B2B Marketing

B2B (business-to-business) marketing is marketing of products to

businesses or other organizations for use in production of goods, for use
in general business operations (such as office supplies), or for resale to
other consumers, such as a wholesaler selling to a retailer.
Importance of Business Marketing:
Business market serve the largest market of all: The rupee volume of
transactions in the industrial or business market significantly exceeds
that of the ultimate consumer market. In the business market, a single
customer can account for an enormous level of purchasing activity.
Getting Word Out
For a business to succeed, the product or service it provides must be
known to potential buyers. Without marketing, the potential customers
may never be aware of the business offerings and the business may not
be given the opportunity to progress and succeed.
Higher Sales
Once the product, service or company gets the response from prospects,
it increases your chances that consumers will make a purchase. As
awareness becomes a reality, it is also the point where new customers
start to spread the word, telling friends and family about this amazing
new product they discovered. Sales will steadily increase as the word
spreads. Without employing marketing strategies, these sales may not
have ever happened; without sales, a company cannot succeed.
Company Reputation
The success of a company often rests on a solid reputation. Marketing
builds brand name recognition or product recall with a company. As your
reputation grows, the business expands and sales increase. The
reputation of your company is built through active participation in
community programs.
Healthy Competition
Marketing also fosters an environment in the marketplace for healthy
completion. Marketing helps keep pricing competitive for a business to
try to win over consumers before its competition does. Without
competition, well-known companies would continue to sell while lesser
known companies or new companies would stand little chance of ever
becoming successful. Marketing facilitates the healthy competition that
allows small businesses and new businesses to be successful enter and
grow in the marketplace.
Business Marketing vs Consumer Marketing

Business Marketing
Business Marketing refers to the sale of either products or services or
both by one organization to other organizations that further resell the
same or utilize to support their own system. Examples -(Industrial
marketing)
 1. Office furniture (Cabinets, desks, workstations, drawers) -End
user will not purchase workstations for his own use at home.
 2. Bulk SMS service (utilized by organizations)
Consumer Marketing
On the other hand refers to the transaction of goods and services
between organizations and potential customers. In consumer markets,
products are sold to consumers either for their own use or use by their
family members.
Examples –
 1. Fast Moving Consumer Goods (FMCG) -Fast moving consumer
goods are items that are sold quickly to the end-users generally at
nominal costs. Example -Aerated drinks, grocery items and so on.
 2. Consumer Durables -Goods that a consumer uses for a
considerable amount of time rather than consuming in one use are
categorized under Consumer Durables.
Consumer Durables are further categorized into -White Goods and
Brown Goods
 a) White Goods -(Refrigerators, Microwaves, air conditioners and so
on (Majorly all household appliances)
 b) Brown Goods -(Television, CD Players, Radio, Game Consoles
(Majorly used for entertainment and fun)
 3. Soft Goods -Soft goods are products which have a shorter lifecycle
and their value decreases after every use. E.g. shirts, clothes, shoes.
Difference between Business Marketing and Consumer Marketing:

Areas of
B2B market Consumer Market
difference

Market   Geographically   Geographically

characteristics concentrated disbursed
  Relatively fewer   Mass market
 buyer
Product   Technical complex  Standardized
characteristics   Customized

 Emphasis on personal  Emphasis on mass

Promotional characteristics selling media

  Competitive
building  List price or MRP
Price   Negotiated prices
characteristics
 List prices for standard
products

  Service, timely
Service availability  Somewhat important
characteristics   Extremely
important
 More direct  Indirect
Channel
characteristics  Multiple layer of
 Fewer intermediaries
intermediaries

 Involvement of various
 Involvement of family
functional area from
members
both the ends

 Purchase decisions are

 Purchase decisions are
mostly based on
performance based and
psychological/social/
rational
Buying behaviour physiological need

 Relatively less
 Technical expertise technical expertise is
required

 Stable interpersonal  Non personal

relationship relationship

Type of Business Customers:

 Commercial Governmental
Institutional Customers
Customers Customers

Schools, colleges, Federal

Manufacturers
universities government

Construction
Health-care organization · Non-defence
companies

Service firms Libraries · Defence

Transportation companies Foundations State government

Selected professional
Art galleries Local government
groups

Wholesalers Clinics · Counties

Retailers · Townships

1. Commercial Enterprises as Customers

Commercial enterprises include manufacturers, construction companies,
service firms (for example, hotels), transportation companies, selected
professional groups (for example, dentists), and resellers (wholesalers
and retailers purchasing equipment and supplies to use in their
operations).

