading to line filling may include realizing incremental profits, meeting dealers’ demands in response to their complaints that they lose sales because of missing items in the lines, excess capacity pressures, and trying to fill up vacant item slots to keep out competitors. For ex. Videocon and Onida have introduced various TV models at various price points’ right through high end to low end.
Ø Line Prunning
Line pruning is the just the opposite to line stretching and involves a deliberate decision to cut the number of items in product line(s). Over a period of time, market conditions and customer preferences change, and companies find that some of their product lines contain some unnecessary variants pack sizes. Another reason for line pruning can be the shortage of current production capacity. It is necessary for product managers to periodically review their product lines by examining sales and costs to spot items that are negatively impacting the profits.
Thus most business entities have many products in their portfolio. By dealing in many products, companies aim to serve a much larger and varied group of customers who look for solutions to different types of needs. This also helps to minimize the risks for a company across different products. For ex. ITC diversified from tobacco-based products to hospitality products, financial services and consumer non durables such as edible oil and atta.
Hence we may conclude that product mix consists of all the set of product lines and items that a particular seller offers for sale. A company’s product mix has four important dimensions, namely i) width, ii) length, iii) depth and iv) consistency.
Product width refers to the total number of items the company carries within its product lines. Ex. Procter & Gamble consisting of many product lines like paper, food, household, cleaning, medicinal, cosmetics and personal care products.
Product length refers to the total no. of items the Co. carries within its products lines. Procter & Gamble typically carries many bands with in each lines, for example, it sells eleven laundry detergent, eight hand soap, six shampoo and four dishwashing detergent.
Product depth refers to the no. of versions, offered of each product in the line. Thus Procter & gamble’s Crest Tooth Paste comes in three size and two formulation (paste & Gel)
Consistency refers to how closely relate the various product lines are in end use, production requirements, distribution channels, or some other way.
Wednesday, May 27, 2009
TEST MARKETING
Test marketing or market testing is the controlled experiment done in a limited but carefully selected part of the market place. The basic aim of test marketing is to predict the sales or profit consequences, either in absolute or relative terms of one or more proposed marketing actions. It is essentially the use of market place as a laboratory and of a direct sales measurement which differentiates these tests from other types of marketing research. Test marketing is an ultimate test to experience and experiment with actual selling and purchase of the product. Test marketing is the actual conduct of a marketing campaign within a limited market, for a period that is hoped to be long enough to indicate its probable success on a large scale and indefinite basis.
Test marketing is the stage where the entire product and marketing programme is tried out for the first time in a small number of well chosen and authentic sales environment. Test marketing is normally the last step in the development process before a new product is launched either on regional or national level. Test marketing or market testing is to validate the results obtained from prototype testing and early consumer research by extending these results to a representative sample or actual markets.
According to Mr. Gold J. A., test marketing is “a research technique in which the product under study is placed on a sale I one or more selected localities or areas, and its reception by consumer and trade is observed, recorded and analysed.”
Test marketing is a means of minimizing the risk of national or regional launch. A good test marketing operation is a marketing plan carried out in a miniature and scaled in every detail as to its relationship to the total intended market. It confirms the management’s expectations about the product by testing those variables in the marketing planning or plan other than the product.
WHY TEST MARKETING?
Market testing is a managerial control tool because, a market test can serve as a piliot operation for the large scale marketing activity. This is particularly true for marketing new products and new brands. Further, test marketing is a predictive research tool because, it is employed in two, broad and dissimilar situations namely,
The introduction of new products or brand and
The evaluation of alternative marketing variable.
BENEFITS OF TEST MARKETING
To improve the knowledge of potential product sales.
Those firms that do undertake test marketing of new products seek essentially to try out the product in miniature to hedge against the potential disaster of an ill considered product introduced prematurely. Their concern in testing with gaining an insight into the product market potential as well as with ascertaining what supporting promotional, pricing and distributional strategies are likely to work best. If a product sales fall below break even expectations, in the test markets, then the company is wiser. It is because the results are only a part of the total results.
To pretest alternative marketing plans.
To achieve a given target, alternative marketing programmes can be possible. However, the question is one of the best or most suitable alternatives. For instance, marketing appeals may be tried out say , by Colgate Palmolive – in four cosmopolites of India as:
a. Average amount of advertising with heavy samples.
b. Heavy advertising with limited samples.
c. Average amount of advertising with offers, and
d. Average amount of advertising with special introductory offers.
It may so happen that after a trial, the company may find the third alternative as most effective. Thus, test marketing helps in assessing the worth of alternative marketing programmes.
To predict product faults:
Some times the company may discover a product fault that escaped its attention in the product development stage. As a prototype or a model product is pretested and retested that gives improved perceptions of market segments should enable the company to bring about various aspect of marketing programme into finer focus. The product testing done earlier gives a partial solution to the problem, while test marketing puts the product to acid test of cold facts and determines its real standing-as its true nature is made known.
To know reactions of competitors.
Whenever the new product is introduced in the market, it is quite natural that the competitors have a fear of reduction in market share that they are already enjoying. With this they try to change their marketing strategy in an attempt to reposition their products as something stronger to counter impact the new product so launched. These reactions of competitors can be exploited and enchased on by gathering, analysing and interpreting for company’s benefits. Thus, the company can neutralize the competitive combat and this build up is the outcome of market testing.
PROBLEMS IN TEST MARKETING
Not all companies believe in test marketing. That is, test marketing, by no means meets with universal approval; even from in those industries where it is used in great deal. There are certain problems which arise in conducting test marketing that have reduced its importance. The basic problems are:
Inaccurate results.
Many of the new products that have achieved favourable test marketing results have not achieved commercial success. Even though test marketing is used extensively, the results are often neither useful nor accurate, especially as a predictive device. Many studies conducted on the predictive value of test marketing have indicated very large margins of errors. This makes it mandatory to be very careful to ensure greater congruity between the results of a test marketing and final launch in the national market.
It is an expensive exercise.
The unreliability of market test results is not only the problem, the cost of this technique is also another problem. Test marketing a new product not only requires huge investments in the produce itself, but also in the remuneration and expenses of the members of the company, outside agency and the distribution network. That is why, test marketing is skipped off easily on the ground of high cost.
It is a time consuming affair.
Another problem with test marketing is that it consumes time. If the test market period is too short, the distribution strategy adopted may be based on inaccurate, incomplete or inconclusive data. If a new product is tested for a long period of time, competitors may respond with substitute product. Normal period of test marketing is six months and these six months are more than enough for dangerous developments to occur. Thus, the distinctiveness of the product innovation can decay drastically so much so that the so called new product so tested will remain no longer new product when it enters national market after its launching.
It lets the tips to competitors
A test marketing efforts is very visible and any good marketing intelligence system will report its existence to a competitor’s management almost immediately. Competition can be a problem in test marketing a new product by distorting the test results with heavy, abnormal promotional expenditures in the test area or by actually purchasing very large quantities of the product. In case strong competitive activities are implemented in the test area, the new product test results are of little value. Te least that can happen is that competitors will be ready to meet the threat of new products when it enters the national market.
ESSENTIALS OF SOUND TEST MARKETING
To make test marketing an effective one, the following factors are to be given due weightage:
Representative test market.
The test market to be selected must be such a geographical area that represents the national market. In our national market, the places that have congregation of people coming from every nook and corner can be best chosen as test markets. These can be Mumbai, Kolkata, Chennai, Bengaluru and so on. Normally two or four places are selected to assess the consumer relations.
Perfect projection of results
The marketing reactions in the form of achievements in these test markets should be properly recorded and scientifically projected on nationwide base. If a test marketing is conducted over a period of six months and in particular month the sales account for say Rs. 25000 for a particular product, and if it works out 4 per cent of the national sale volume, then the monthly sales volume on national basis will be Rs. 6,50,000. Later o these projections can be made for a period of one year etc.
Demographic validation
The test market area should be large enough to accommodate divergent demographic features such as number of people-sex-age group-special class-caste-religion-rural and urban classification-level of education and so on. Such a unity in diversity makes the data more representative and meaningful.
Competitive validation
As the strength of competition has its upper hand in validating the test market results, the area selected for test marketing should be such that there is existence of competitors who are more or less of equal strength. Even if the competitors are strong, the test marketing company should be prepared to face the same with strength and vitality.
Behavioural validation
The test market area selected must be one that provides for the large scale use of close similar products and substitutes to the new product to be tested. The real life reactions of consumers are known only when the market releases not only the new product but the existing close and substitute products. It gives a clue to find out consumer behavioural changes in the market.
Strategy validation
Successful test marketing also takes into account the strategies applied in each component of marketing mix. The company should be sure of what strategy it wants to follow in test marketing and how far it is going to refine them in commercialization stage. It is of top importance because change in strategy and change in situation will distort the possible results.
Test marketing or market testing is the controlled experiment done in a limited but carefully selected part of the market place. The basic aim of test marketing is to predict the sales or profit consequences, either in absolute or relative terms of one or more proposed marketing actions. It is essentially the use of market place as a laboratory and of a direct sales measurement which differentiates these tests from other types of marketing research. Test marketing is an ultimate test to experience and experiment with actual selling and purchase of the product. Test marketing is the actual conduct of a marketing campaign within a limited market, for a period that is hoped to be long enough to indicate its probable success on a large scale and indefinite basis.
Test marketing is the stage where the entire product and marketing programme is tried out for the first time in a small number of well chosen and authentic sales environment. Test marketing is normally the last step in the development process before a new product is launched either on regional or national level. Test marketing or market testing is to validate the results obtained from prototype testing and early consumer research by extending these results to a representative sample or actual markets.
According to Mr. Gold J. A., test marketing is “a research technique in which the product under study is placed on a sale I one or more selected localities or areas, and its reception by consumer and trade is observed, recorded and analysed.”
Test marketing is a means of minimizing the risk of national or regional launch. A good test marketing operation is a marketing plan carried out in a miniature and scaled in every detail as to its relationship to the total intended market. It confirms the management’s expectations about the product by testing those variables in the marketing planning or plan other than the product.
WHY TEST MARKETING?
Market testing is a managerial control tool because, a market test can serve as a piliot operation for the large scale marketing activity. This is particularly true for marketing new products and new brands. Further, test marketing is a predictive research tool because, it is employed in two, broad and dissimilar situations namely,
The introduction of new products or brand and
The evaluation of alternative marketing variable.
BENEFITS OF TEST MARKETING
To improve the knowledge of potential product sales.
Those firms that do undertake test marketing of new products seek essentially to try out the product in miniature to hedge against the potential disaster of an ill considered product introduced prematurely. Their concern in testing with gaining an insight into the product market potential as well as with ascertaining what supporting promotional, pricing and distributional strategies are likely to work best. If a product sales fall below break even expectations, in the test markets, then the company is wiser. It is because the results are only a part of the total results.
To pretest alternative marketing plans.
To achieve a given target, alternative marketing programmes can be possible. However, the question is one of the best or most suitable alternatives. For instance, marketing appeals may be tried out say , by Colgate Palmolive – in four cosmopolites of India as:
a. Average amount of advertising with heavy samples.
b. Heavy advertising with limited samples.
c. Average amount of advertising with offers, and
d. Average amount of advertising with special introductory offers.
It may so happen that after a trial, the company may find the third alternative as most effective. Thus, test marketing helps in assessing the worth of alternative marketing programmes.
To predict product faults:
Some times the company may discover a product fault that escaped its attention in the product development stage. As a prototype or a model product is pretested and retested that gives improved perceptions of market segments should enable the company to bring about various aspect of marketing programme into finer focus. The product testing done earlier gives a partial solution to the problem, while test marketing puts the product to acid test of cold facts and determines its real standing-as its true nature is made known.
To know reactions of competitors.
Whenever the new product is introduced in the market, it is quite natural that the competitors have a fear of reduction in market share that they are already enjoying. With this they try to change their marketing strategy in an attempt to reposition their products as something stronger to counter impact the new product so launched. These reactions of competitors can be exploited and enchased on by gathering, analysing and interpreting for company’s benefits. Thus, the company can neutralize the competitive combat and this build up is the outcome of market testing.
PROBLEMS IN TEST MARKETING
Not all companies believe in test marketing. That is, test marketing, by no means meets with universal approval; even from in those industries where it is used in great deal. There are certain problems which arise in conducting test marketing that have reduced its importance. The basic problems are:
Inaccurate results.
Many of the new products that have achieved favourable test marketing results have not achieved commercial success. Even though test marketing is used extensively, the results are often neither useful nor accurate, especially as a predictive device. Many studies conducted on the predictive value of test marketing have indicated very large margins of errors. This makes it mandatory to be very careful to ensure greater congruity between the results of a test marketing and final launch in the national market.
It is an expensive exercise.
The unreliability of market test results is not only the problem, the cost of this technique is also another problem. Test marketing a new product not only requires huge investments in the produce itself, but also in the remuneration and expenses of the members of the company, outside agency and the distribution network. That is why, test marketing is skipped off easily on the ground of high cost.
It is a time consuming affair.
Another problem with test marketing is that it consumes time. If the test market period is too short, the distribution strategy adopted may be based on inaccurate, incomplete or inconclusive data. If a new product is tested for a long period of time, competitors may respond with substitute product. Normal period of test marketing is six months and these six months are more than enough for dangerous developments to occur. Thus, the distinctiveness of the product innovation can decay drastically so much so that the so called new product so tested will remain no longer new product when it enters national market after its launching.
It lets the tips to competitors
A test marketing efforts is very visible and any good marketing intelligence system will report its existence to a competitor’s management almost immediately. Competition can be a problem in test marketing a new product by distorting the test results with heavy, abnormal promotional expenditures in the test area or by actually purchasing very large quantities of the product. In case strong competitive activities are implemented in the test area, the new product test results are of little value. Te least that can happen is that competitors will be ready to meet the threat of new products when it enters the national market.
ESSENTIALS OF SOUND TEST MARKETING
To make test marketing an effective one, the following factors are to be given due weightage:
Representative test market.
The test market to be selected must be such a geographical area that represents the national market. In our national market, the places that have congregation of people coming from every nook and corner can be best chosen as test markets. These can be Mumbai, Kolkata, Chennai, Bengaluru and so on. Normally two or four places are selected to assess the consumer relations.
