Module IV

Logistic and supply chain management –its elements-channel of distribution Types-

factors affecting the choice of a channel of distribution
 CHAPTER-10

LOGISTIC AND SUPPLY CHAIN MANAGEMENT

LOGISTICS.

Logistics is the process of planning ,implementing and controlling the efficient ,

effective flow and storage of goods, services and related information from point of origin
to the point of consumption for the purpose of consuming to customer requirement.

“The movement and handling of goods from the point of production to the point of
consumption or use”- American Marketing Association.

The importance of Logistics has grown considerably during this decade. Competitive
pressure , both from domestic and international players and intense promotional tactics has
made the organization to be more innovative with not even with product ,promotion and
pricing but also in the field Logistics too.
“Convenient Marketing” has been in vogue during these years ,to make the product
easily available to the customer before its competitors gains momentum.
Logistics depends on certain activities like service( punctuality on deliver goods,
after sales processing ,updating the customer with latest information etc.). From the
Organization point of view Inventory Management is a very significant part of marketing
for any Organization.

It contains issues like :-

a).Stocking(warehousing) of Raw material and finished goods(packaging),

b).Protective handling of Raw material(maintaining the quality, checking the

damage material etc.)

c).Sales forecasting ,Quantity and Just-in-time management ,whether to opt for Push
or Pull strategies.

Nature and importance: To some managers, physical distribution means only trucks and
warehouses. But modern logistics is much more than this. Physical distribution – or
marketing logistics – involves planning, implementing and controlling the physical flow of
materials, final goods and related information from points of origin to points of consumption
to meet customer requirements at a profit.

The logistics manager’s task is to coordinate the whole-channel physical distribution system -
the activities of suppliers, purchasing agents, marketers, channel members and customers.
These activities include forecasting, information systems, purchasing, production planning,
order possessing, inventory, warehousing and transportation planning.
Companies today are placing greater emphasis on logistics for several reasons:

1) Effective logistics is becoming a key to winning and keeping customers. Companies

are finding that they can attract more customers by giving better service or lower
prices through better physical distribution.

2) Logistics is a major cost element for most companies. Poor physical distribution
decisions result in high costs. even large companies sometimes make too little use of
modern decision tools for coordinating inventory levels; transportation modes, and
plant, warehouse, and store locations. Improvements in physical distribution
efficiency can yield tremendous cost savings for both the company and its customers.

3) The explosion in product variety has created a need for improved logistics
management.

4) Finally, improvements in information technology have created opportunities for major

gains in distribution efficiency. The increased use of computer, point-of-sale scanners,
uniform product codes, satellite tracking, electronic data interchange (EDI) and
electronic funds transfer (EFT) has allowed companies to create advanced systems for
order processing, inventory control and handling, and transportation routing and
scheduling.

Goals of logistics systems: The goal of the marketing logistics system should be to
provide a targeted level of customer service at the least cost. A company must first
research the importance of various distribution services to its customers, and then set
desired service levels for each segments.

MAJOR LOGISTICS FUNCTIONS:

Given a set of logistics objectives, the company is ready to design a logistics system
that will minimize the cost of attaining these objectives. The major logistics functions
include order processing, warehousing, inventory management and transportation.

1. Order Processing: The orders once received, must be processed quickly and
accurately. The order processing system prepares invoices and sends order
information to those who need it. The appropriate warehouse receives instruction
 to pack and ship the ordered items. Shipped items are accompanied by shipping
and billing documents, with copies going to various departments. Both the
company and its customers benefits when the order-processing steps are carried
out efficiently.

2. Warehouse: All Organization must store its goods while they wait to be sold. A
storage function is needed because production and consumption cycles rarely
match. A company must decide on how many and what types of warehouse it
needs, and where they will be located. The more warehouse the company uses, the
more quickly goods can be delivered to customers. However, more locations mean
higher warehousing costs. The company, therefore, must balance the level of
customer service against distribution costs.

3. Inventory :Inventory levels also affect customer satisfaction. The major problems
to maintain the delicate balance between carrying too much inventory and
carrying too little. Carrying too much inventory results in higher-than necessary
inventory carrying costs and stock obsolescence. Carrying too little may result in
stock-outs, costly emergency shipments or production, and customer
dissatisfaction. In making inventory decisions, management must balance that
costs of carrying larger inventories against resulting sales and profit.