Commercial enterprises can be divided into three categories: 

Users purchase industrial products or services to produce other goods or
services that are, in turn, sold in the business or consumer markets.
Original Equipment Manufacturers (OEMs)
The OEM purchases industrial goods to incorporate into other products it
sells in the business or ultimate consumer market.
Dealers and Distributors
Dealers and Distributors include commercial enterprises that purchase
industrial goods for resale (in basically the same form) to users and
OEMs. The distributors accumulate, stores, and sell a large assortment
of goods to industrial users, assuming title to the goods it purchases.
A Concentration of Customers
Because manufacturing operations are so concentrated in India, the
business marketer normally serves far fewer but far larger customers
than does a consumer products marketer. In addition to concentration
to size, business marketers are also concentrated geographically.
2. Government Units as Customers
Total money spent on public services by the Centre, state and local
governments constitute government spending or expenditure. In other
words, money spent by the government on providing goods and services
such as defence, judicial and education system to its citizens is total
government spending.
3. Institutions as Customers
Institutional customers comprise the third sector of the business market.
They make up a sizable market – total expenditures on public
elementary and secondary schools. Schools and health-care
organizations make up a sizable component of the institutional market,
which also includes colleges and universities, libraries, foundations, art
galleries and clinics.
Business customers can also be classified as:

1. Producers:
Producers are companies that purchase goods and services that they
transform into other products. They include both manufacturers and
service providers. Example -Procter & Gamble, General Motors,
McDonald’s, Dell, Delta Airlines, restaurants, dentist, doctor etc. All
these businesses have to buy certain products to produce the goods and
services they create.
2. Resellers:
Resellers are companies that sell goods and services produced by other
firms without materially changing them. They include wholesalers,
brokers, and retailers. Walmart and Target are two big retailers you are
familiar with. Large wholesalers, brokers, and retailers have a great deal
of market power.
3. Government:
Business-to-government (B2G) markets, or when companies sell to local,
state, and governments, represent a major selling opportunity, even for
smaller sellers. In fact, many government entities specify that their
agencies must award a certain amount of business to small businesses,
minority-and women-owned businesses, and businesses owned by
disabled veterans.
4. Institutions
Institutional markets include non-profit organizations such as the Red
Cross, Churches, Hospitals, Charitable organizations, Private colleges,
Civic clubs, and so on. Like government and for-profit organizations,
they buy a huge quantity of products and services. Holding costs down
is especially important to them. The lower their costs are, the more
people they can provide their services to.
Type of Business Products: Business products are sold to other
businesses, as opposed to convenience, shopping, and specialty
products, which are sold to consumers.
Entering goods and services
Entering goods become part of the finished product. These categories of
goods consist of raw materials and manufactured materials and parts.
Their cost is an expensive item assigned to the manufacturing process.
Raw Materials
Raw materials include both farm products and natural products. Raw
materials are processed only to the level required for economical
handling and transport; they basically enter the buying organization’s
production process in their natural state.

Manufactured Materials and Parts

In contrast to raw materials, manufactured materials and parts undergo
more initial processing. Component materials such as textiles or sheet
steel have been processed before reaching a clothing manufacturer or
automaker but must be processed further before becoming part of the
finished consumer product.
B2B Products

Foundation Goods
The distinguishing characteristic of foundation goods is that they are
capital items. As capital goods are used up or worn out, a portion of
their original cost is assigned to the production process as a depreciation
expense. Foundation goods include installation and accessory
equipment.
Installations
Installations include the major long-term investment items that underlie
the manufacturing process, such as buildings, land rights, and fixed
equipment. Large computers and machine tools are examples of fixed
equipment. The demand for installations is shaped by the economic
climate (for example, favourable interest rates) but is driven by the
market outlook for a firm’s products.
Accessory Equipment
Accessory equipment is generally less expensive and is short-lived
compared with installations, and it is not considered part of the fixed
plant. This equipment can be found in plant as well as in the office.
Portable drills, personal computers, and photocopying machines
illustrate this category.
Facilitating Goods
Facilitating goods are the supplies and services that support
organizational operations. Because these goods do not enter the
production process or become part of the finished product, their costs
are handled as expense items.
Supplies
Virtually every organization requires operating supplies, such as printer
cartridges, paper, or business forms, and maintenance and repair items,
such as paint and cleaning materials. These items generally reach a
broad cross section of industrial users. In fact, they are similar to the
kinds of supplies that consumers might purchase at a hardware or
discount store.
Services
As the service sector in India is contributing to about a quarter of total
employment, the service firms have expanded sophistically in relation to
the scale and expertise that individual staff and service groups have
within integrated companies. To capture the skills of the specialist and
to direct attention to what they do best, many firms are shifting or
“outsourcing” selected service functions to outside suppliers.
Understanding Business Market & Environment:
When determining the best way to market a product, the marketing
team must analyse the marketing environment. Obviously, the
marketing team must understand the market they wish to sell to, and
what is the best way to market to those customers.
Business marketing
It is the practice of individuals, or organizations, including commercial
businesses, governments and institutions, facilitating the sale of their
products or services to other companies or organizations that in turn
resell them, use them as components in products or services they offer,
or use them to support their operations. It is also the task of selecting,
developing and managing customer relationships for the advantage of
both customer and supplier, with regard to their respective skills,
resources, technologies, strategies and objectives.
Business environment
Business Environment consists of all those factors that have a bearing
on the business, such as the strengths, weaknesses, internal power
relationships and orientations of the organization; government policies
and regulations; nature of the economy and economic conditions;
sociocultural factors; demographic trends; natural factors; and, global
trends and cross-border developments.
Concept of Business Environment
A business firm is an open system. It gets resources from the
environment and supplies its goods and services to the environment.
There are different levels of environmental forces. Some are close and
internal forces whereas others are external forces. External forces may
be related to national level, regional level or international level. These
environmental forces provide opportunities or threats to the business
community. Every business organization tries to grasp the available
opportunities and face the threats that emerge from the business
environment. Business organizations cannot change the external
environment but they just react. They change their internal business
components (internal environment) to grasp the external opportunities
and face the external environmental threats.
Types of Environment:
On the basis of the extent of intimacy with the firm, the environmental
factors may be classified in to different types or levels. As indicated
below, there are, broadly, two types of environment, the internal
environment, i.e., factors internal to the firm and external environment,
i.e., factors external to the firm which have relevance to it.