Perfect projection of results
The marketing reactions in the form of achievements in these test markets should be properly recorded and scientifically projected on nationwide base. If a test marketing is conducted over a period of six months and in particular month the sales account for say Rs. 25000 for a particular product, and if it works out 4 per cent of the national sale volume, then the monthly sales volume on national basis will be Rs. 6,50,000. Later o these projections can be made for a period of one year etc.
Demographic validation
The test market area should be large enough to accommodate divergent demographic features such as number of people-sex-age group-special class-caste-religion-rural and urban classification-level of education and so on. Such a unity in diversity makes the data more representative and meaningful.
Competitive validation
As the strength of competition has its upper hand in validating the test market results, the area selected for test marketing should be such that there is existence of competitors who are more or less of equal strength. Even if the competitors are strong, the test marketing company should be prepared to face the same with strength and vitality.
Behavioural validation
The test market area selected must be one that provides for the large scale use of close similar products and substitutes to the new product to be tested. The real life reactions of consumers are known only when the market releases not only the new product but the existing close and substitute products. It gives a clue to find out consumer behavioural changes in the market.
Strategy validation
Successful test marketing also takes into account the strategies applied in each component of marketing mix. The company should be sure of what strategy it wants to follow in test marketing and how far it is going to refine them in commercialization stage. It is of top importance because change in strategy and change in situation will distort the possible results.
VALUE ANALYSIS
VALUE ANALYSIS
Value analysis is one of the major techniques of cost reduction and control. It is a disciplined approach which ensures the necessary functions for the minimum cost without diminishing quality, reliability, performance and appearance. It is a creative approach to eliminate the unnecessary costs which add neither to quality nor to the appearance of the product. It is a systematic application of techniques to identify the functions of a product or a component and to provide the desired function at the lowest total costs.
What is value analysis?
Value is one of those terms having good many connotations and even contradictory definitions. ‘Value’ is a word that is very often used by individuals without being clearly understood. Even different departments of the same organizations have different opinions of the ‘value’ of the product that the company manufactures. The designer equates value with reliability, purchase people with price paid for them, production personnel with that of cost from the angle of manufacturer, sales people with what customer is willing to pay. In the field of value investigation, value refers to economic value, which itself can be divided into four types as cost value, exchange value, use value and esteem value.
‘Cost value’ is the measure of sum of all costs incurred in producing the product. The cost value, therefore is the sum of raw materials cost, labour cost, tool cost and overhead expenses to produce the product.
‘Exchange value’ is the measure of all the properties, qualities and features of the product which make the product possible of being traded for another product or for money. In a conventional sense, exchange value refers to the price that a purchaser will offer for the product, the price being dependent upon the satisfaction value which derives from the product. Value derived from the product consists of two components namely (a) value due to reliability of performance of the product and (b) the value which the possessions bestow upon the buyer. These are often referred to as ‘value in value’ and ‘esteem in value’
‘Use value’ is the measure of properties, qualities and features which make the product accomplish use, work or service. Use value, therefore, is the price paid by the buyer or the cost incurred by the manufacturer in order to ensure that the product performs its intended function efficiently.
‘Esteem value’ is the measure of properties, features, attractiveness graphic packaging and the like which increases sale appeal or which attracts customers and create in them a strong desire to own the product. Esteem value, therefore, is the price paid by the buyer or the cost incurred by the manufacturer beyond the use value. It is the perception value.
Value analysis is an organized approach to identify unnecessary costs associated with any product, material, part, component, system or service by analysis of function and efficiently eliminating them without impairing the quality functional reliability or its capacity to give service.
According to Society of American Value Engineers (SAVE), “Value Analysis is the systematic application of recognized techniques which identify the function of a product or services establish a monetary value for the function and provide the necessary function reliability at the lowest overall cost.”
According to Lorry D. Miles, Value analysis is the study of the relationship of design, function and cost of any material or service with an object of reducing its cost through modification of design or material specifications, manufacture by more efficient process, changes in sources of supply, elimination or incorporation into another item.
Thus value analysis is a systematic application of established techniques to identify the functions of a product or component and to provide the desired functions at the lowest total cost. It is a creative approach to eliminate unnecessary costs which add neither to quality nor to the appearance of the product. It is a rational and structured process consisting of:
Functional analysis to define the reason for the existence of a product or its component,
Creatively analysis for generating new and better alternatives, and
Measurement for evaluating the value of present and future concepts.
Hence, value analysis is a technique which examines the facts of a function and cost of a product in order to determine whether the cost can be reduced or altogether eliminated while retaining all the features of performance and quality of a product or both. It is an organized approach of exposing and eliminating unnecessary costs.
PHASES OF VALUE ANALYSIS
The phases of value analysis are:
Phase of Origination
In this stage, a value analysis study team is formed. The project is selected and clearly defined. The team examines in detail the product and its components to understand thoroughly their nature.
Phase of Information
A functional analysis is carried out to determine the functions and uses of the product and its components. The cost and importance of each function is identified. A value index is calculated on the basis of cost benefit ratio for each function. A list is being prepared in which the items of functions are arranged in decreasing order of value.
Phase of Innovation
This is the creative phase concerned with the generation of new alternatives to replace or removing the existing ones.
Phase of Evaluation
Each and every alternative is analysed and the most promising alternatives are selected. These alternatives are further examined for economic and technical feasibility. The alternatives finally selected must be capable of performance. They must meet the standard of accuracy, reliability, safety, maintenance and repairs, free from environmental effect etc.
Phase of Choice
In this phase, report is prepared. This report contains a summary of the study, conclusions and specific proposals. The decision makers choose the alternative.
Phase of Implementation
The chosen alternative is put to the actual use with the help of the programs and action plans so developed in advance.
Phase of Review
The progress of analysis changes in continuously monitored and followed up in order to provide assistance, to clarify any misconceptions and to ensure that the desired results are achieved.
MERITS OF VALUE ANALYSIS
Improvement In Product Design
It leads to improvements in the product design so that more useful products are given shape.
Ex. ball point pens do not clog now a days and there is even free flow of ink and along with rubber for smooth writing.
High quality is maintained
High quality means higher value.
Ex. dry cells were earlier leaking, but now a days we have leak proof dry cells. Today even we get rechargeable batteries.
Elimination of wastage.
Value analysis improves the overall efficiency by eliminating the wastages of various types.
Savings in costs
The main aim of value analysis is to cut the unwanted costs by retaining all the features of performance or even bettering the performance.
Building and improving company image
The company’s image or status or personality is built up or improved to a great extent. Improvement in quality and reduction in cost means competitive products and good name in product market; it is a good pay master as sales and profits higher and labour market it enjoys reputation; its capital market, nobody hesitates to invest as it is a quality company.
Wide spectrum of application
The principle and techniques of value analysis can be applied to all areas that may be purchasing, hardware, products, systems, procedures and so on.
Encourages Team spirit and morale
Value analysis is a tool which is not handled by one, but groups or teams and an organization itself is a team of personnel having specifications. A product is the product of all team efforts. Therefore, it fosters team spirit and manures employee morale as they are pulling together for greater success.
LIMITATIONS
Like any other cost reduction technique, value analysis has its own limitation. The most common limitations are:
Lack of motivation
Resistive to change
Inertia
Lack of knowledge and patience
Attitudes like: we are very small or big, if it will not work in India, this has been tried earlier and failed, the change is too big, let our competitor try before we try, etc.
These limitations are however man made and can be overcome once the team decides to implement value analysis.
Value analysis is one of the major techniques of cost reduction and control. It is a disciplined approach which ensures the necessary functions for the minimum cost without diminishing quality, reliability, performance and appearance. It is a creative approach to eliminate the unnecessary costs which add neither to quality nor to the appearance of the product. It is a systematic application of techniques to identify the functions of a product or a component and to provide the desired function at the lowest total costs.
What is value analysis?
Value is one of those terms having good many connotations and even contradictory definitions. ‘Value’ is a word that is very often used by individuals without being clearly understood. Even different departments of the same organizations have different opinions of the ‘value’ of the product that the company manufactures. The designer equates value with reliability, purchase people with price paid for them, production personnel with that of cost from the angle of manufacturer, sales people with what customer is willing to pay. In the field of value investigation, value refers to economic value, which itself can be divided into four types as cost value, exchange value, use value and esteem value.
‘Cost value’ is the measure of sum of all costs incurred in producing the product. The cost value, therefore is the sum of raw materials cost, labour cost, tool cost and overhead expenses to produce the product.
‘Exchange value’ is the measure of all the properties, qualities and features of the product which make the product possible of being traded for another product or for money. In a conventional sense, exchange value refers to the price that a purchaser will offer for the product, the price being dependent upon the satisfaction value which derives from the product. Value derived from the product consists of two components namely (a) value due to reliability of performance of the product and (b) the value which the possessions bestow upon the buyer. These are often referred to as ‘value in value’ and ‘esteem in value’
‘Use value’ is the measure of properties, qualities and features which make the product accomplish use, work or service. Use value, therefore, is the price paid by the buyer or the cost incurred by the manufacturer in order to ensure that the product performs its intended function efficiently.
‘Esteem value’ is the measure of properties, features, attractiveness graphic packaging and the like which increases sale appeal or which attracts customers and create in them a strong desire to own the product. Esteem value, therefore, is the price paid by the buyer or the cost incurred by the manufacturer beyond the use value. It is the perception value.
Value analysis is an organized approach to identify unnecessary costs associated with any product, material, part, component, system or service by analysis of function and efficiently eliminating them without impairing the quality functional reliability or its capacity to give service.
According to Society of American Value Engineers (SAVE), “Value Analysis is the systematic application of recognized techniques which identify the function of a product or services establish a monetary value for the function and provide the necessary function reliability at the lowest overall cost.”
According to Lorry D. Miles, Value analysis is the study of the relationship of design, function and cost of any material or service with an object of reducing its cost through modification of design or material specifications, manufacture by more efficient process, changes in sources of supply, elimination or incorporation into another item.
Thus value analysis is a systematic application of established techniques to identify the functions of a product or component and to provide the desired functions at the lowest total cost. It is a creative approach to eliminate unnecessary costs which add neither to quality nor to the appearance of the product. It is a rational and structured process consisting of:
Functional analysis to define the reason for the existence of a product or its component,
Creatively analysis for generating new and better alternatives, and
Measurement for evaluating the value of present and future concepts.
Hence, value analysis is a technique which examines the facts of a function and cost of a product in order to determine whether the cost can be reduced or altogether eliminated while retaining all the features of performance and quality of a product or both. It is an organized approach of exposing and eliminating unnecessary costs.
PHASES OF VALUE ANALYSIS
The phases of value analysis are:
Phase of Origination
In this stage, a value analysis study team is formed. The project is selected and clearly defined. The team examines in detail the product and its components to understand thoroughly their nature.
Phase of Information
A functional analysis is carried out to determine the functions and uses of the product and its components. The cost and importance of each function is identified. A value index is calculated on the basis of cost benefit ratio for each function. A list is being prepared in which the items of functions are arranged in decreasing order of value.
Phase of Innovation
This is the creative phase concerned with the generation of new alternatives to replace or removing the existing ones.
Phase of Evaluation
Each and every alternative is analysed and the most promising alternatives are selected. These alternatives are further examined for economic and technical feasibility. The alternatives finally selected must be capable of performance. They must meet the standard of accuracy, reliability, safety, maintenance and repairs, free from environmental effect etc.
Phase of Choice
In this phase, report is prepared. This report contains a summary of the study, conclusions and specific proposals. The decision makers choose the alternative.
Phase of Implementation
The chosen alternative is put to the actual use with the help of the programs and action plans so developed in advance.
Phase of Review
The progress of analysis changes in continuously monitored and followed up in order to provide assistance, to clarify any misconceptions and to ensure that the desired results are achieved.
MERITS OF VALUE ANALYSIS
Improvement In Product Design
It leads to improvements in the product design so that more useful products are given shape.
Ex. ball point pens do not clog now a days and there is even free flow of ink and along with rubber for smooth writing.
High quality is maintained
High quality means higher value.
Ex. dry cells were earlier leaking, but now a days we have leak proof dry cells. Today even we get rechargeable batteries.
Elimination of wastage.
Value analysis improves the overall efficiency by eliminating the wastages of various types.
Savings in costs
The main aim of value analysis is to cut the unwanted costs by retaining all the features of performance or even bettering the performance.
Building and improving company image
The company’s image or status or personality is built up or improved to a great extent. Improvement in quality and reduction in cost means competitive products and good name in product market; it is a good pay master as sales and profits higher and labour market it enjoys reputation; its capital market, nobody hesitates to invest as it is a quality company.
Wide spectrum of application
The principle and techniques of value analysis can be applied to all areas that may be purchasing, hardware, products, systems, procedures and so on.
Encourages Team spirit and morale
Value analysis is a tool which is not handled by one, but groups or teams and an organization itself is a team of personnel having specifications. A product is the product of all team efforts. Therefore, it fosters team spirit and manures employee morale as they are pulling together for greater success.
LIMITATIONS
Like any other cost reduction technique, value analysis has its own limitation. The most common limitations are:
Lack of motivation
Resistive to change
Inertia
Lack of knowledge and patience
Attitudes like: we are very small or big, if it will not work in India, this has been tried earlier and failed, the change is too big, let our competitor try before we try, etc.
These limitations are however man made and can be overcome once the team decides to implement value analysis.
PUBLICITY AND PROPAGANDA
PUBLICITY AND PROPAGANDA
Publicity is an effect to make available certain information to the public. According to Association of Teachers of Marketing and Advertising of America, ‘publicity’ is “any form of non-personal presentation of goods, service or ideas to a group; such presentation may be or may not be sponsored only by the one responsible for it and it may or may not be paid for.”
Advertising and Publicity are similar in the following respects:
They convey the information regarding product, service or institution.
They present the information to the audiences impersonally.
Advertising and Publicity differ in the following ways:
Advertising has commercial touch while publicity may or may not have.
Advertising is paid for while publicity may or may not be paid for.
In advertising the sponsor controls the message while in case of publicity it is controlled by the media.