Inventory decisions involve knowing both when to order and how much to order.
In deciding when to order, the company balances the risks of running our of stock
against the cost of carrying too much. In deciding how much to order, the
company needs to balance order-processing costs against inventory carrying costs.
Larger average-order size results in fewer orders and lower order-processing
costs, but it also means larger inventory carrying costs.

4. Transportation: Marketers need to take an interest in their company’s

transportation decisions. The choice of transportation carries affects the pricing of
products, delivery performance, and condition of the goods when they arrive – all
of which will affect customer satisfaction.

The company can choose among five transportation modes: road, rail, sea, air
and pipeline. In choosing a transportation mode for a product, senders consider as
many as five criteria, viz. speed, dependability, capability, availability and cost.
Integrated Logistics Management:

Today, more companies are adopting the concept of integrated logistics

management. This concept recognizes that providing better customer service and
trimming distribution costs teamwork, both inside the company and among all the
marketing channel organizations. Inside the company, the various functional
departments must work closely together to maximize the company’s own logistics
performance. The company must also integrate its logistics system with those of its
suppliers and customers to maximize the performance of the entire distribution
system. Thus the goal of integrated logistics management is to harmonize all of the
company’s distribution decisions.

*SUPPLY CHAIN
MANAGEMENT*
“Supply chain encompasses all activities associated with the flow and
transformation of goods from raw material stage(extraction),through to the end- user as
well as the associated information flows. Material and information flow both up and down
the supply chain”-Prof. Robert B. Handfield and Earnest L. Nicholas Jr.

“Supply Chain Management is a process oriented ,integrated approach to procuring ,

producing and delivering end products and services to customers. It includes sub-suppliers,
suppliers, internal operations, trade customers and end users. It covers the management of
material, information and fund flow.”-Prof. [Link].

In the highly networked environment ,high performance supply chains are key to growth

Customer Delivery & Flexibility

Supply
Chain
Design
Inventory Asset utilization

Supply chain management is the coordination and management of a complex network of

activities involved in delivering a finished product to the end-user or customer .All stages of
product life cycle will influence Supply chain environment burden from resource
extraction to manufacturing ,use and reuse ,final recycling ,or disposal. Beyond this
definition with adding the “green” component ,it refers to Green Supply Chain
Management (GSCM) defined as “green procurement +green manufacturing +green
distribution+ reverse logistics”-The idea of GSCM is to eliminate or manage waste
(Energy, emission,& chemical /hazardous solid waste) along supply chain . Environmental
issues under legislation and directives from customers especially in US , EU ,Japan have
become an important concern for manufacturers . As a more systematic and integrated
strategy ,GSCM has emerged as an important innovation that will help the organization
develop a “win-win” strategy to achieve profit and market share objects by lowering their
environmental risk and impacts ,while raising their ecological efficiency ,becoming
important for India’s retail chain and Consumer product goods(CPG)

GCSM promotes various activities such as:-

Energy efficiency ,
Reduction of Green House Gas (GHG) emission.
Water conservation.
Water reduction.
Reduced packaging /increased used of biodegraded packaging.
Green procurement practices and manufacturing .
Green distribution(green packaging and logistics)

3R’s of the Environment

3 R’s

REUSE REDUCE RECYCLE

The Three R's: Reduce, Reuse and Recycle

The three R's - reduce, reuse and recycle - all help to cut down on the amount of waste we
throw away. They conserve natural resources, landfill space and energy. The three R’s
optimizes the performance of the system.

REDUCE:-
The best way to manage waste is to not produce it. This can be done by shopping
carefully and being aware of a few guidelines:
 Buy products in bulk. Larger, economy-size products or ones in concentrated form
use less packaging and usually cost less per ounce.
 Avoid over-packaged goods, especially ones packed with several materials such as
foil, paper, and plastic. They are difficult to recycle, plus you pay more for the
package.
  Avoid disposable goods, such as paper plates, cups, napkins, razors, and lighters.
Throwaways contribute to the problem, and cost more because they must be replaced
again and again.
 Buy durable goods - ones that are well-built or that carry good warranties. They will
last longer, save money in the long run and save landfill space.
 At work, make two-sided copies whenever possible.
 Maintain central files rather than using several files for individuals.
 Use electronic mail or main bulletin board.
 Use cloth napkins instead of paper napkins.
 Use a dish cloth instead of paper towels.