The internal factors are generally regarded as controllable factors

because the company has control over these factors; it can alter or
modify such factors as its personnel, physical facilities, organization and
functional means, such as marketing mix, to suit the environment.
The external factors, on the other hand, are, by and large, beyond the
control of a company. The external or environmental factors such as the
economic "factors, sociocultural factors, government and legal factors,
demographic factors, geo-physical factors etc.; are, therefore, generally
regarded as uncontrollable factors.
Internal Environment
The important internal factors which have a bearing on the strategy and
other decisions are outlined below.
Value System
The value system of the founders and those at the helm of affairs has
important bearing on the choice of business, the mission and objectives
of the organization, business policies and practices. It is a widely
acknowledged fact that the extent to which the value system is shared
by all in the organization is an important factor contributing to success.
The value system and ethical standards are also among the factors
evaluated by many companies in the selection of suppliers, distributors,
collaborators etc.
Vision, Mission and Objectives
The business domain of the company, priorities, direction of
development, business philosophy, business policy etc., is guided by the
vision mission and objectives of the company.
Management Structure and Nature
The organizational structure, the composition of the Board of Directors,
extent of professionalization of management etc., are important factors
influencing business decisions. Some management structures and styles
delay decision making while some others facilitate quick decision
making.
Internal Power Relationship
Factors like the amount of support the top management enjoys from
different levels of employees, shareholders and Board of Directors have
important influence on the decisions and their implementation. The
relationship between the members of Board of Directors and between
the chief executive and the Board are also critical factors.
Human Resources
The characteristics of the human resources like skill, quality, morale,
commitment, attitude etc., could contribute to the strength -and
weakness, of an organization. Some organizations find it difficult to carry
out restructuring or modernization because of resistance by employees
whereas they are smoothly done in some others.
Company Image and Brand Equity
The image of the company matters while raising finance, forming joint
ventures or other alliances, soliciting marketing intermediaries, entering
purchase or sale contracts, launching new, products etc. Brand equity is
also relevant in several of these cases.
Miscellaneous Factors
There are a number of other internal factors which contribute to the
business success/failures or influence the decision-making. They include
the following.
 1. Physical Assets and Facilities like the production capacity,
technology and efficiency of the productive apparatus, distribution
logistics etc., are among the factors which influence the competitiveness
of a firm.
 2. R & D and Technological Capabilities, among other things,
determine a company's ability to innovate and compete.
 3. Marketing Resources like the organization for marketing, quality of
the marketing men, brand equity and distribution network have direct
bearing on marketing efficiency. They are important also for brand
extension, new product introduction etc.
 4. Financial Factors like financial policies, financial position and
capital structure are also important internal environment affecting
business performances, strategies and decisions.
External Environment
As stated earlier, the external business environment consists of a micro
environment and a macro environment.
Micro Environment
The micro environment consists of the actors in the company's
immediate environment that affects the performance of the company.
These include the suppliers, marketing intermediaries, competitors,
customers and the publics." The macro environment consists larger
societal forces that affect all the actors in the company's micro
environment namely, the demographic, economic, natural, technical,
political and cultural forces."
Suppliers
An important force, in the micro environment of a company is the
suppliers, i.e., those who supply the inputs like raw materials and
components to the company. The importance of reliable source/sources
of supply to the smooth functioning of the business is obvious.
Uncertainty regarding the supply or other supply constraints often
compels companies to maintain high inventories causing cost increases.
Customers
As it is often exhorted, the major task of a business is to create and
sustain customers. A business exists only because, of its customers.
Monitoring the customer sensitivity is, therefore, a prerequisite for the
business success. A company may have different categories of
consumers like individuals, households, industries and other commercial
establishments, and government and other institutions.
Competitors
A firm's competitors include not only the other firms which market the
same or similar products but also all those who compete for thee
discretionary income of the consumers.
The competition among such alternatives which satisfy a particular
category of desire is called generic competition. If the consumer decides
to go in for a T.V., the next question is which form of the T.V black and
white .or Colour with remote control or without it etc. In other words,
there is a product form competition. Finally, the consumer encounters
the brand competition i.e. the competition between the different brands
of the same product form.
Module-II
Segmentation of Business Market Introduction
A market segment represents “a group of present or potential customers
with some common characteristics which is relevant in explaining (and
predicting) their response to a supplier’s marketing stimuli.” Effective
segmentation of markets is the first step in crafting a marketing strategy
because the characteristics and needs of each segment will define the
direction and focus of the marketing program. Segmentation that is
done well provides the necessary information for understanding what
elements of the marketing mix are going to be critical in satisfying the
target customers in those segments.