Advertising message commands more or less respect while publicity does.
In advertising the sponsor is known, while in case of publicity he may or may not be known.
If the message is ignored by the audience, it is the advertiser who suffers, while in case of publicity, it is the audience that suffers.
All advertising is publicity but all publicity is not advertising.
Propaganda is the means of gaining support for a given cause or belief or an opinion or an attitude. It is essentially a bias towards a particular view point-good or bad. Propaganda signifies an organized effort to spread a peculiar doctrine, dogma or principle. It is not frank, open and confesses openly in its approach and achievements.
Propaganda differs from advertising in following ways:
Propaganda sends message which is not commercial in nature while in case of advertising it is commercial.
Propaganda achieves its objectives by poisoning the minds of public while advertising is not sinister in its approach.
The identity of a propagandist is not known but in case of advertising it is known.
Propaganda makes no difference between the individuals in sending the message while advertising does.
The claim of propagandists cannot be easily tested while those of advertisers can be tested.
All advertising is propaganda but the vice versa is not true.
Publicity is an effect to make available certain information to the public. According to Association of Teachers of Marketing and Advertising of America, ‘publicity’ is “any form of non-personal presentation of goods, service or ideas to a group; such presentation may be or may not be sponsored only by the one responsible for it and it may or may not be paid for.”
Advertising and Publicity are similar in the following respects:
They convey the information regarding product, service or institution.
They present the information to the audiences impersonally.
Advertising and Publicity differ in the following ways:
Advertising has commercial touch while publicity may or may not have.
Advertising is paid for while publicity may or may not be paid for.
In advertising the sponsor controls the message while in case of publicity it is controlled by the media.
Advertising message commands more or less respect while publicity does.
In advertising the sponsor is known, while in case of publicity he may or may not be known.
If the message is ignored by the audience, it is the advertiser who suffers, while in case of publicity, it is the audience that suffers.
All advertising is publicity but all publicity is not advertising.
Propaganda is the means of gaining support for a given cause or belief or an opinion or an attitude. It is essentially a bias towards a particular view point-good or bad. Propaganda signifies an organized effort to spread a peculiar doctrine, dogma or principle. It is not frank, open and confesses openly in its approach and achievements.
Propaganda differs from advertising in following ways:
Propaganda sends message which is not commercial in nature while in case of advertising it is commercial.
Propaganda achieves its objectives by poisoning the minds of public while advertising is not sinister in its approach.
The identity of a propagandist is not known but in case of advertising it is known.
Propaganda makes no difference between the individuals in sending the message while advertising does.
The claim of propagandists cannot be easily tested while those of advertisers can be tested.
All advertising is propaganda but the vice versa is not true.
PHYSICAL DISTRIBUTION
PHYSICAL DISTRIBUTION
Physical distribution is a marketing activity that concerns the handling and the movement of goods. Physical distribution is a major component of marketing mix and cost area of business. It includes all those activities connected with the efficient movement of goods from the place of production to the place of consumption. Physical distribution involves the handling of raw-materials, fabricated parts, supplies and finished products from producers to consumers via intermediaries. It is the process of strategically managing the movement and storage of materials, parts and finished inventory from supplier, between enterprise facilities and to customers.
According to William J. Stanton, “Physical distribution involves the management of physical flow of products and establishment and operation of flow systems.”
According to Philip Kotler, “Physical distribution involves planning, implementing and controlling the physical flow of materials, and final goods from the points of origin of use to meet customer needs at a profit.”
The physical distribution encompasses the wide range of interrelated activities such as transportation, warehousing, materials handling, packaging, inventory control, plant and warehouse location, order processing, marketing forecasting and customer services. Broadly, these activities can be grouped into four major functions namely, order processing, inventory management, transportation and material handling.
OBJECTIVES OF PHYSICAL DISTRIBUTION
Physical distribution has two broad objectives- consumer satisfaction and profit maximization. Physical distribution is concerned with getting the product to the right place at right time at the lowest costs. It involves the coordination of activities to place the right quantity of right goods at the desired place and time. Consumer satisfaction is improved upon by delivering the products to the consumers at the point and time required. Similarly, profit margin for the manufacturers can be increased by making this physical distribution more effective and efficient. Effectiveness and efficiency will bring in economy and that has salutary effect on profit margins.
ROLE OF PHYSICAL DISTRIBUTION SYSTEM
The physical distribution arrangement or system designed to move the goods from producers and manufacturers to the users has a definite role. That is why; all wise business firms have forged ahead with investment of good deal of time, treasure and talent in physical distribution system improvements to get best to others. It provides a new orientation for marketing.
Physical distribution contributes in the following ways:
Creation of utilities:
The physical distribution function of a firm provides the place and time dimensions which contribute a basic element of marketing mix. The major components of physical distribution are transportation and warehousing. Transport system creates place utility making goods more useful by bringing them from the places where they are not needed to the places where they are badly needed. Warehousing system is known for creating time utility. By holding the goods from the time they are produced till their consumption, and making them available during shortages creates time utility. This results in maximizing customer satisfaction and profits to the firm.
Improved consumer services
Consumer services are the services provided to the customers from the time of order placed till the product is delivered. Customer service in physical distribution function consists of providing products at the time and location corresponding to the customer needs.
Cut in distribution cost
The prices paid by customers consist of not only production cost but also delivery cost. Experts have estimated that the physical distribution cost is in range of 20 to 25 percent of the price.
Increased market share
A new look and approach to physical distribution can contribute beyond the attainment of the twin objectives of improving customer satisfaction and dealer profit margins. Physical distribution system contributes to increased market share in many ways like a well designed physical distribution frame can decentralise its ware housing option, devise the combination of efficient and economic means of transport to penetrate into the areas untapped so far, planning inventory operations to avoid stock outs.
Price stabilization
Physical distribution can contribute considerably to the attainment of the situation of price stabilization. Physical distribution components are capable of bringing out price stabilization. Through the best use of available transport and warehousing facility and adjustment between demand and supply, price fluctuations can be prevented.
COMPONENTS OF PHYSICAL DISTRIBUTION
Physical distribution management is that part of general management which is responsible for the design, administration and operation of the systems to control the movement of raw materials and processed goods. The structure of physical distribution system or arrangement of any marketing organization is made up of four broad components namely, order processing, inventory management, materials handling and transportation.
ORDER PROCESSING
Physical distribution sets in motion with a customer. Order processing includes the activities of receiving, recording, filing and assembling the orders for shipment. Each customer expects that the order placed by him should be implemented without any delay on one hand and that the goods dispatched match perfectly to his order placed. This leads to quality control that ensures upright execution of orders. Hence, marketers and distribution managers are very much concerned about the order cycle time and every effort is made to keep it rigged.
An order cycle is the period between the time of the placement of an order by the customer to the time of eth arrival of goods at his destination. This cycle is made up of the transmission of the order, document processing in the department and shipment of goods. As this is a time consuming and tedious activity, full advantage of electronic data processing is to be taken to guarantee accurate and timely service.
The order processing procedures followed in a firm have dual impact on customer service level, namely;
Ø Order time that is the time interval between two orders of a customer, and
Ø The consistency and uniformity of delivery time i.e. regular and dependable deliveries.
INVENTORY MANAGEMENT
Inventory management means and includes the management of products on the move. Inventory management is the basic task of planning and controlling of finished goods after they have been brought out from production centers and before their deliveries to the users. Inventory management covers the most immediate aspects of warehousing and inventory controlling.
A. Warehousing
Warehousing or storage is an act of storing and assorting the finished goods so as to create maximum time utility at minimum cost. Warehousing covers two sub functions namely: movement and storage of finished goods. Movement refers to the actual receipt of products from the manufacturing centre(s), their transfer into warehouse and stocking at designated place, assorting according to customers orders and transferring them to common carriers on their way to consumers. The storage function is mainly concerned with holding and carrying the goods from the time they are placed in and till they are placed out in common carriers. It is mainly a safety and preservation function.
A warehouse may be centralized or decentralized. Centralized warehouse is near the manufacturing plant and the products are moved to the warehouse from the plant and later on distributed to different markets. Hence centralized warehousing firm have one dispatch point. Decentralised warehousing on the other hand is a warehouse built at or in the close vicinity of the market. The products are first moved in bulk from plant to different warehouses located in different markets where they are assorted according to the customers needs. Hence there are number of dispatch points.
B. Inventory controlling
Physical distribution management surrounds the inventory and its management. Inventory implies the stock of goods held over a period of time for meeting the customer needs – both business and final. Inventory acts as a link between the orders of the customers and the production or the procurement cycle of the firm. For a manufacturer, the inventories are made up of raw materials and parts, stocks of partly manufactured products nad finished goods. In case of distributors and retailers, it is mostly the finished stock meant for the final consumption.
Goals of Inventory management
v Providing adequate level of consumer service and
v Minimizing the firm’s investment in inventory.
Inventory can be controlled by adopting the following strategy:
· Setting stock levels
· Determining the economic order quantity
· Exercising control by importance and exception
· Keeping rack of inventory
MATERIAL HANDLING
Material handling as a human activity is as old as mankind. Material handing handling is undertaken at every stage of logistic activity namely- during production, storage, transport and packaging. Material handling, from the marketing perspective, stands for product movement after it gets out of manufacturing plant but before it is loaded on the transport mode to the destination of consumer. It represents product handling from plant to warehouse or warehouse location to another within the warehouse and from the warehouse to the place of loading.
Material handling is the subsystem of physical distribution system of a firm and is an agent of cost reduction and improved customer service. In effect, an efficient and effective materials handling system in a unit contributes to eth efficiency and effectiveness of the total physical distribution system. It is because, sound management of material handling avoids damage in product handling, prevents unnecessary and irrelevant movement, facilitates order processing and order picking and enables efficient product movement to match with inventory levels and transportation.
TRANSPORTATION
Transportation as the last component of distribution system is to do with the movement of products from warehouses to the customers destinations. Transportation involves loading and unloading of products and shipment between the places of dispatch and places of arrival. The major contribution of transportation management is cost reduction because cost of transportation is 35percent of total distribution cost and 15-20 percent of the total prices paid by the users. The point lies in cost reduction and creation of maximum of time utility.
The transportation mix comprises of railways, roadways, airways, waterways and pipelines.
Physical distribution is a marketing activity that concerns the handling and the movement of goods. Physical distribution is a major component of marketing mix and cost area of business. It includes all those activities connected with the efficient movement of goods from the place of production to the place of consumption. Physical distribution involves the handling of raw-materials, fabricated parts, supplies and finished products from producers to consumers via intermediaries. It is the process of strategically managing the movement and storage of materials, parts and finished inventory from supplier, between enterprise facilities and to customers.
According to William J. Stanton, “Physical distribution involves the management of physical flow of products and establishment and operation of flow systems.”
According to Philip Kotler, “Physical distribution involves planning, implementing and controlling the physical flow of materials, and final goods from the points of origin of use to meet customer needs at a profit.”
The physical distribution encompasses the wide range of interrelated activities such as transportation, warehousing, materials handling, packaging, inventory control, plant and warehouse location, order processing, marketing forecasting and customer services. Broadly, these activities can be grouped into four major functions namely, order processing, inventory management, transportation and material handling.
OBJECTIVES OF PHYSICAL DISTRIBUTION
Physical distribution has two broad objectives- consumer satisfaction and profit maximization. Physical distribution is concerned with getting the product to the right place at right time at the lowest costs. It involves the coordination of activities to place the right quantity of right goods at the desired place and time. Consumer satisfaction is improved upon by delivering the products to the consumers at the point and time required. Similarly, profit margin for the manufacturers can be increased by making this physical distribution more effective and efficient. Effectiveness and efficiency will bring in economy and that has salutary effect on profit margins.
ROLE OF PHYSICAL DISTRIBUTION SYSTEM
The physical distribution arrangement or system designed to move the goods from producers and manufacturers to the users has a definite role. That is why; all wise business firms have forged ahead with investment of good deal of time, treasure and talent in physical distribution system improvements to get best to others. It provides a new orientation for marketing.
Physical distribution contributes in the following ways:
Creation of utilities:
The physical distribution function of a firm provides the place and time dimensions which contribute a basic element of marketing mix. The major components of physical distribution are transportation and warehousing. Transport system creates place utility making goods more useful by bringing them from the places where they are not needed to the places where they are badly needed. Warehousing system is known for creating time utility. By holding the goods from the time they are produced till their consumption, and making them available during shortages creates time utility. This results in maximizing customer satisfaction and profits to the firm.
Improved consumer services
Consumer services are the services provided to the customers from the time of order placed till the product is delivered. Customer service in physical distribution function consists of providing products at the time and location corresponding to the customer needs.
Cut in distribution cost
The prices paid by customers consist of not only production cost but also delivery cost. Experts have estimated that the physical distribution cost is in range of 20 to 25 percent of the price.
Increased market share
A new look and approach to physical distribution can contribute beyond the attainment of the twin objectives of improving customer satisfaction and dealer profit margins. Physical distribution system contributes to increased market share in many ways like a well designed physical distribution frame can decentralise its ware housing option, devise the combination of efficient and economic means of transport to penetrate into the areas untapped so far, planning inventory operations to avoid stock outs.
Price stabilization
Physical distribution can contribute considerably to the attainment of the situation of price stabilization. Physical distribution components are capable of bringing out price stabilization. Through the best use of available transport and warehousing facility and adjustment between demand and supply, price fluctuations can be prevented.
COMPONENTS OF PHYSICAL DISTRIBUTION
Physical distribution management is that part of general management which is responsible for the design, administration and operation of the systems to control the movement of raw materials and processed goods. The structure of physical distribution system or arrangement of any marketing organization is made up of four broad components namely, order processing, inventory management, materials handling and transportation.
ORDER PROCESSING
Physical distribution sets in motion with a customer. Order processing includes the activities of receiving, recording, filing and assembling the orders for shipment. Each customer expects that the order placed by him should be implemented without any delay on one hand and that the goods dispatched match perfectly to his order placed. This leads to quality control that ensures upright execution of orders. Hence, marketers and distribution managers are very much concerned about the order cycle time and every effort is made to keep it rigged.