REUSE
It makes economic and environmental sense to reuse products. Sometimes it takes
creativity:
 Reuse products for the same purpose. Save paper and plastic bags, and repair
broken appliances, furniture and toys.
 Reuse products in different ways. Use a coffee can to pack a lunch; use plastic
microwave dinner trays as picnic dishes.
 Sell old clothes, appliances, toys, and furniture in garage sales or ads, or donate
them to charities.
 Use re-saleable containers rather than plastic wrap.
 Use a ceramic coffee mug instead of paper cups.
 Reuse grocery bags or bring your own cloth bags to the store. Do not take a bag
from the store unless you need one.

RECYCLE
Recycling is a series of steps that takes a used material and processes,
remanufactures, and sells it as a new product. Begin recycling at home and at
work:
 Buy products made from recycled material. Look for the recycling symbol or ask
store managers or salesmen. The recycling symbol means one of two things -
either the product is made of recycled material, or the item can be recycled. For
instance, many plastic containers have a recycling symbol with a numbered code
the identifies what type of plastic resin it is made from. However, just because the
container has this code does not mean it can be easily recycled locally.
 Check collection centers and curbside pickup services to see what they accept, and
begin collecting those materials. These can include metal cans, newspapers, paper
products, glass, plastics and oil.
 Consider purchasing recycled materials at work when purchasing material for
office supply, office equipment or manufacturing.
 Speak to store managers and ask for products and packaging that help cut down on
waste, such as recycled products and products that are not over packaged.
 Buy products made from material that is collected for recycling in your
community.
 Use recycled paper for letterhead, copier paper and newsletters1.

1
[Link]
 *CHANNEL OF
DISTRIBUTION*

According to Stanton,” A distribution channel consists of the set of people and

firms involved in the transfer of title to a product as the product moves from producer to
ultimate consumer or business user”.

Types of Distribution Channel:-

I. Consumer Products

Producer Producer Producer Producer Producer

Consumer Retailer Wholesaler Agent/Middleman

Agent /Middleman
Consumer Retailer Retailer
Wholesalers

Retailer Consumer Consumer

Consumer

II. Industrial Product

Producer Producer Producer

Consumer Agent /Middleman Wholesaler

Consumer Consumer

The movements of products from manufacturer to consumer is referred to as a

distribution channel, with agents en route to the consumer serving as intermediaries. Firms
in industries selling multiple product and using multiple distribution channel have to
decide which distribution to use and which product to sell through which distribution
channel. .Distribution strategies are intertwined with a firms product line , market
segmentation ,and positioning and targeting strategies. Changes to these strategies affect a
firm’s customer base and profits , as well as it relationship with intermediaries and other
firms in the market.
It is difficult to predict the result of changes in distribution channels , because
existing relationship with intermediaries prevent firms from conducting actual
experiments to test new strategies.
Gauging the outcomes of new distribution strategies is especially important
because contracts between manufacturers and retailers are long-term relationships and
cannot arbitrarily be broken . Modifying distribution channels is an expensive ,time
consuming affair that leaves many people upset , notably intermediaries who might be dis-
intermediated . The removal of any distribution channel benefits the competitors ,because
it reduce competition . Removal of direct channel will benefit intermediaries , but removal
of indirect channel will affect them badly .In all case , either way the end users –consumers
will suffer. Consumers are better of when a product line is added to another channel
because they will have more choices. They also benefit when product line are switched
from retail channel to the internet . In such contexts , a firm needs to have better guidance
regarding the consequence of their actions.

Some of the distribution channels are :-

1. Direct outbound sales by a manufacturer’s sales team.

2. Direct Inbound telemarketing or catalog sales
3. Dealer corporate account resellers and specialty dealers.
4. Retail store front business that sells to a large number of unrelated consumers
5. Internet direct sales via manufacturer web sites

Intensity of market coverage: The number of middleman to be needed is a matter of

concern: A firm can use any 3 methods for distribution

I. Intensive Distribution:- In this methods can distribute their products

anywhere and wherever possible .Any outlets that is convenient enough to
reach the target customer- E.g., FMCG Goods-like tooth paste , soaps etc.

II. Selective Distribution:-The company will choose a few distributors who

are capable of handling large quantities and the market potential .Example;-
Home appliances etc.

III. Exclusive Distribution:- The company gets and demands exclusive right
from the those distributors who agrees to sell the goods of that company
only. Example;- Car dealers , textiles, Machines tools etc.