Segmentation Challenges in Business-to-Business Markets:

Business-to-business markets are characterised in a number of ways

that makes them very different to their consumer cousins. Below we
summarise the main differences between consumer and business-to-
business markets, and set out the implications for market segmentation:
 1) B2B markets have a more complex decision-making unit: In most
households, even the most complex and expensive of purchases are
confined to the small family unit, while the purchase of items such as
food, clothes and cigarettes usually involves just one person. Other than
low-value, low-risk items such as paperclips, the decision-making unit in
businesses is far more complicated. The purchase of a piece of plant
equipment may involve technical experts, purchasing experts, board
members, production managers and health and safety experts, each of
these participants having their own set of (not always evident) priorities.
 2) B2B buyers are more “rational”: In business-to-business markets
it is critical to identify the drivers of customer needs. These often boil
down to relatively simple identifiers such as company size, volume
purchased or job function. These identifiers often enable needs and
therefore segments to be quite accurately predicted.
 3) B2B products are often more complex: Just as the decision-
making unit is often complex in business-to-business markets, so too are
b2b products themselves. Even complex consumer purchases such as
cars and stereos tend to be chosen on the basis of fairly simple criteria.
Conversely, even the simplest of b2b products might have to be
integrated into a larger system, making the involvement of a qualified
expert necessary. Whereas consumer products are usually standardized,
b2b purchases are frequently tailored.
 4) B2B target audiences are smaller than consumer target
audiences: Almost all business-to-business markets exhibit a customer
distribution that confirms the Pareto Principle or 80:20 rule. A small
number of customers dominate the sales ledger.
 5) Personal relationships are more important in b2b markets: A small
customer base that buys regularly from the business-to-business
supplier is relatively easy to talk to. Sales and technical representatives
visit the customers. People are on first-name terms. Personal
relationships and trust develop. It is not unusual for a business-to-
business supplier to have customers that have been loyal and committed
for many years.
 6) B2B buyers are longer-term buyers: Whilst consumers do buy
items such as houses and cars which are long-term purchases, these
incidences are relatively rare. Long-term purchases – or at least
purchases which are expected to be repeated over a long period of time
– are more common in business-to-business markets, where capital
machinery, components and continually used consumables are
prevalent. In addition, the long-term products and services required by
businesses are more likely to require service back-up from the supplier
than is the case in consumer markets.
 7) B2B markets drive innovation less than consumer markets: B2B
companies that innovate usually do so as a response to an innovation
that has happened further upstream. In contrast with FMCG companies,
they have the comparative luxury of responding to trends rather than
having to predict or even drive them.
 8) B2B markets have fewer behavioural and needs-based segments:
The small number of segments typical to b2b markets is in itself a key
distinguishing factor of business-to-business markets.
Segmentation Process:
The benefits of B2B segmentation are not hard to grasp. The challenge
is arriving at the most effective groupings.
A common approach in business-to-business markets is to apply a
market segmentation based on company size. The consumption levels of
business-to-business customers are so widely different that this often
makes sense due to large companies usually thinking and acting
differently to small ones. A further sophistication may be to classify
customers into those who are identified as strategic to the future of
the business, those who are important and therefore key and those who
are smaller and can be considered more of a transactional typology.
These “demographic” segmentations, sometimes referred to as
“firmographic” in business-to-business markets, are perfectly reasonable
and may suffice. However, they do not offer that sustainable competitive
advantage that competitors cannot copy. A more challenging
segmentation is one based on behaviour or needs. Certainly large
companies may be of key or strategic value to a business but some want
a low cost offer stripped bare of all services while others are demanding
in every way. If both are treated the same, one or both will feel
unfulfilled in some way and be vulnerable to the charms of the
competition.
It is not easy to jump straight into a fully-fledged needs-based
segmentation. Most companies are starting with some history of
involvement in segmentation, even if it is only a north/south split of its
sales force. Companies move down the road of segmentation learning all
the way.
The Road To A Needs-based Segmentation