An order cycle is the period between the time of the placement of an order by the customer to the time of eth arrival of goods at his destination. This cycle is made up of the transmission of the order, document processing in the department and shipment of goods. As this is a time consuming and tedious activity, full advantage of electronic data processing is to be taken to guarantee accurate and timely service.
The order processing procedures followed in a firm have dual impact on customer service level, namely;
Ø Order time that is the time interval between two orders of a customer, and
Ø The consistency and uniformity of delivery time i.e. regular and dependable deliveries.
INVENTORY MANAGEMENT
Inventory management means and includes the management of products on the move. Inventory management is the basic task of planning and controlling of finished goods after they have been brought out from production centers and before their deliveries to the users. Inventory management covers the most immediate aspects of warehousing and inventory controlling.
A. Warehousing
Warehousing or storage is an act of storing and assorting the finished goods so as to create maximum time utility at minimum cost. Warehousing covers two sub functions namely: movement and storage of finished goods. Movement refers to the actual receipt of products from the manufacturing centre(s), their transfer into warehouse and stocking at designated place, assorting according to customers orders and transferring them to common carriers on their way to consumers. The storage function is mainly concerned with holding and carrying the goods from the time they are placed in and till they are placed out in common carriers. It is mainly a safety and preservation function.
A warehouse may be centralized or decentralized. Centralized warehouse is near the manufacturing plant and the products are moved to the warehouse from the plant and later on distributed to different markets. Hence centralized warehousing firm have one dispatch point. Decentralised warehousing on the other hand is a warehouse built at or in the close vicinity of the market. The products are first moved in bulk from plant to different warehouses located in different markets where they are assorted according to the customers needs. Hence there are number of dispatch points.
B. Inventory controlling
Physical distribution management surrounds the inventory and its management. Inventory implies the stock of goods held over a period of time for meeting the customer needs – both business and final. Inventory acts as a link between the orders of the customers and the production or the procurement cycle of the firm. For a manufacturer, the inventories are made up of raw materials and parts, stocks of partly manufactured products nad finished goods. In case of distributors and retailers, it is mostly the finished stock meant for the final consumption.
Goals of Inventory management
v Providing adequate level of consumer service and
v Minimizing the firm’s investment in inventory.
Inventory can be controlled by adopting the following strategy:
· Setting stock levels
· Determining the economic order quantity
· Exercising control by importance and exception
· Keeping rack of inventory
MATERIAL HANDLING
Material handling as a human activity is as old as mankind. Material handing handling is undertaken at every stage of logistic activity namely- during production, storage, transport and packaging. Material handling, from the marketing perspective, stands for product movement after it gets out of manufacturing plant but before it is loaded on the transport mode to the destination of consumer. It represents product handling from plant to warehouse or warehouse location to another within the warehouse and from the warehouse to the place of loading.
Material handling is the subsystem of physical distribution system of a firm and is an agent of cost reduction and improved customer service. In effect, an efficient and effective materials handling system in a unit contributes to eth efficiency and effectiveness of the total physical distribution system. It is because, sound management of material handling avoids damage in product handling, prevents unnecessary and irrelevant movement, facilitates order processing and order picking and enables efficient product movement to match with inventory levels and transportation.
TRANSPORTATION
Transportation as the last component of distribution system is to do with the movement of products from warehouses to the customers destinations. Transportation involves loading and unloading of products and shipment between the places of dispatch and places of arrival. The major contribution of transportation management is cost reduction because cost of transportation is 35percent of total distribution cost and 15-20 percent of the total prices paid by the users. The point lies in cost reduction and creation of maximum of time utility.
The transportation mix comprises of railways, roadways, airways, waterways and pipelines.
PHYSICAL DISTRIBUTION
PHYSICAL DISTRIBUTION
Physical distribution is a marketing activity that concerns the handling and the movement of goods. Physical distribution is a major component of marketing mix and cost area of business. It includes all those activities connected with the efficient movement of goods from the place of production to the place of consumption. Physical distribution involves the handling of raw-materials, fabricated parts, supplies and finished products from producers to consumers via intermediaries. It is the process of strategically managing the movement and storage of materials, parts and finished inventory from supplier, between enterprise facilities and to customers.
According to William J. Stanton, “Physical distribution involves the management of physical flow of products and establishment and operation of flow systems.”
According to Philip Kotler, “Physical distribution involves planning, implementing and controlling the physical flow of materials, and final goods from the points of origin of use to meet customer needs at a profit.”
The physical distribution encompasses the wide range of interrelated activities such as transportation, warehousing, materials handling, packaging, inventory control, plant and warehouse location, order processing, marketing forecasting and customer services. Broadly, these activities can be grouped into four major functions namely, order processing, inventory management, transportation and material handling.
OBJECTIVES OF PHYSICAL DISTRIBUTION
Physical distribution has two broad objectives- consumer satisfaction and profit maximization. Physical distribution is concerned with getting the product to the right place at right time at the lowest costs. It involves the coordination of activities to place the right quantity of right goods at the desired place and time. Consumer satisfaction is improved upon by delivering the products to the consumers at the point and time required. Similarly, profit margin for the manufacturers can be increased by making this physical distribution more effective and efficient. Effectiveness and efficiency will bring in economy and that has salutary effect on profit margins.
ROLE OF PHYSICAL DISTRIBUTION SYSTEM
The physical distribution arrangement or system designed to move the goods from producers and manufacturers to the users has a definite role. That is why; all wise business firms have forged ahead with investment of good deal of time, treasure and talent in physical distribution system improvements to get best to others. It provides a new orientation for marketing.
Physical distribution contributes in the following ways:
Creation of utilities:
The physical distribution function of a firm provides the place and time dimensions which contribute a basic element of marketing mix. The major components of physical distribution are transportation and warehousing. Transport system creates place utility making goods more useful by bringing them from the places where they are not needed to the places where they are badly needed. Warehousing system is known for creating time utility. By holding the goods from the time they are produced till their consumption, and making them available during shortages creates time utility. This results in maximizing customer satisfaction and profits to the firm.
Improved consumer services
Consumer services are the services provided to the customers from the time of order placed till the product is delivered. Customer service in physical distribution function consists of providing products at the time and location corresponding to the customer needs.
Cut in distribution cost
The prices paid by customers consist of not only production cost but also delivery cost. Experts have estimated that the physical distribution cost is in range of 20 to 25 percent of the price.
Increased market share
A new look and approach to physical distribution can contribute beyond the attainment of the twin objectives of improving customer satisfaction and dealer profit margins. Physical distribution system contributes to increased market share in many ways like a well designed physical distribution frame can decentralise its ware housing option, devise the combination of efficient and economic means of transport to penetrate into the areas untapped so far, planning inventory operations to avoid stock outs.
Price stabilization
Physical distribution can contribute considerably to the attainment of the situation of price stabilization. Physical distribution components are capable of bringing out price stabilization. Through the best use of available transport and warehousing facility and adjustment between demand and supply, price fluctuations can be prevented.
COMPONENTS OF PHYSICAL DISTRIBUTION
Physical distribution management is that part of general management which is responsible for the design, administration and operation of the systems to control the movement of raw materials and processed goods. The structure of physical distribution system or arrangement of any marketing organization is made up of four broad components namely, order processing, inventory management, materials handling and transportation.
ORDER PROCESSING
Physical distribution sets in motion with a customer. Order processing includes the activities of receiving, recording, filing and assembling the orders for shipment. Each customer expects that the order placed by him should be implemented without any delay on one hand and that the goods dispatched match perfectly to his order placed. This leads to quality control that ensures upright execution of orders. Hence, marketers and distribution managers are very much concerned about the order cycle time and every effort is made to keep it rigged.
An order cycle is the period between the time of the placement of an order by the customer to the time of eth arrival of goods at his destination. This cycle is made up of the transmission of the order, document processing in the department and shipment of goods. As this is a time consuming and tedious activity, full advantage of electronic data processing is to be taken to guarantee accurate and timely service.
The order processing procedures followed in a firm have dual impact on customer service level, namely;
Ø Order time that is the time interval between two orders of a customer, and
Ø The consistency and uniformity of delivery time i.e. regular and dependable deliveries.
INVENTORY MANAGEMENT
Inventory management means and includes the management of products on the move. Inventory management is the basic task of planning and controlling of finished goods after they have been brought out from production centers and before their deliveries to the users. Inventory management covers the most immediate aspects of warehousing and inventory controlling.
A. Warehousing
Warehousing or storage is an act of storing and assorting the finished goods so as to create maximum time utility at minimum cost. Warehousing covers two sub functions namely: movement and storage of finished goods. Movement refers to the actual receipt of products from the manufacturing centre(s), their transfer into warehouse and stocking at designated place, assorting according to customers orders and transferring them to common carriers on their way to consumers. The storage function is mainly concerned with holding and carrying the goods from the time they are placed in and till they are placed out in common carriers. It is mainly a safety and preservation function.
A warehouse may be centralized or decentralized. Centralized warehouse is near the manufacturing plant and the products are moved to the warehouse from the plant and later on distributed to different markets. Hence centralized warehousing firm have one dispatch point. Decentralised warehousing on the other hand is a warehouse built at or in the close vicinity of the market. The products are first moved in bulk from plant to different warehouses located in different markets where they are assorted according to the customers needs. Hence there are number of dispatch points.
B. Inventory controlling
Physical distribution management surrounds the inventory and its management. Inventory implies the stock of goods held over a period of time for meeting the customer needs – both business and final. Inventory acts as a link between the orders of the customers and the production or the procurement cycle of the firm. For a manufacturer, the inventories are made up of raw materials and parts, stocks of partly manufactured products nad finished goods. In case of distributors and retailers, it is mostly the finished stock meant for the final consumption.
Goals of Inventory management
v Providing adequate level of consumer service and
v Minimizing the firm’s investment in inventory.
Inventory can be controlled by adopting the following strategy:
· Setting stock levels
· Determining the economic order quantity
· Exercising control by importance and exception
· Keeping rack of inventory
MATERIAL HANDLING
Material handling as a human activity is as old as mankind. Material handing handling is undertaken at every stage of logistic activity namely- during production, storage, transport and packaging. Material handling, from the marketing perspective, stands for product movement after it gets out of manufacturing plant but before it is loaded on the transport mode to the destination of consumer. It represents product handling from plant to warehouse or warehouse location to another within the warehouse and from the warehouse to the place of loading.
Material handling is the subsystem of physical distribution system of a firm and is an agent of cost reduction and improved customer service. In effect, an efficient and effective materials handling system in a unit contributes to eth efficiency and effectiveness of the total physical distribution system. It is because, sound management of material handling avoids damage in product handling, prevents unnecessary and irrelevant movement, facilitates order processing and order picking and enables efficient product movement to match with inventory levels and transportation.
TRANSPORTATION
Transportation as the last component of distribution system is to do with the movement of products from warehouses to the customers destinations. Transportation involves loading and unloading of products and shipment between the places of dispatch and places of arrival. The major contribution of transportation management is cost reduction because cost of transportation is 35percent of total distribution cost and 15-20 percent of the total prices paid by the users. The point lies in cost reduction and creation of maximum of time utility.
The transportation mix comprises of railways, roadways, airways, waterways and pipelines.
Physical distribution is a marketing activity that concerns the handling and the movement of goods. Physical distribution is a major component of marketing mix and cost area of business. It includes all those activities connected with the efficient movement of goods from the place of production to the place of consumption. Physical distribution involves the handling of raw-materials, fabricated parts, supplies and finished products from producers to consumers via intermediaries. It is the process of strategically managing the movement and storage of materials, parts and finished inventory from supplier, between enterprise facilities and to customers.
According to William J. Stanton, “Physical distribution involves the management of physical flow of products and establishment and operation of flow systems.”
According to Philip Kotler, “Physical distribution involves planning, implementing and controlling the physical flow of materials, and final goods from the points of origin of use to meet customer needs at a profit.”
The physical distribution encompasses the wide range of interrelated activities such as transportation, warehousing, materials handling, packaging, inventory control, plant and warehouse location, order processing, marketing forecasting and customer services. Broadly, these activities can be grouped into four major functions namely, order processing, inventory management, transportation and material handling.
OBJECTIVES OF PHYSICAL DISTRIBUTION
Physical distribution has two broad objectives- consumer satisfaction and profit maximization. Physical distribution is concerned with getting the product to the right place at right time at the lowest costs. It involves the coordination of activities to place the right quantity of right goods at the desired place and time. Consumer satisfaction is improved upon by delivering the products to the consumers at the point and time required. Similarly, profit margin for the manufacturers can be increased by making this physical distribution more effective and efficient. Effectiveness and efficiency will bring in economy and that has salutary effect on profit margins.
ROLE OF PHYSICAL DISTRIBUTION SYSTEM
The physical distribution arrangement or system designed to move the goods from producers and manufacturers to the users has a definite role. That is why; all wise business firms have forged ahead with investment of good deal of time, treasure and talent in physical distribution system improvements to get best to others. It provides a new orientation for marketing.
Physical distribution contributes in the following ways:
Creation of utilities:
The physical distribution function of a firm provides the place and time dimensions which contribute a basic element of marketing mix. The major components of physical distribution are transportation and warehousing. Transport system creates place utility making goods more useful by bringing them from the places where they are not needed to the places where they are badly needed. Warehousing system is known for creating time utility. By holding the goods from the time they are produced till their consumption, and making them available during shortages creates time utility. This results in maximizing customer satisfaction and profits to the firm.
Improved consumer services
Consumer services are the services provided to the customers from the time of order placed till the product is delivered. Customer service in physical distribution function consists of providing products at the time and location corresponding to the customer needs.
Cut in distribution cost
The prices paid by customers consist of not only production cost but also delivery cost. Experts have estimated that the physical distribution cost is in range of 20 to 25 percent of the price.
Increased market share
A new look and approach to physical distribution can contribute beyond the attainment of the twin objectives of improving customer satisfaction and dealer profit margins. Physical distribution system contributes to increased market share in many ways like a well designed physical distribution frame can decentralise its ware housing option, devise the combination of efficient and economic means of transport to penetrate into the areas untapped so far, planning inventory operations to avoid stock outs.