Function of Distribution Channel

i. Research:- Conducting research and helping the organization in

 marketing the product.

ii. Promotion:- Promoting the Product by highlighting the special features and
usage of the product.

iii. Negotiation:- on terms and condition and price to the customer.

iv. Physical distribution:- Transporting and storing of the goods.

*TYPES OF
MIDDLEMAN*
Middleman are the persons who provides a link between the manufacturer and the
consumer.

MIDDELMAN

MERCANTILE AGENTS MERCHANT MIDDLEMAN

i. Commission agent 1. Wholesaler

ii. Factor 2. Retailer

iii. Auctioneer

iv. Broker

I. MERCANTILE AGENTS

Factor:- A factor is a mercantile agent who keeps the goods of others for sale.

Auctioneer:-An auctioneer is mercantile agent who sells the goods on the behalf of
his principal by undertaking auction of goods. The auctioneer sells it to the highest
bidder and transfer the ownership of goods to the buyer.

Broker:-A broker is a mercantile agent who negotiates purchase or sale of goods

on behalf of other parties

Commission agent:- A commission agent acts on behalf of some other person

(known as principal) for agreed commission.

II. MERCHANT MIDDLEMAN

A. WHOLESALER

The merchants or traders who purchase and sell in large quantities.

Type of Wholesalers
 i. Pure wholesaler:-Who exclusively concentrate on buying and selling only.

ii. Manufacturer wholesaler;-.Undertakes the manufacture of goods along with

the distribution .

iii. Retailer wholesaler;- Selling to the retailers and also to the customer

B. RETAILERS.
According to Stanton, “Retailing consists of the sale , and all activities
directly related to the sale of goods or services to the ultimate consumer for
personal and non-business use” Retail ,one of the largest sectors in the Global
economy ,is going through a transition phase in India .Retailing is a profitable
business .Many corporates have started establishing themselves in the retail sectors.

Types of Retailers

Small scale Retailers. Large-scale retailers

Small scale Retailers

Mobile or Itinerant Fixed shop

 Peddlers -Street stalls

 Hawkers -General stores

 Street traders -Specialty stores

 Market traders -Second-hand and goods shop

Large-scale retailers

 Departmental stores

 Multiple shops

 Mail order houses

 Consumer cooperative good shop

 Super markets

 Hire purchase and Installment shop

Factors In the choice of Distribution Channel.

[Link] consideration:- The nature of the market is one of the important factors in the
choice of distribution channel
 Industrial market:-for an industrial market The channel of distribution is limited.
Number of potential customer/order size:- for a relatively small customer , the
manufacture can directly sell .
Geographical concentration of market:-If the market is vast and huge then
multilevel distribution is required.
Follow the leader or the competitors: The channel strategies that they adopt can be
followed by the Organization

2. Product consideration:-
<!>If the unit value is low then Intensive distribution is suggested and otherwise
selective distribution if the unit is high.
<!>Technical nature of the product-if the product is not highly technical in nature,
intensive distribution is selected
<!>An organization with short Product-line would choose middleman
intermediaries. Sometimes the organization may opt for a single channel for the
entire product-line or separate channel for each product .

3. Institutional factors :-

<!>The financial and the promotional ability of channel members are very
important aspect to sustain the business.
<!>The Organization’s image ,status and reputation in the market ,do play an
important role in channel selected.

Channel management and motivation

Channel management:- .the administration of existing channels to serve the cooperation of

channel members in achieving the firm’s distribution objectives.
Channel Motivation:-Refers to the actions taken by the manufacturer to foster strong
channel member cooperation in implementing the manufacturer’s distribution objectives.

When setting up a distribution channel with one or more partners, treat it as a sale process.
a. Approach the potential channel partner and “sell” the value of the partnership.
b. Establish goals, service requirements and reporting requirements.
c. Deliver inventory (if necessary) and sales/support materials.
d. Train the partner.
e. Run promotions and programs to support the partner and help them increase sales.

Function :
The main function of a distribution channel is to
provide a link between production and consumption.
Organizations that form any particular distribution
channel perform many key functions:
Information Gathering and distributing market research and intelligence -
important for marketing planning

Promotion Developing and spreading communications about offers Contact

Finding and communicating with prospective buyers

Matching Adjusting the offer to fit a buyer's needs, including grading, assembling
and packaging

Negotiation Reaching agreement on price and other terms of the offer

Physical distribution Transporting and storing goods

Financing Acquiring and using funds to cover the costs of the distribution channel

Risk taking Assuming some commercial risks by operating the channel (e.g.
holding stock)