There may be problems in developing a needs-based segmentation but

this is at least an aspiration to drive towards. The question is “how?”
The starting point of any business-to-business segmentation is a good
database. A well-maintained database is high on the list in any audit of
marketing excellence in a business-to-business company. The database
should, as a minimum, contain the obvious details of correct address
and telephone number together with a purchase history. Ideally it
should also contain contact names of people involved in the decision-
making unit, though this does present problems of keeping it up to date.
Management is frequently blissfully unaware of the parlous state of its
databases as it is rarely involved in inputting and maintaining data.
Sometimes the best database in the company is the Christmas card list
held close to the chest of every sales person.
Using Statistics for Segmentation
The classification data on questionnaires provides demographic data
while questions in the body of the interview determine aspects of
behaviour. Cross tabulations of data on these criteria allow us to see the
different responses amongst groups of respondents. This is market
segmentation at its simplest level and every researcher uses the
computer tabulations of findings to establish groups of respondents with
marked differences.
Factor Analysis:
Using a technique known as factor analysis, statisticians can work out
which groups of attributes best fit together. Looking through the
different statements or attributes that make up these groupings it is
usually possible to see common themes such as people who want low
prices with few extras, people who want lots of services or add-ons and
are prepared to pay for them, people who are concerned
about environmental issues and so on. Factor analysis reduces the large
number of attributes to a smaller but representative sub-set. These sub-
sets are then given labels such as “price fighters”, “service seekers” and
any other such terms that help the marketing team know exactly who
they are addressing.
Cluster Analysis:
The groupings of needs that have been worked out by factor analysis
are now run through further computations using a technique known as
cluster analysis. These factors are presented to the cluster analysis
whose algorithms rearrange the data into the partitions that have been
specified and so determine how neatly the population fits into the
different groupings.
Organizational Buying and Buying Behaviour:
Organization buying behaviour is defined as the rational decision-making
process in which organization buys goods and services when they have
need of any goods or service for their organization. The purchased
products and services get identified, evaluated, and chosen among
alternative brands and suppliers. Organizational buying is similar to the
consumer buyer behaviour without any major differences. Organizations
buy the products and services for the betterment of organizational
objectives such as manufacture and deliver goods and services to
members, customers or the community.
Nature/ Characteristics of Organizational Buying Behaviour
  Every organization is unique – As different organization have
different organizational structure, culture, values, objectives and
resources. Therefore, they also have a unique set of needs, demands
and exhibit unique buying behaviour.
  There is long time lag between efforts and results – In the process
of individual buying, the time taken between a purchase decision and
sales transaction is shorter than industrial buying. This is due to the
extra formalities and procedures that are to be followed in organizational
buying process. For example, asking quotations, evaluating tenders,
preparing bulk orders etc.
  It is a rational as well as emotional activity – Due to presence of
human beings in the purchase process, it rise to emotional element
involved in buying. As industrial buyer may select the quantity and
quality of a product on the basis of specified organization norms but
may choose a dealer on the basis of his personal or political affiliation or
past experience with the dealer.
  It is a formal activity – Organization buying involves a formal
contract between the buyer and seller. It is an formal activity which
requires the buyer to follow rules and procedures laid down by the
organization regarding the type, quality, quantity, terms of payment,
delivery time etc. while making a purchase decision.
  It is a multi-person activity – Buying decisions in an organization
are generally taken by a team of qualified personnel also referred to as
buying centre where each individual plays different buying roles.
Organizational buying behaviour is a process, not an isolated act or
event. Tracing the history of a procurement decision uncovers critical
decision points and evolving information requirements. In fact,
organizational buying involves several stages, each of which yields a
decision.
Organisational Buying Stages
Stage Description
1. Problem Managers at P&G need new high-
speed packaging equipment to
Recognition
support a new product launch
2. General Description of Need Production managers’ work with a
purchasing manager to determine
the characteristics needed in the
new packaging system.
3. Product Specifications An experienced production
manager assists a purchasing
manager in developing a detailed
and precise description of the
needed equipment.
4. Supplier Search After conferring with production
managers, a purchasing manager