Price stabilization
Physical distribution can contribute considerably to the attainment of the situation of price stabilization. Physical distribution components are capable of bringing out price stabilization. Through the best use of available transport and warehousing facility and adjustment between demand and supply, price fluctuations can be prevented.
COMPONENTS OF PHYSICAL DISTRIBUTION
Physical distribution management is that part of general management which is responsible for the design, administration and operation of the systems to control the movement of raw materials and processed goods. The structure of physical distribution system or arrangement of any marketing organization is made up of four broad components namely, order processing, inventory management, materials handling and transportation.
ORDER PROCESSING
Physical distribution sets in motion with a customer. Order processing includes the activities of receiving, recording, filing and assembling the orders for shipment. Each customer expects that the order placed by him should be implemented without any delay on one hand and that the goods dispatched match perfectly to his order placed. This leads to quality control that ensures upright execution of orders. Hence, marketers and distribution managers are very much concerned about the order cycle time and every effort is made to keep it rigged.
An order cycle is the period between the time of the placement of an order by the customer to the time of eth arrival of goods at his destination. This cycle is made up of the transmission of the order, document processing in the department and shipment of goods. As this is a time consuming and tedious activity, full advantage of electronic data processing is to be taken to guarantee accurate and timely service.
The order processing procedures followed in a firm have dual impact on customer service level, namely;
Ø Order time that is the time interval between two orders of a customer, and
Ø The consistency and uniformity of delivery time i.e. regular and dependable deliveries.
INVENTORY MANAGEMENT
Inventory management means and includes the management of products on the move. Inventory management is the basic task of planning and controlling of finished goods after they have been brought out from production centers and before their deliveries to the users. Inventory management covers the most immediate aspects of warehousing and inventory controlling.
A. Warehousing
Warehousing or storage is an act of storing and assorting the finished goods so as to create maximum time utility at minimum cost. Warehousing covers two sub functions namely: movement and storage of finished goods. Movement refers to the actual receipt of products from the manufacturing centre(s), their transfer into warehouse and stocking at designated place, assorting according to customers orders and transferring them to common carriers on their way to consumers. The storage function is mainly concerned with holding and carrying the goods from the time they are placed in and till they are placed out in common carriers. It is mainly a safety and preservation function.
A warehouse may be centralized or decentralized. Centralized warehouse is near the manufacturing plant and the products are moved to the warehouse from the plant and later on distributed to different markets. Hence centralized warehousing firm have one dispatch point. Decentralised warehousing on the other hand is a warehouse built at or in the close vicinity of the market. The products are first moved in bulk from plant to different warehouses located in different markets where they are assorted according to the customers needs. Hence there are number of dispatch points.
B. Inventory controlling
Physical distribution management surrounds the inventory and its management. Inventory implies the stock of goods held over a period of time for meeting the customer needs – both business and final. Inventory acts as a link between the orders of the customers and the production or the procurement cycle of the firm. For a manufacturer, the inventories are made up of raw materials and parts, stocks of partly manufactured products nad finished goods. In case of distributors and retailers, it is mostly the finished stock meant for the final consumption.
Goals of Inventory management
v Providing adequate level of consumer service and
v Minimizing the firm’s investment in inventory.
Inventory can be controlled by adopting the following strategy:
· Setting stock levels
· Determining the economic order quantity
· Exercising control by importance and exception
· Keeping rack of inventory
MATERIAL HANDLING
Material handling as a human activity is as old as mankind. Material handing handling is undertaken at every stage of logistic activity namely- during production, storage, transport and packaging. Material handling, from the marketing perspective, stands for product movement after it gets out of manufacturing plant but before it is loaded on the transport mode to the destination of consumer. It represents product handling from plant to warehouse or warehouse location to another within the warehouse and from the warehouse to the place of loading.
Material handling is the subsystem of physical distribution system of a firm and is an agent of cost reduction and improved customer service. In effect, an efficient and effective materials handling system in a unit contributes to eth efficiency and effectiveness of the total physical distribution system. It is because, sound management of material handling avoids damage in product handling, prevents unnecessary and irrelevant movement, facilitates order processing and order picking and enables efficient product movement to match with inventory levels and transportation.
TRANSPORTATION
Transportation as the last component of distribution system is to do with the movement of products from warehouses to the customers destinations. Transportation involves loading and unloading of products and shipment between the places of dispatch and places of arrival. The major contribution of transportation management is cost reduction because cost of transportation is 35percent of total distribution cost and 15-20 percent of the total prices paid by the users. The point lies in cost reduction and creation of maximum of time utility.
The transportation mix comprises of railways, roadways, airways, waterways and pipelines.
Tuesday, May 26, 2009
CHANNEL OF DISTRIBUTION
CHANNELS OF DISTRIBUTION
The marketing system of any country is made up of a vast manifestation of the organisations and individuals linked by information, product negotiations, money and people. Of these, institutions and individuals act as pipeline that connects the makers of products with people and organisations that consume the product. This pipeline or channel in the marketing system seeks to satisfy the needs and wants of target end users and objectives of the channel participants. A channel is a live organ of marketing. A channel of distribution is an organized net work or a system of agencies and institutions which, in combination, perform all the activities required to link producers with users and users with producers to accomplish the marketing task.
The word “Channel” has its origin in the French word for canal. The term “Channel of distribution” connotes a path way taken by goods as they flow from the point of production to the point of ultimate consumption.
According to Cundiff and Still, a channel of distribution is ‘a path traced in the direct or indirect transfer of title to a product as it moves from a producer to ultimate consumers.’
American Marketing Association defines a market channel as “the structure of intra company organisation units and extra company agents and dealers, wholesale and retail, through which a commodity, product or service is marketed.”
Prof. Phillip Kotler defines marketing or trade channels as “a set of independent organisations involved in the process of making a product or service available for use or consumption.” In other words, it stands for the path or route traced in the direct or indirect transfer of title to a product; as it moves from a producer to the ultimate consumer or industrial users.
According to Stanton, “A distribution channel consists of set of people and firms involved in the transfer of title to a product as the product moves from producers to ultimate consumer or business user.” It includes both the producer and the final user of the product as well as mercantile agents and merchant middlemen engaged in the transfer of the title of goods and services.
Thus, a channel of distribution is a path way directing the flow of goods and services from producers to consumers composed of intermediaries through their functions and attainment of the mutual objectives.
NOTE: Some intermediaries – such as wholesalers and retailers – buy, take title to, and resell the merchandise; they are called merchants. Others – brokers, manufacturers’ representatives, sales agents - search for customers and may negotiate on the producer’s behalf but do not take title to the goods; they are called agents. Still others – transportation companies, independent warehouses, banks, advertising agencies – assist in the distribution process but neither takes title to goods nor negotiates purchases or sales; they are called facilitators.
CLASSIFICATION OF CHANNELS
The trade channels are classified as to conventional and non-conventional.
A. Conventional channel
Conventional or individualistic channels are the fragmented networks where in the manufacturers and the consumers are loosely linked by intermediaries in the process of exchange. These intermediaries perform the usual conventional marketing functions. The conventional channel alternatives can be:
Manufacturer to consumer.
Manufacturer to Retailer to consumer
Manufacturer to wholesaler to retailer to consumer.
Manufacturer to wholesaler to Consumer
Manufacturers to agents to wholesalers to retailer to consumer.
Conventional channels namely take two shapes-direct and indirect.
A ‘direct’ channel is one which is the shortest wherein the company chooses to sell directly to the consumer without engaging any intermediary. It is commonly seen in case of mail order sales, sales by travelling salesmen and multiple shops. On the other hand, ‘indirect’ channel is one which employs the services of intermediaries in moving the goods to the consumers.
1. Manufacturer to consumer
It is the shortest and simplest channel wherein the goods are moved directly from the producers to the consumers. That is no inventory is involved. It is opted by manufacturers of consumer durable products. It is also called as direct sales.
2. Manufacturer to retailer to consumer.
Between the producer and the consumer there is an intermediary called as retailer. This is the most common channel in the case of consumer durables like textiles shoes ready garments etc.
3. Manufacturer to wholesaler to retailer to consumer.
This channel option has two intermediaries i.e. wholesaler and retailer in between the manufacturer and the consumer. The manufacturers of consumer non durables use this method of channel distribution. Here the wholesalers stock the products in different parts of the nation or a region and from there, the products are supplied in smaller quantities to the retailer and who in turn sells it to the customers.
4. Manufacturer to wholesaler to consumer.
This is a most acceptable practice when the consumers are not individual buyers but are institutional buyers such as hospitals, schools, govt. institutions etc.
5. Manufacturer to agent to wholesaler to retailer to consumer.
It is the longest indirect channel option a company has. The channel has the services of agent middlemen only next to producers who in turn sell to wholesalers and so on. This is done by companies with multiple product port folio and producing consumer non durables on large scale enjoying national and international market.
B. Non Conventional Channels
The non conventional channels may be vertically integrated or horizontally integrated.
i. Vertical integrated channels.
Vertical or vertically integrated channels of distribution are those which are professionally managed and centrally programmed networks that are pre-engineered to achieve operating economies and maximum market impact. In other words these are rationalized and capital intensive networks designed to achieve, technical, managerial and promotional economies through integration, coordination and synchronization of marketing flows from the point s of production to the final points of ultimate use.
These vertically integrated channels are of three types namely,
i. Administered
ii. Contractual and
iii. Corporate.
Administrative channel is one in which coordination of marketing activities is achieved through the use of programmes developed by one or a limited number of firms. This is generally followed by two wheeler or three wheeler or four wheeler manufacturers who direct its dealers guarantee coordinated display and merchandising to win the dealer support.
Contractual channel is one under which the independent channel components integrate their programme on contractual lines to attain the economies and enhance the market impact. That is, the outside units specializing would do the work for a price. Thus, the manufacturer hires the services of other units on contract basis.
Corporate channel is one in which the channel components are owned and operated by the same organization. Though it involves huge investment, it has the advantage of full control.
ii. Horizontal channels.
Horizontal channels is one in which two or more companies join their hands to exploit a marketing opportunity or opportunities, either by themselves or by creating an independent unit. Ex. Sugar Syndicate of India and Associated Cement Company (ACC). The reasons for horizontal integration are – the ever changing markets, cut-throat competition, changing pace of technology, excess capacity, cyclical and seasonal changes in consumer demand and the inbuilt capacity to take financial risks single handed and so on.
Efficiency in Exchanges Provided by an Intermediary
In the case of absence of intermediaries, the number of contacts is 4*4=16, whereas in the presence of intermediaries the number of contacts is 4+4=8.
The importance of channels
A marketing channel system is the particular set of marketing channels employed by a firm. Decisions about the marketing channel system are among the most critical task of every management. One of the chief roles of marketing channels is to convert potential buyers into profitable orders. Marketing channels must not just serve markets, they must also make markets.
The channels chosen affect the all other marketing decisions. The company’s pricing depends on the type of channel selected. The firm’s sales force and advertising decisions depend on how much training and motivations dealers need. In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing. A Push strategy involves the manufacturer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end users. Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the store, the product is an impulse item, and the products benefits are well understood. A Pull strategy involves the manufacturer using advertising and promotion to persuade consumers to ask intermediaries for the product, thus inducing the intermediaries to order it. Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when people perceive differences between the brands, and when people choose the brand before they go to the store.
Today’s successful companies are also multiplying the number of “go-to-market” or hybrid channels in the market area they serve. Hybrid channel means a company uses varieties of channels or more than one means (intermediaries) to make his s available in the market. Ex. Axis Bank enables its customers to do transactions in its branches, over the phone, or on the Internet.
Customers expect channel integration besides hybrid channels, characterized by the following features:
The ability to order a product online and pick it up at a convenient retail location.
The ability to return an online ordered product to a nearby store of the retailer.
The right to receive discounts based on total online and offline purchases.
Consumers choose to use different channels for different functions in making a purchase. Buyers generally fall into one of the four categories:
i. Habitual shoppers- purchase from the same places in the same manner over time.
ii. High value deal seekers – know their needs and ‘channel surf’ a great deal before buying at the lowest possible price.
iii. Variety loving shoppers – gather information in many channels, take advantage of high touch services, and then buy in their favorite channel, regardless of their price.
iv. High involvement shoppers – gather information in all channels, make their purchases in a low cost channel, but take advantage of customer support from a high touch channel.
Consumers may seek different types of channels depending on the particular types of goods involved. Some consumers are willing to “trade up” to retailers offering higher –end goods while these same consumers are also willing to “trade down” to discount retailers to buy private label paper towels, detergents or vitamins.
TYPES OF INTERMEDIARIES
Intermediaries are the middlemen and signify those individuals and institutions in the channel that either take title to the goods and sell at profit or do not take title to the goods but sell for a commission.
American Marketing Association defined the term “middlemen” as “one who specialize in performing operations of rendering services that are directly involved in the purchase an sale of goods in process of their flow from the producers to the users.”
Marketing intermediaries are the individuals and the organizations that perform various functions to connect the producers to the end users. The individuals and the institutions perform the functions of procurement, storage, packing, financing, transportation and counseling-in linking the two ends.
MIDDLEMEN
Merchant Agents
Wholesalers Retailers Brokers Commission Selling Forwarding Factors Auctioneers
Agents Agents & Clearing
Agents
Full Function Converter Drop Shipper
Small Scale Large Scale
Unit Street Market Cheap Syndicate
Stores Traders Traders Jacks Stores
Departmental Chain Mail order Super Cooperative
Stores Stores Houses Markets Societies
I. Merchant Middlemen
Merchant middlemen are those who take title to the goods and channelize the goods from the previous channel step to the next channel step in the pipeline. In other words, merchant middlemen buy and sell the goods by taking possession of goods, bear the risks and the price for their efforts and earn profit.
The merchant middlemen are broadly classified as wholesalers and retailers.
A. Wholesalers
Wholesaler is one who wholesales to other middlemen, institutions and individuals usually in fairly large quantities. According to American Marketing Association, ‘wholesalers sell to retailers or other merchants and/or individual, institutional and commercial users but they do not sell in significant amount to ultimate consumers.’
Functions:
a. Assembling and Buying
Assembling implies the collection of small lot of scattered agricultural production for economic bulk buying and also even bringing together stocks of different manufacturers producing same line of goods.
Buying comprises of the activities of selection of manufacturers and placing orders on them and making special purchases in cases of seasonal purchases.
b.Warehousing
Warehousing or storing is closely related to the function of assembling. As there is a gap between the time periods of production and consumption, the goods are to be held and preserved. This involves capital lock up plus risk. This warehousing by wholesalers relieves both the producers and the retailers from the problems of storage.
c. Transporting
Wholesalers undertake the transportation of goods from producers to their warehouses and back to the retailers during the course of assembling and warehousing.
d. Financing
Wholesalers undertake financing activities by granting credit on liberal terms to retailers on one hand and reduce the financial burden of the manufacturers by taking early delivery of stock from them.
e. Risk bearing
Wholesalers bear the risk of loss of change in prices, loss due to damage, deterioration in quality, pilferage, theft, fire and the like of goods held in storage. They also bear the risk of non or under payment by the retailers.
f. Providing Market Information
Wholesalers are the vital link between the retailers and the manufacturers. They provide relevant and up-to-date information to the retailers affecting their trade interest; so also they reciprocate the same to manufacturers as to wholesalers retailers feed them on changing market conditions useful for the wholesalers.
TYPES OF WHOLESALERS
Wholesalers are mainly of three types:
1. Full function
A full function wholesaler is an intermediary who buys and sells the products on his own account, assembles products from different sources in bulk, carries stock, sells in smaller lots, grants credit and renders valuable counsel and advice. Because of wide range of functions he performs and services he renders, he is called as full line wholesalers.
2. Converter
A converter is that full line wholesaler who buys products and sells them to subsequent channel members after processing them. Thus in cotton textile, he may convert gray cloth into bleached and dyed, in corns, he may convert what into wheat flours or pallets.
3. Drop-shipper
A drop shipper is that wholesaler who neither stores the products nor delivers them to the buyers from his own stock but books orders and directs manufacturers to the retailers to that effect. However, he has to take delivery of goods in case the retailer or the buyer fails to accept the same.
B. Retailers
Retailer is one whose business is to sell to consumers a wide variety of goods which are assembled at his premises as per the needs of final users. The term ‘retail’ implies sale for final consumption rather than for resale or for further processing. A retailer is the last link between the final user and the wholesaler or the manufacturers.
According to William Stanton, Retailing includes all activities directly related to the sale of goods and services to the ultimate consumers for personal or non-business use.
Thus, retailer is that merchant intermediary who buys goods from preceding channel members in small assorted lots and sells them in the lot requirements to final users.
Distinction between wholesaler and retailer
1. Wholesaler primarily sells to the dealers or industrial users whereas the retailer to the final consumers mostly the households.
2. Goods sold by the wholesalers are meant either for resale or for further processing while the goods sold by the retailers are meant for final consumption.
3. Wholesalers sell in larger quantities than retailers and the price charged by the wholesalers are lower than those of the retailers.
4. Wholesalers generally specialize in one or a few products of the same line while retailer in wide variety of products of many manufacturers.
5. Wholesalers works on reasonably low but quick returns while retailer works to higher margin over a relatively small period.
TYPES OF RETAILERS
A. Small Scale Retailers
1. Unit Stores: Unit stores are the retail stores run on proprietary basis dealing in general stores or single line stores such as drugs, clothes, grocery items, hardware, shoes, books, utensils etc. Single line stores are mostly called as specialty shops as they may specialize in one line only.
2. Street traders: These are retailers who display their stock on footpaths or the sidewalks of busy spots of cities and towns. The most prominent places are bus stands, railway stations, parks etc.
3. Market Traders: These retailers open their shops on fixed days or dates in specified areas. The time interval may be a week or a fortnight or a month. They do join fairs and festivals. They deal in general or special line stores. These retail outlet have fixed type of arrangements with built in flexibility.
4. Hawkers and Pedlars: This class of retailers has been there in all centers from the time immemorial. They do not have any fixed place of business. They carry the goods from one place to another on hand cart selling the goods from door to door. They keep on moving from locality to locality and business to business with change in season. Thus, ice candy seller has a brisk business in summer and may change over to cornflakes in rainy and winter season.
5. Cheap Jacks: Cheap jack is a retailer who has a fixed place of business in a locality but goes on changing his place to exploit the marketing opportunities. Change of locality is quite common in case of these retailers. They deal in cheap varieties of readymade garments, plastics, shoes and the like.
6. Syndicate Stores: It is an extension of the theory of mail order business on a small scale. Syndicate stores are known for widest varieties of goods in a product line but of known brands. These retailers buy most of the unbranded varieties and try to sell under their names. These apply to readymade garments, toys, machinery items and so on.
B. Large Scale Retailers
1. Departmental Stores: It is a large retail store dealing in a wide variety of goods under a single roof. It is essentially an urban retail outlet designed for mass selling sealing in almost Aspirin (medicine) to zip, mostly catering to the needs of higher income groups. It is a central location and unified control. It is known for orderly arrangement of products in separate departments and it lays emphasis on consumer service. Ex. Ebony Stores, Spencer’s, Vishal, Big Bazar etc.
2. Multiple shops and Malls: A multiple shop or a chain store is a system of branch shops operated under a centralized management and dealing in similar lines of goods. It is a chain of retail stores dealing in identical and generally restricted range of articles operating in different localities under central ownership and control. It works on the principle of centralized buying and administration and decentralized selling. The attributes of multiple shops are: cash and carry, limited lines of articles, items are consumer durables, decentralized selling in different localities. Ex. Bata Shoes, Carona shoes, Khadims shoes etc.
3. Mail order houses: As the title suggests, the seller contacts the buyer through some form of advertising. That is, the customers do not visit the sellers premises no there is personal inspection of goods before the purchase. The transaction is settled through postal medium mostly through V.P.P. or registered post. That is why, some prefer to call it as selling by post. As the goods are sent through post parcel, the article must be well known, describable, command demand and are durable in addition to high value. Ex. Patent medicines, Jewellery, Leather goods, garments are sold in this way.
4. Consumer Coopretaives: These are the retailers or stores owned by a group of consumers themselves on cooperative principles. It is an association of consumers to obtain their requirements by purchasing in bulk and selling through the stores to the member and non-member consumer. It believes in wholesale buying and retail selling at reasonable prices than prevailing in the open market. Ex. Apna Bazar, Janata Bazar etc.
5. Fair Price shops: These are the retail outlets started by the manufacturers in different cities and towns to sell at prices which are quite fair. It can be private, public, or even cooperative sector unit engaged in retail business to ensure regular equitable and adequate supply of essential commodities at just or fair prices. These are designed to meet the requirements of the weaker sections of the society. Ex. Ration.
II. Agent Middlemen
Agent middlemen are as important as merchant middlemen. Agent middlemen are those channel components who help in the transfer of goods from the hands of producers to the hands of ultimate users without acquiring the ownership of these goods, therefore, they do not assume any risk involved in marketing of goods, they operate for a commission and act on behalf of their account but render a valuable service of bringing together the buyers and sellers or assume the role of striking a transition for commission.
Types of agent Middlemen
1. Brokers: Broker is an agent who is employed to make bargains and contracts in matters of trade, commerce or navigation, between two parties for a compensation known as brokerage. He is an independent agent who negotiates bargains or agreements between two or more parties for exchange. He brings the intending buyer and the seller together. He does not take the title to the goods and hence he does not take the possession of goods. Ex. stock broker, insurance brokers etc.
Brokers render useful services like:
They bring the parties to exchange together.
They make actual arrangement for the delivery of goods.
They maintain extensive organizations to keep in touch with the suppliers and the customers.
They give valuable advice to both the parties on the issues of marketing affecting their interests.
2. Commission Agents: A Commission Agent buys or sells goods for his principal in return of a commission. He may or may not buy in his name but he does not assume any risk. He gets a fixed rate of commission for the business done. He has expert knowledge of all the commodities in which he is trading; he keeps close contact with the producers and dealers on the one hand and the market trends on the other. He procures goods as per the instructions of his principals; he gets orders and is responsible for arranging for packing, transport and delivery of goods including granting of credit and collecting the payments and dues.
He has the right to charge his principal for the costs of the goods purchased and the expenses incurred and his share agreed as commission. If he guarantees payment on goods sold on credit, he is eligible for extra commission called ‘del credere’ commission.
3. Selling Agents: Selling agents are the intermediaries who are given the exclusive franchise only for a limited market segment. He performs the functions of an independent middlemen taking overall the selling activities of a producer. He negotiates sales of merchandise produced by his principal and has full authority and control over the prices and the terms and conditions of the sale.
4. Forwarding and Clearing Agents: Forwarding and clearing agents are the middlemen employed to collect, deliver and otherwise forward goods on behalf of others. Most of the manufacturing houses, with gradual expansion and growth for their business find it necessary and economical to employ the agent, middlemen to relieve them of the tedious tasks of collection, delivery and forwarding the goods to their destinations.
5. Factors: Factor is an agent employed to sell the goods or merchandise consigned or delivered to him by or his principals for a compensation. Thus, his major role is to sell the goods assigned to him under the instructions of the principals. Since, selling is his sole responsibility, a factor has the power to sell the goods in his own name; he can sell at such prices and times he thinks best; he can sell on credit; he can receive the payment and issue valid receipts on behalf of his principals; he has the lien on goods in his possession for the charges due to him and recovery of advance payment made.
Thus, he takes possession of goods and sells in his own name for a commission. He even finances his principal by making advance payment or immediate payment.
6. Auctioneers: There are some class of products where sale by auction takes place. The products like jewellery, art pieces, land, buildings etc. are most commonly sold on auctions. Auctioneer is the legal agent of eth seller till the goods are knocked down to the highest bidder. He is the intermediary between the buyers and the sellers. His dealings are mostly on cash terms. He take s the possession of goods and remits the sale proceedings to the seller by deducting his expenses and agreed commission.
Auction sale is open to the public and therefore auctioneer is to widely give publicity from time to time regarding the place of auction and the time of auction.
FACTORS GOVERNING THE CHOICE OF CHANNELS OF DISTRIBUTION
The following factors are to be considered while selecting a channel of distribution.
Consumer
A major determinant of channel structure is whether the product is intended for the consumer or the industrial market. Industrial consumers prefer to deal directly with the manufacturer but most consumers make their purchases from the retail store. Products sold to both industrial users and the consumer market will employ more than one channel.
The geographic location and the needs of the firm’s potential market will also affect channel choice. Direct sales are possible where the firm’s potential market is concentrated in a few regions. Industrial production tends to be concentrated in a relatively small geographic region, making direct contact possible. Consumer goods are purchased by every household everywhere. Since they are numerous, geographically dispersed and purchase a small volume at a given time, middlemen must be employed to market products for them.
Shifts in consumer buying patterns will also influence channel decision. Such factors as the desire of credit, growth of after sale service, increased use of mail order houses and greater willingness to purchase from door to door salesperson will affect a firm’s marketing channel.
Characteristics of the product
Product characteristics also play a role in determining optimum marketing channels. Perishable products such as fresh produce, fruits and fashion products with short life cycles typically move through relatively short channels direct to the retailer or to the ultimate consumers. The more standardized is the product, longer is the channel. Lower the unit value of the product, the longer is the channel.
Characteristic of the manufacturer.
Companies with adequate resources-financial, marketing and managerial-will be less compelled to utilize middlemen in marketing their products. A financially strong manufacturer can hire its own sales force, warehouse its products to their customers. A firm with a broad product line is better able to market its product directly to retailers or industrial users since its sales force can offer a variety of products to its consumers.
The manufacturer’s need for control over the product will also influence channel selection. If aggressive promotion of the firm’s product at the retail level is desired, the manufacturer will choose the shortest available channel. For new products the manufacturer may be forced to implement an introductory advertising campaign before independent wholesalers will handle the item.
Environmental considerations
Firms should take into consideration the competition factors. The nature and extent of competition also affects the channel choice. An industry made up of a larger number of competitors with similar products will often experience intense competition, particularly at eth retail level.
CHANNEL CONFLICT MANAGEMENT
No matter how well the channels are designed and managed, there will be some conflict, if for no other reason that the interests of independent business entities do not always coincide. Channel conflict is generated when one channel member’s actions prevent the channel from achieving its goal. Channel coordination occur when channel members are brought together to advance the goals of the channel, as opposed to their own potentially incompatible goals.
Types of Conflict and Cooperation
The types of conflict that occurs may be:
Vertical Channel Conflict
A conflict between different levels within the same channel. HUL came in conflict with its distributors in Kerala on the issue of commissions, etc.
Horizontal channel conflict
It involves a conflict between members at the same level within the channels. Dealers frequently get into conflicts with each other for the transgression of the domain of operation and under cutting.
Multi channel conflict
It exists when the manufacturer has established two or more channels that sell to the same market. Escorts ltd. Trying to create a parallel dealership for a line of tractors in the early 1980s faced massive protests from established dealers; companies getting into online direct sales through web marketing receive boycott threats from established distributors.
CAUSES OF CHANNEL CONFLICT
It is important to identify the causes of channel conflict. Some are easy to resolve where as other are not. The major causes of channel conflict are:
Goal Incompatibility:
The manufacturer may want to achieve rapid market penetration through a low price policy. Dealers in contrast may prefer to work with high margins and pursue short run profitability.
Unclear roles and rights
Some times conflict arises from unclear roles and rights. HP may sell personal computers to large clients through its own sales force but its licensed dealers may also be trying to sell to large clients.
Differences in perception:
The manufacturer may be optimistic about the short term economic outlook and want dealers to carry higher inventory. Dealers may be pessimistic which leads to conflict.
Conflict might also arise due to intermediaries dependence on the manufacturer.
Territory boundaries and credit for sale often produce conflict.
MANAGING CHANNEL CONFLICT
As companies add channels to grow sales, they run the risk of creating channel conflict. Some channel conflict can be constructive and lead to better adaption to a changing environment, but too much is dysfunctional. The challenge is not to eliminate conflict but to manage it better.