identifies a set of alternative
suppliers that could satisfy P&G’s
 requirement.
5. Acquisition and Analysis of Alternative proposals are
Proposals evaluated by a purchasing
manager and a number of
members of the production
department.
6. Supplier Selection Negotiations with the two finalists
are conducted, and a supplier is
chosen.
7. Selection of Order Routine A delivery date is established for
the production equipment.
8. Performance Review After equipment is installed,
purchasing and production
managers evaluate the
performance of the equipment
and the service support provided
by the supplier.
Problem Solving
The first stage of the business buying process is to identify the need of
the organization which will be met by purchasing any goods or services.
Problem recognition can result from internal or external stimuli.
Internally, the company may take a decision to launch a new product
that requires new production equipment and materials. Or, a machine
may break down and need another new part. Externally, the buyer gets
some new ideas at a trade show, see an ad, or receive a call from a
seller who offers best products at low price.
General Need Description
After the need is recognized, the buyers prepare a general need
description which reports both characteristics and quantity needed and
item for the organization. For standard items, this process presents very
few problems but for complex problems the buyer needs to work with
the other engineers, users, consultants in order to define the item.
Product Specification
In this stage, the buying organization decides and specifies the technical
product features for the needed item. Product value analysis is the
approach that helps to reduce the cost in which the components are
studied. After studying it carefully they can be redesigned, standardized
or made by fewer cost methods of production. The team will decide best
product features and specifies them accordingly.
Supplier Search
In this stage, the buyer conducts supplier search to find the best sellers.
The buyer can assemble a list of qualified suppliers by analysing trade
directories, doing computer searches or contacting other companies for
recommendation letters.
Proposal Solicitation
The stage of the business buying in which the buyer ask qualified
suppliers to submit proposals is called proposal solicitation. In the next
stage suppliers send only a catalogues or a salespersons. However,
when the item is complex or expensive, the buyer asks for the detailed
written proposals or formal presentations for each potential supplier.
Supplier Selection
In this stage, the buyer reviews proposals and choose a supplier or
suppliers. During supplier selection, the buying centre often will prepare
up a list of the desired supplier trait and their relative importance.
Such trait includes product and service quality, reputation, on-time
delivery, ethical corporate behaviour, honest communication and
competitive prices.
Order-Routine Specification
This is the stage of buying process in which the buyer choose the final
supplier by listing various things like technical specifications, quantity
needed, expected time of delivery, return policies, and warranties.
Performance Review
The stage of buying process in which the buyer analyse the supplier's
performance on the basis of different criteria and decides to continue,
modify or drop the arrangement. The seller's job is to observe and
examine the same factors used by the buyer to make sure that the seller
is giving the expected satisfaction.
The purchasing process begins when someone in the organization
recognizes a problem that can be solved or an opportunity that can be
captured by acquiring specific product. Problem recognition can be
triggered by internal or external forces.
The Search Process
Once the organization has defined the product that meets its
requirements, attention turns to this question: Which of the many
possible suppliers are promising candidates? The organization invests
more time and energy in the supplier search when the proposed product
has a strong bearing on organizational performance. When the
information needs of the buying organization are low, stage 4 and 5
occur simultaneously, especially for standardized items. In this case, a
purchasing manager may merely check a catalogue or secure an update
price from the internet. Stage 5 emerges as a distinct category only
when the information needs of the organization are high. Here, the
process of acquiring and analysing proposals may involve purchasing
managers, engineers, users, and other organizational members.
Supplier Selection and Performance Review
After being selected as a chosen supplier (stage 6) and agreeing to
purchasing guidelines (stage 7), such as required quantities and
expected time of delivery, a marketer faces further tests. A performance
review is the final stage in the purchasing process. The performance
review may lead the purchasing manager to continue, modify, or cancel
the agreement. A review critical of the chosen supplier and supportive of
rejected alternatives can lead members of the decision-making unit to
re-examine their position. If the product fails to meet the needs of the
using department, decision makers may give further consideration to
vendors screened earlier in the procurement process. To keep a new
customer, the marketer must ensure that the buying organization’s need
have been completely satisfied. Failure to follow through at this critical
stage leaves the marketer vulnerable.
Buying Situation

New A situation requiring the purchase of a product for the first

Task time

Modifie
A situation where the purchaser wants some changes in the
d
original good or service
Rebuy

A situation in which the purchaser reorders the same goods or

Straigh
services without looking for new information or investigating
t Rebuy
other suppliers
Therefore, attention must centre on buying situations rather than on
products. Three types of buying situations have been delineated:
 1. New Task – In the new-task buying situation, organization
decision makers perceive the problem or need as totally different from
previous experience; therefore, they need a significant amount of
information to explore alternative ways of solving the problem and
searching for alternative suppliers.
When confronting a new-task buying situation, organizational buyers
operate in a stage of decision making referred to as extensive problem
solving. The buying influentials and decision makers lack well-defined
criteria for comparing alternative products and suppliers, but they also
lack strong predispositions toward a particular solution. In the consumer
market, this is the same type of problem solving an individual or
household might follow when buying a first home.
 2. Straight Rebuy – When there is a continuing or recurring
requirement, buyers have substantial experience in dealing with the
need and require little or no new information. Evaluation of new
alternative solutions is unnecessary and unlikely to yield appreciable
improvements. Thus, a straight rebuy approach is appropriate.
Routine problem solving is the decision process organizational buyers
employ in the straight rebuy. Organizational buyers apply well-
developed choice criteria to the purchase decision. The criteria have
been refined over time as the buyers have developed predisposition
toward the offerings of one or a few carefully screened suppliers.
 3. Modified Rebuy – In the modified rebuy situation, organizational
decision makers feel they can derive significant benefits by re-evaluating
alternatives. The buyers have experience in satisfying the continuing or
recurring requirement, but they believe it is worthwhile to seek
additional information and perhaps to consider alternative solutions.
Several factors may trigger such a reassessment. Internal forces include
the search for quality improvements or cost reductions. A marketer
offering cost, quality, or service improvements can be an external
precipitating force. The modified rebuy situation is most likely to occur
when the firm is displeased with the performance of present suppliers
(for example, poor delivery service).
Limited problem solving best describes the decision-making process for
the modified rebuy. Decision makers have well-defined criteria but are
uncertain about which suppliers can best fit their needs. In the
consumer market, college students buying their second computer might
follow a limited problem-solving approach.
The Buying Centre
The concept of the buying centre provides rich insights into the role of
group forces in organizational buying behaviour. The buying centre
consists of individuals who participate in the purchasing decision and
share the goals and risk arising from the decision. The size of the buying
centre varies, but an average buying centre includes more than four
person per purchase; the number of people involved in all stages of one
purchase may be as many as 20.
The composition of the buying centre may change from one purchasing
situation to another and is not prescribed by the organizational chart. A
buying group evolves during the purchasing process in response to the
information requirements of the specific situation. Because
organizational buying is a process rather than an isolated act, different
individuals are important to the process at different times. A design
engineer may exert significant influence early in the process when
product specifications are being established; others may assume a more
dominant role in later phases. A salesperson must define the buying
situation and the information requirements from the organization’s
perspective in order to anticipate the size and composition of the buying
centre. Again, the composition of the buying centre evolves during the
purchasing process, differs from firm to firm, and varies from one
purchasing situation to another.
Isolating the Buying Situation
First steps in defining the buying centre is the buying situation and
determining whether the firm is in the early or later stages of the
procurement decision-making process. The product, intensive-care
monitoring systems, is complex and costly. Buying centre members are
drawn from five functional areas, each participating to varying degrees
in the process. A marketer who concentrated exclusively on the
purchasing function would be overlooking key buying influentials.

The Involvement of Buying Centre Participants at Different Stages of

the Procurement Process

Stages of Procurement Process for a Medical Supplier

Buying Identific Establish Identification and Selectio

 Centre n of
ation of ment of Evaluation of
Participan Supplier
Need Objective Buying Alternatives
ts s

Physicians High High High High

Nursing Low High High Low

Administrati
Moderate Moderate Moderate High
on

Engineering Low Moderate Moderate Low

Purchasing Low Low Low Moderate

Predicting Composition
A marketer can also predict the composition of the buying centre by
projecting the effect of the industrial product on various functional areas
in the organization. If the procurement decision will affect the
marketability of a firm’s product (for example, product design, and
price) then the marketing department has to be active in the process.
Engineering will be influential in decision about new capital equipment,
materials and, and components; setting specification; defining product
performance requirements; and qualifying potential vendors.
Manufacturing executives will be included for procurement decisions that
affect the production mechanism (for example, materials or parts used
in production). When procurement decision involve a substantial
economic commitment or impinge on strategic or policy matters, top
management will have considerable influence.
Roles in the Buying Centre
Members of the buying centre assume different roles throughout the
procurement process. Frederick Webster Jr. and Yoram Wind have given
the following levels to each of these roles: users, gatekeepers,
influencers, deciders, and buyers.
Users – are the personnel who use the product in question. Users may
have anywhere from inconsequential to extremely important influence
on the purchase decision. In some cases, the users initiate the purchase
action by requesting the product. They may even develop the product
specifications.
Gatekeepers – control information to be reviewed by other members of
the buying centre. They may do so by disseminating printed information,
such as advertisements, or by controlling which salesperson speaks to
which individuals in the buying centre. To illustrate, the purchasing
agent might perform this screening role by opening the gate to the
buying centre for some sales personnel and closing it to others.
Influencers – affect the purchasing decision by supplying information for
the evaluation of alternatives or by setting buying specifications.
Typically, those in technical departments, such as engineering, quality
control, and R&D, have significant influence on the purchase decision.
Sometimes, outside individuals can assume this role. For high-tech
purchases, technical consultants often assume an influential role in the
decision process and broaden the set of alternatives being considered.
Deciders – actually make the buying decision, whether or not they have
the formal authority to do so. The identity of the decider is the most
difficult role to determine: Buyers may have formal authority to buy, but
the president of the firm may actually make the decision. A decider
could be a design engineer who develops a set of specifications that
only one vendor can meet.
Buyer – has formal authority to select a supplier and implement all
procedures connected with securing the product. More powerful
members of the organization often usurp the power of the buyer. The
buyer’s role is often assumed by the purchasing agent, who executes
the administrative functions associated with a purchase order.
Module-III
Types of Business Channel Intermediaries Distribution channel:
 The link between the manufacturer and the customer is called the
Channel of Distribution.
 The channel accomplishes all the tasks necessary to get the
product/service to market.
 Tasks can be performed by the manufacturer or be delegated
throughout the channel.
Distribution channel is a set of interdependent organizations that ease
the transfer of ownership as products move from producer to business
user or consumer.
The distribution of products involves two main elements:
 1. The management of the tangible or physical aspects of moving a
product from the producer to the end user (part of supply chain
management).
 2. The management of the intangible aspects or issues of ownership,
control and flows of communication between the parties responsible for
making the offering accessible to the customer (channel management).