There are several mechanism for effective conflict management. One is the adoption of superordinate goals. Channel members come to an agreement on the fundamental goal they are jointly seeking, whether it is survival, market share, high quality or consumer satisfaction. They usually do this when the channel faces an outside threat, such as more efficient conflicting channel, an adverse piece of legislation or a shift in consumers desires.
A useful step is to exchange persons between two or more channel levels. Co-optation is an effort by one organization to win the support of the leaders of another organization by inclusing them in advisory councils, board of directors and the like. When conflict is chronic or acute, the parties may have to resort to diplomacy, mediation or arbitration. Diplomacy takes place when each side sends a person or group to meet with its counterpart to resolve the conflict. Mediation means resorting to a neutral third party who is skilled in conciliating the two parties interest. Arbitration occurs when the two parties agree to present their arguments to one or more arbitrators and accept the arbitration decision.
When neither of the methods proves effective, the company or a channel partner may file a lawsuit.
Thus concluding from the above scenario, we can arrive at the following conflict management strategies:
Conflict management Strategies:
To overcome the conflict and to head towards satisfactory settlement of conflict, the firm may follow the following conflict management strategies:
Bargain Strategy
Bargain or bargaining strategy involves the use of different power bases such as reward- coercion-expertise-referral and legitimacy – to cut the intermediaries to the size or to the point of conflict resolution. Mutual trust, eagerness to give and take on the part of parties and the tolerance on the part of parties and the tolerance on the part of the negotiators are a must for its clicking.
Boundary strategy
This strategy believes in appointing some persons as liaison officers to operate the boundary where both the manufacturers and the intermediaries meet. The work of the officers is that of diplomats setting international issues and relations and attempt to analyse and interprete the company policies and kill and ill-will that is likely to arise.
Penetration strategy
Penetration strategy is an attempt to understand the attitudes of intermediaries so that their dispositions can be reshaped to the requirements of the company.
Supra-Organisational strategy
This strategy is employed to reorganize functional interdependence and need for channel membership of trader. It consists of ‘conciliation’ between the parties and other two aspects namely, ‘mediation’ and ‘arbitration’. Conciliation believes in settling the disputes and conflicts of the conflicting parties themselves. ‘Mediation’ involves active participation by the third party to settle the disputes or resolve the conflict by persuasion. In case of ‘arbitration’, the parties of conflict submit their dispute either voluntarily or compulsorily under law of agreement to a third party whose decision in final and binding on both parties.
The marketing system of any country is made up of a vast manifestation of the organisations and individuals linked by information, product negotiations, money and people. Of these, institutions and individuals act as pipeline that connects the makers of products with people and organisations that consume the product. This pipeline or channel in the marketing system seeks to satisfy the needs and wants of target end users and objectives of the channel participants. A channel is a live organ of marketing. A channel of distribution is an organized net work or a system of agencies and institutions which, in combination, perform all the activities required to link producers with users and users with producers to accomplish the marketing task.
The word “Channel” has its origin in the French word for canal. The term “Channel of distribution” connotes a path way taken by goods as they flow from the point of production to the point of ultimate consumption.
According to Cundiff and Still, a channel of distribution is ‘a path traced in the direct or indirect transfer of title to a product as it moves from a producer to ultimate consumers.’
American Marketing Association defines a market channel as “the structure of intra company organisation units and extra company agents and dealers, wholesale and retail, through which a commodity, product or service is marketed.”
Prof. Phillip Kotler defines marketing or trade channels as “a set of independent organisations involved in the process of making a product or service available for use or consumption.” In other words, it stands for the path or route traced in the direct or indirect transfer of title to a product; as it moves from a producer to the ultimate consumer or industrial users.
According to Stanton, “A distribution channel consists of set of people and firms involved in the transfer of title to a product as the product moves from producers to ultimate consumer or business user.” It includes both the producer and the final user of the product as well as mercantile agents and merchant middlemen engaged in the transfer of the title of goods and services.
Thus, a channel of distribution is a path way directing the flow of goods and services from producers to consumers composed of intermediaries through their functions and attainment of the mutual objectives.
NOTE: Some intermediaries – such as wholesalers and retailers – buy, take title to, and resell the merchandise; they are called merchants. Others – brokers, manufacturers’ representatives, sales agents - search for customers and may negotiate on the producer’s behalf but do not take title to the goods; they are called agents. Still others – transportation companies, independent warehouses, banks, advertising agencies – assist in the distribution process but neither takes title to goods nor negotiates purchases or sales; they are called facilitators.
CLASSIFICATION OF CHANNELS
The trade channels are classified as to conventional and non-conventional.
A. Conventional channel
Conventional or individualistic channels are the fragmented networks where in the manufacturers and the consumers are loosely linked by intermediaries in the process of exchange. These intermediaries perform the usual conventional marketing functions. The conventional channel alternatives can be:
Manufacturer to consumer.
Manufacturer to Retailer to consumer
Manufacturer to wholesaler to retailer to consumer.
Manufacturer to wholesaler to Consumer
Manufacturers to agents to wholesalers to retailer to consumer.
Conventional channels namely take two shapes-direct and indirect.
A ‘direct’ channel is one which is the shortest wherein the company chooses to sell directly to the consumer without engaging any intermediary. It is commonly seen in case of mail order sales, sales by travelling salesmen and multiple shops. On the other hand, ‘indirect’ channel is one which employs the services of intermediaries in moving the goods to the consumers.
1. Manufacturer to consumer
It is the shortest and simplest channel wherein the goods are moved directly from the producers to the consumers. That is no inventory is involved. It is opted by manufacturers of consumer durable products. It is also called as direct sales.
2. Manufacturer to retailer to consumer.
Between the producer and the consumer there is an intermediary called as retailer. This is the most common channel in the case of consumer durables like textiles shoes ready garments etc.
3. Manufacturer to wholesaler to retailer to consumer.
This channel option has two intermediaries i.e. wholesaler and retailer in between the manufacturer and the consumer. The manufacturers of consumer non durables use this method of channel distribution. Here the wholesalers stock the products in different parts of the nation or a region and from there, the products are supplied in smaller quantities to the retailer and who in turn sells it to the customers.
4. Manufacturer to wholesaler to consumer.
This is a most acceptable practice when the consumers are not individual buyers but are institutional buyers such as hospitals, schools, govt. institutions etc.
5. Manufacturer to agent to wholesaler to retailer to consumer.
It is the longest indirect channel option a company has. The channel has the services of agent middlemen only next to producers who in turn sell to wholesalers and so on. This is done by companies with multiple product port folio and producing consumer non durables on large scale enjoying national and international market.
B. Non Conventional Channels
The non conventional channels may be vertically integrated or horizontally integrated.
i. Vertical integrated channels.
Vertical or vertically integrated channels of distribution are those which are professionally managed and centrally programmed networks that are pre-engineered to achieve operating economies and maximum market impact. In other words these are rationalized and capital intensive networks designed to achieve, technical, managerial and promotional economies through integration, coordination and synchronization of marketing flows from the point s of production to the final points of ultimate use.
These vertically integrated channels are of three types namely,
i. Administered
ii. Contractual and
iii. Corporate.
Administrative channel is one in which coordination of marketing activities is achieved through the use of programmes developed by one or a limited number of firms. This is generally followed by two wheeler or three wheeler or four wheeler manufacturers who direct its dealers guarantee coordinated display and merchandising to win the dealer support.
Contractual channel is one under which the independent channel components integrate their programme on contractual lines to attain the economies and enhance the market impact. That is, the outside units specializing would do the work for a price. Thus, the manufacturer hires the services of other units on contract basis.
Corporate channel is one in which the channel components are owned and operated by the same organization. Though it involves huge investment, it has the advantage of full control.
ii. Horizontal channels.
Horizontal channels is one in which two or more companies join their hands to exploit a marketing opportunity or opportunities, either by themselves or by creating an independent unit. Ex. Sugar Syndicate of India and Associated Cement Company (ACC). The reasons for horizontal integration are – the ever changing markets, cut-throat competition, changing pace of technology, excess capacity, cyclical and seasonal changes in consumer demand and the inbuilt capacity to take financial risks single handed and so on.
Efficiency in Exchanges Provided by an Intermediary
In the case of absence of intermediaries, the number of contacts is 4*4=16, whereas in the presence of intermediaries the number of contacts is 4+4=8.
The importance of channels
A marketing channel system is the particular set of marketing channels employed by a firm. Decisions about the marketing channel system are among the most critical task of every management. One of the chief roles of marketing channels is to convert potential buyers into profitable orders. Marketing channels must not just serve markets, they must also make markets.
The channels chosen affect the all other marketing decisions. The company’s pricing depends on the type of channel selected. The firm’s sales force and advertising decisions depend on how much training and motivations dealers need. In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing. A Push strategy involves the manufacturer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end users. Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the store, the product is an impulse item, and the products benefits are well understood. A Pull strategy involves the manufacturer using advertising and promotion to persuade consumers to ask intermediaries for the product, thus inducing the intermediaries to order it. Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when people perceive differences between the brands, and when people choose the brand before they go to the store.
Today’s successful companies are also multiplying the number of “go-to-market” or hybrid channels in the market area they serve. Hybrid channel means a company uses varieties of channels or more than one means (intermediaries) to make his s available in the market. Ex. Axis Bank enables its customers to do transactions in its branches, over the phone, or on the Internet.
Customers expect channel integration besides hybrid channels, characterized by the following features:
The ability to order a product online and pick it up at a convenient retail location.
The ability to return an online ordered product to a nearby store of the retailer.
The right to receive discounts based on total online and offline purchases.
Consumers choose to use different channels for different functions in making a purchase. Buyers generally fall into one of the four categories:
i. Habitual shoppers- purchase from the same places in the same manner over time.
ii. High value deal seekers – know their needs and ‘channel surf’ a great deal before buying at the lowest possible price.
iii. Variety loving shoppers – gather information in many channels, take advantage of high touch services, and then buy in their favorite channel, regardless of their price.
iv. High involvement shoppers – gather information in all channels, make their purchases in a low cost channel, but take advantage of customer support from a high touch channel.
Consumers may seek different types of channels depending on the particular types of goods involved. Some consumers are willing to “trade up” to retailers offering higher –end goods while these same consumers are also willing to “trade down” to discount retailers to buy private label paper towels, detergents or vitamins.
TYPES OF INTERMEDIARIES
Intermediaries are the middlemen and signify those individuals and institutions in the channel that either take title to the goods and sell at profit or do not take title to the goods but sell for a commission.
American Marketing Association defined the term “middlemen” as “one who specialize in performing operations of rendering services that are directly involved in the purchase an sale of goods in process of their flow from the producers to the users.”
Marketing intermediaries are the individuals and the organizations that perform various functions to connect the producers to the end users. The individuals and the institutions perform the functions of procurement, storage, packing, financing, transportation and counseling-in linking the two ends.
MIDDLEMEN
Merchant Agents
Wholesalers Retailers Brokers Commission Selling Forwarding Factors Auctioneers
Agents Agents & Clearing
Agents
Full Function Converter Drop Shipper
Small Scale Large Scale
Unit Street Market Cheap Syndicate
Stores Traders Traders Jacks Stores
Departmental Chain Mail order Super Cooperative
Stores Stores Houses Markets Societies
I. Merchant Middlemen
Merchant middlemen are those who take title to the goods and channelize the goods from the previous channel step to the next channel step in the pipeline. In other words, merchant middlemen buy and sell the goods by taking possession of goods, bear the risks and the price for their efforts and earn profit.
The merchant middlemen are broadly classified as wholesalers and retailers.
A. Wholesalers
Wholesaler is one who wholesales to other middlemen, institutions and individuals usually in fairly large quantities. According to American Marketing Association, ‘wholesalers sell to retailers or other merchants and/or individual, institutional and commercial users but they do not sell in significant amount to ultimate consumers.’
Functions:
a. Assembling and Buying
Assembling implies the collection of small lot of scattered agricultural production for economic bulk buying and also even bringing together stocks of different manufacturers producing same line of goods.
Buying comprises of the activities of selection of manufacturers and placing orders on them and making special purchases in cases of seasonal purchases.
b.Warehousing
Warehousing or storing is closely related to the function of assembling. As there is a gap between the time periods of production and consumption, the goods are to be held and preserved. This involves capital lock up plus risk. This warehousing by wholesalers relieves both the producers and the retailers from the problems of storage.
c. Transporting
Wholesalers undertake the transportation of goods from producers to their warehouses and back to the retailers during the course of assembling and warehousing.
d. Financing
Wholesalers undertake financing activities by granting credit on liberal terms to retailers on one hand and reduce the financial burden of the manufacturers by taking early delivery of stock from them.
e. Risk bearing
Wholesalers bear the risk of loss of change in prices, loss due to damage, deterioration in quality, pilferage, theft, fire and the like of goods held in storage. They also bear the risk of non or under payment by the retailers.
f. Providing Market Information
Wholesalers are the vital link between the retailers and the manufacturers. They provide relevant and up-to-date information to the retailers affecting their trade interest; so also they reciprocate the same to manufacturers as to wholesalers retailers feed them on changing market conditions useful for the wholesalers.
TYPES OF WHOLESALERS
Wholesalers are mainly of three types:
1. Full function
A full function wholesaler is an intermediary who buys and sells the products on his own account, assembles products from different sources in bulk, carries stock, sells in smaller lots, grants credit and renders valuable counsel and advice. Because of wide range of functions he performs and services he renders, he is called as full line wholesalers.
2. Converter
A converter is that full line wholesaler who buys products and sells them to subsequent channel members after processing them. Thus in cotton textile, he may convert gray cloth into bleached and dyed, in corns, he may convert what into wheat flours or pallets.
3. Drop-shipper
A drop shipper is that wholesaler who neither stores the products nor delivers them to the buyers from his own stock but books orders and directs manufacturers to the retailers to that effect. However, he has to take delivery of goods in case the retailer or the buyer fails to accept the same.
B. Retailers
Retailer is one whose business is to sell to consumers a wide variety of goods which are assembled at his premises as per the needs of final users. The term ‘retail’ implies sale for final consumption rather than for resale or for further processing. A retailer is the last link between the final user and the wholesaler or the manufacturers.
According to William Stanton, Retailing includes all activities directly related to the sale of goods and services to the ultimate consumers for personal or non-business use.
Thus, retailer is that merchant intermediary who buys goods from preceding channel members in small assorted lots and sells them in the lot requirements to final users.
Distinction between wholesaler and retailer
1. Wholesaler primarily sells to the dealers or industrial users whereas the retailer to the final consumers mostly the households.
2. Goods sold by the wholesalers are meant either for resale or for further processing while the goods sold by the retailers are meant for final consumption.
3. Wholesalers sell in larger quantities than retailers and the price charged by the wholesalers are lower than those of the retailers.
4. Wholesalers generally specialize in one or a few products of the same line while retailer in wide variety of products of many manufacturers.
5. Wholesalers works on reasonably low but quick returns while retailer works to higher margin over a relatively small period.
TYPES OF RETAILERS
A. Small Scale Retailers
1. Unit Stores: Unit stores are the retail stores run on proprietary basis dealing in general stores or single line stores such as drugs, clothes, grocery items, hardware, shoes, books, utensils etc. Single line stores are mostly called as specialty shops as they may specialize in one line only.
2. Street traders: These are retailers who display their stock on footpaths or the sidewalks of busy spots of cities and towns. The most prominent places are bus stands, railway stations, parks etc.
3. Market Traders: These retailers open their shops on fixed days or dates in specified areas. The time interval may be a week or a fortnight or a month. They do join fairs and festivals. They deal in general or special line stores. These retail outlet have fixed type of arrangements with built in flexibility.
4. Hawkers and Pedlars: This class of retailers has been there in all centers from the time immemorial. They do not have any fixed place of business. They carry the goods from one place to another on hand cart selling the goods from door to door. They keep on moving from locality to locality and business to business with change in season. Thus, ice candy seller has a brisk business in summer and may change over to cornflakes in rainy and winter season.
5. Cheap Jacks: Cheap jack is a retailer who has a fixed place of business in a locality but goes on changing his place to exploit the marketing opportunities. Change of locality is quite common in case of these retailers. They deal in cheap varieties of readymade garments, plastics, shoes and the like.
6. Syndicate Stores: It is an extension of the theory of mail order business on a small scale. Syndicate stores are known for widest varieties of goods in a product line but of known brands. These retailers buy most of the unbranded varieties and try to sell under their names. These apply to readymade garments, toys, machinery items and so on.
B. Large Scale Retailers
1. Departmental Stores: It is a large retail store dealing in a wide variety of goods under a single roof. It is essentially an urban retail outlet designed for mass selling sealing in almost Aspirin (medicine) to zip, mostly catering to the needs of higher income groups. It is a central location and unified control. It is known for orderly arrangement of products in separate departments and it lays emphasis on consumer service. Ex. Ebony Stores, Spencer’s, Vishal, Big Bazar etc.
2. Multiple shops and Malls: A multiple shop or a chain store is a system of branch shops operated under a centralized management and dealing in similar lines of goods. It is a chain of retail stores dealing in identical and generally restricted range of articles operating in different localities under central ownership and control. It works on the principle of centralized buying and administration and decentralized selling. The attributes of multiple shops are: cash and carry, limited lines of articles, items are consumer durables, decentralized selling in different localities. Ex. Bata Shoes, Carona shoes, Khadims shoes etc.
3. Mail order houses: As the title suggests, the seller contacts the buyer through some form of advertising. That is, the customers do not visit the sellers premises no there is personal inspection of goods before the purchase. The transaction is settled through postal medium mostly through V.P.P. or registered post. That is why, some prefer to call it as selling by post. As the goods are sent through post parcel, the article must be well known, describable, command demand and are durable in addition to high value. Ex. Patent medicines, Jewellery, Leather goods, garments are sold in this way.
4. Consumer Coopretaives: These are the retailers or stores owned by a group of consumers themselves on cooperative principles. It is an association of consumers to obtain their requirements by purchasing in bulk and selling through the stores to the member and non-member consumer. It believes in wholesale buying and retail selling at reasonable prices than prevailing in the open market. Ex. Apna Bazar, Janata Bazar etc.
5. Fair Price shops: These are the retail outlets started by the manufacturers in different cities and towns to sell at prices which are quite fair. It can be private, public, or even cooperative sector unit engaged in retail business to ensure regular equitable and adequate supply of essential commodities at just or fair prices. These are designed to meet the requirements of the weaker sections of the society. Ex. Ration.
II. Agent Middlemen
Agent middlemen are as important as merchant middlemen. Agent middlemen are those channel components who help in the transfer of goods from the hands of producers to the hands of ultimate users without acquiring the ownership of these goods, therefore, they do not assume any risk involved in marketing of goods, they operate for a commission and act on behalf of their account but render a valuable service of bringing together the buyers and sellers or assume the role of striking a transition for commission.
Types of agent Middlemen
1. Brokers: Broker is an agent who is employed to make bargains and contracts in matters of trade, commerce or navigation, between two parties for a compensation known as brokerage. He is an independent agent who negotiates bargains or agreements between two or more parties for exchange. He brings the intending buyer and the seller together. He does not take the title to the goods and hence he does not take the possession of goods. Ex. stock broker, insurance brokers etc.
Brokers render useful services like:
They bring the parties to exchange together.
They make actual arrangement for the delivery of goods.
They maintain extensive organizations to keep in touch with the suppliers and the customers.
They give valuable advice to both the parties on the issues of marketing affecting their interests.
2. Commission Agents: A Commission Agent buys or sells goods for his principal in return of a commission. He may or may not buy in his name but he does not assume any risk. He gets a fixed rate of commission for the business done. He has expert knowledge of all the commodities in which he is trading; he keeps close contact with the producers and dealers on the one hand and the market trends on the other. He procures goods as per the instructions of his principals; he gets orders and is responsible for arranging for packing, transport and delivery of goods including granting of credit and collecting the payments and dues.
He has the right to charge his principal for the costs of the goods purchased and the expenses incurred and his share agreed as commission. If he guarantees payment on goods sold on credit, he is eligible for extra commission called ‘del credere’ commission.
3. Selling Agents: Selling agents are the intermediaries who are given the exclusive franchise only for a limited market segment. He performs the functions of an independent middlemen taking overall the selling activities of a producer. He negotiates sales of merchandise produced by his principal and has full authority and control over the prices and the terms and conditions of the sale.
4. Forwarding and Clearing Agents: Forwarding and clearing agents are the middlemen employed to collect, deliver and otherwise forward goods on behalf of others. Most of the manufacturing houses, with gradual expansion and growth for their business find it necessary and economical to employ the agent, middlemen to relieve them of the tedious tasks of collection, delivery and forwarding the goods to their destinations.
5. Factors: Factor is an agent employed to sell the goods or merchandise consigned or delivered to him by or his principals for a compensation. Thus, his major role is to sell the goods assigned to him under the instructions of the principals. Since, selling is his sole responsibility, a factor has the power to sell the goods in his own name; he can sell at such prices and times he thinks best; he can sell on credit; he can receive the payment and issue valid receipts on behalf of his principals; he has the lien on goods in his possession for the charges due to him and recovery of advance payment made.
Thus, he takes possession of goods and sells in his own name for a commission. He even finances his principal by making advance payment or immediate payment.
6. Auctioneers: There are some class of products where sale by auction takes place. The products like jewellery, art pieces, land, buildings etc. are most commonly sold on auctions. Auctioneer is the legal agent of eth seller till the goods are knocked down to the highest bidder. He is the intermediary between the buyers and the sellers. His dealings are mostly on cash terms. He take s the possession of goods and remits the sale proceedings to the seller by deducting his expenses and agreed commission.
Auction sale is open to the public and therefore auctioneer is to widely give publicity from time to time regarding the place of auction and the time of auction.
FACTORS GOVERNING THE CHOICE OF CHANNELS OF DISTRIBUTION
The following factors are to be considered while selecting a channel of distribution.
Consumer
A major determinant of channel structure is whether the product is intended for the consumer or the industrial market. Industrial consumers prefer to deal directly with the manufacturer but most consumers make their purchases from the retail store. Products sold to both industrial users and the consumer market will employ more than one channel.
The geographic location and the needs of the firm’s potential market will also affect channel choice. Direct sales are possible where the firm’s potential market is concentrated in a few regions. Industrial production tends to be concentrated in a relatively small geographic region, making direct contact possible. Consumer goods are purchased by every household everywhere. Since they are numerous, geographically dispersed and purchase a small volume at a given time, middlemen must be employed to market products for them.
Shifts in consumer buying patterns will also influence channel decision. Such factors as the desire of credit, growth of after sale service, increased use of mail order houses and greater willingness to purchase from door to door salesperson will affect a firm’s marketing channel.
Characteristics of the product
Product characteristics also play a role in determining optimum marketing channels. Perishable products such as fresh produce, fruits and fashion products with short life cycles typically move through relatively short channels direct to the retailer or to the ultimate consumers. The more standardized is the product, longer is the channel. Lower the unit value of the product, the longer is the channel.
Characteristic of the manufacturer.
Companies with adequate resources-financial, marketing and managerial-will be less compelled to utilize middlemen in marketing their products. A financially strong manufacturer can hire its own sales force, warehouse its products to their customers. A firm with a broad product line is better able to market its product directly to retailers or industrial users since its sales force can offer a variety of products to its consumers.
The manufacturer’s need for control over the product will also influence channel selection. If aggressive promotion of the firm’s product at the retail level is desired, the manufacturer will choose the shortest available channel. For new products the manufacturer may be forced to implement an introductory advertising campaign before independent wholesalers will handle the item.
Environmental considerations
Firms should take into consideration the competition factors. The nature and extent of competition also affects the channel choice. An industry made up of a larger number of competitors with similar products will often experience intense competition, particularly at eth retail level.
CHANNEL CONFLICT MANAGEMENT
No matter how well the channels are designed and managed, there will be some conflict, if for no other reason that the interests of independent business entities do not always coincide. Channel conflict is generated when one channel member’s actions prevent the channel from achieving its goal. Channel coordination occur when channel members are brought together to advance the goals of the channel, as opposed to their own potentially incompatible goals.
Types of Conflict and Cooperation
The types of conflict that occurs may be:
Vertical Channel Conflict
A conflict between different levels within the same channel. HUL came in conflict with its distributors in Kerala on the issue of commissions, etc.
Horizontal channel conflict
It involves a conflict between members at the same level within the channels. Dealers frequently get into conflicts with each other for the transgression of the domain of operation and under cutting.
Multi channel conflict
It exists when the manufacturer has established two or more channels that sell to the same market. Escorts ltd. Trying to create a parallel dealership for a line of tractors in the early 1980s faced massive protests from established dealers; companies getting into online direct sales through web marketing receive boycott threats from established distributors.
CAUSES OF CHANNEL CONFLICT
It is important to identify the causes of channel conflict. Some are easy to resolve where as other are not. The major causes of channel conflict are:
Goal Incompatibility:
The manufacturer may want to achieve rapid market penetration through a low price policy. Dealers in contrast may prefer to work with high margins and pursue short run profitability.
Unclear roles and rights
Some times conflict arises from unclear roles and rights. HP may sell personal computers to large clients through its own sales force but its licensed dealers may also be trying to sell to large clients.
Differences in perception:
The manufacturer may be optimistic about the short term economic outlook and want dealers to carry higher inventory. Dealers may be pessimistic which leads to conflict.
Conflict might also arise due to intermediaries dependence on the manufacturer.
Territory boundaries and credit for sale often produce conflict.
MANAGING CHANNEL CONFLICT
As companies add channels to grow sales, they run the risk of creating channel conflict. Some channel conflict can be constructive and lead to better adaption to a changing environment, but too much is dysfunctional. The challenge is not to eliminate conflict but to manage it better.
There are several mechanism for effective conflict management. One is the adoption of superordinate goals. Channel members come to an agreement on the fundamental goal they are jointly seeking, whether it is survival, market share, high quality or consumer satisfaction. They usually do this when the channel faces an outside threat, such as more efficient conflicting channel, an adverse piece of legislation or a shift in consumers desires.
A useful step is to exchange persons between two or more channel levels. Co-optation is an effort by one organization to win the support of the leaders of another organization by inclusing them in advisory councils, board of directors and the like. When conflict is chronic or acute, the parties may have to resort to diplomacy, mediation or arbitration. Diplomacy takes place when each side sends a person or group to meet with its counterpart to resolve the conflict. Mediation means resorting to a neutral third party who is skilled in conciliating the two parties interest. Arbitration occurs when the two parties agree to present their arguments to one or more arbitrators and accept the arbitration decision.
When neither of the methods proves effective, the company or a channel partner may file a lawsuit.
Thus concluding from the above scenario, we can arrive at the following conflict management strategies:
Conflict management Strategies:
To overcome the conflict and to head towards satisfactory settlement of conflict, the firm may follow the following conflict management strategies:
Bargain Strategy
Bargain or bargaining strategy involves the use of different power bases such as reward- coercion-expertise-referral and legitimacy – to cut the intermediaries to the size or to the point of conflict resolution. Mutual trust, eagerness to give and take on the part of parties and the tolerance on the part of parties and the tolerance on the part of the negotiators are a must for its clicking.
Boundary strategy
This strategy believes in appointing some persons as liaison officers to operate the boundary where both the manufacturers and the intermediaries meet. The work of the officers is that of diplomats setting international issues and relations and attempt to analyse and interprete the company policies and kill and ill-will that is likely to arise.
Penetration strategy
Penetration strategy is an attempt to understand the attitudes of intermediaries so that their dispositions can be reshaped to the requirements of the company.
Supra-Organisational strategy
This strategy is employed to reorganize functional interdependence and need for channel membership of trader. It consists of ‘conciliation’ between the parties and other two aspects namely, ‘mediation’ and ‘arbitration’. Conciliation believes in settling the disputes and conflicts of the conflicting parties themselves. ‘Mediation’ involves active participation by the third party to settle the disputes or resolve the conflict by persuasion. In case of ‘arbitration’, the parties of conflict submit their dispute either voluntarily or compulsorily under law of agreement to a third party whose decision in final and binding on both parties.
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