How to develop a successful CRM strategy

To develop a successful CRM strategy, you need a clear vision that your
team can collaborate on and execute. It requires your ability to discern
between good and poor leads so that you can prioritize your actions.
Implementing a CRM strategy is an ongoing effort. You may want to
continue to keep track of your leads, carry out targeted marketing
campaigns and reevaluate your actions.

The following is an eight-step guide on how to develop a powerful CRM

strategy:

1. Define your specific goals

Refer to your employer's organizational mission to make informed

decisions about your CRM strategy. This may help you define your
purpose from the very beginning. It's an important step that ensures
you stay on track with every decision you make.

Remember that over the long run these goals are also subject to
change. Thus, you may regularly revisit this step as your strategy
evolves. Here are some common CRM strategy goals for you to
consider:

 Increase customer satisfaction

 Boost productivity
 Enhance customer retention
 Encourage lead conversion
 Decrease customer bounce rates

2. Build your target customer profile

Create a buyer profile that represents your ideal customer. In this step,
you develop an understanding about who is purchasing from you and
why. To build an effective buyer persona, make it as detailed as
possible. Consider the following information:

 Demographic characteristics
 Personality archetypes
 Hobbies and interests
 Likes and dislikes
 Challenges
 Aspirations

To gather these data points, interview your sales and customer services
team, study existing customer profiles and send surveys to your
customers. Thorough research is key to figuring out the needs and
expectations of your customers. At a later stage, it may help you identify
the individuals who are most likely to purchase from you.

3. Describe your customer journey

Map every customer interaction from the moment they first discover
you. Understand how they found you. Was it through a digital banner ad
or an email marketing campaign? This can establish how long or how
many steps it takes before a prospect makes a purchase.

The idea here is to ensure your customer journey is as simple as

possible so that they are less likely to abandon a purchase. It's an
excellent method to address any areas for improvement. Here are some
key questions to ask when mapping the customer journey:

 Which team or process is interacting with the customer at each

stage?
 Is this your ideal customer's preferred style of communication?
 Which content does your customer interact the most with or the
least with?
 What is the customer trying to achieve?
 What challenges does the customer face?

4. Describe your customer experience

Audit the structure of your customer experience so that you can

optimize each stage. The following are some examples for you to
consider:
  Presales: Are you able to analyze customer needs and gather
information effectively?
 Sales process: Are there any sales processes that you can
automate to increase speed and efficiency?
 CRM: Are your communications relevant and engaging to your
customer?
 After-sales: Do you have a system for customers to share their
feedback? How can you lend support to a customer after a sale?

5. Establish a niche for yourself in the current market

To gain a competitive advantage in the current market, differentiate

yourself from other brands and create your own niche. This way, you
are less likely to lose customers to your competition. For a CRM strategy
to work, form an idea about your strengths in the industry and the
threats you may face. Here are some questions to ask:

 Where does your employer fit into the market?

 What is your unique selling point?
 What are the current trends and opportunities?
 How do your competitors differentiate themselves?
 What are the strengths and weaknesses of your competitors?
What can you learn from them? What can you monetize?

6. Understand your product or service

Use your research to improve your products and services. At this stage,
you can develop your value proposition. Analyze your brand's tone of
voice to see whether it fits your goals. Revise your employer's narrative
to stand out from your competitors. The following are some criteria
questions to help you evaluate a company's products and services:

 What message do you want to convey?

 What benefits do you want to draw attention to?
 Why should customers choose you over your competitors?

Once you make the necessary changes, communicate them to your co-
workers. Each department needs to work cohesively to deliver a branded
customer experience. Implement training workshops to ensure your co-
workers are relaying the same message.

7. Invest in CRM software

One of the most efficient ways to drive your CRM strategy is by
investing in CRM software. It helps you cut down on the labor-intensive
tasks of capturing and sorting out data because technology can quickly
take over this part of the process. It not only gathers real-time data but
also ensures you don't miss out on key leads.

To find a suitable CRM software for your team, evaluate your existing
processes to establish your needs. When selecting a CRM software,
consider its price, function and ease of use. Remember to check
whether it can integrate with your existing tools too.

Once you set up your CRM software, assign admins to manage user
access. Next, conduct a pilot study with a small group of co-workers to
test for glitches. Lastly, train your team on how to use the CRM
software.

8. Set KPIs for your team

To ensure the success of your CRM strategy, you also can try to ensure
your co-workers are working efficiently. Give them concrete targets
using SMART goals (Specific, Measurable, Achievable, Realistic and
Time-bound).

The commitment of your team makes a positive impact on your ability to

deliver a memorable customer experience. Thus, keep your co-workers
informed and educated on all aspects of your CRM strategy.

The Business Market Channel

The link between manufacturers and customers is the channel of
distribution. The channel accomplishes the entire task necessary to
affect a sale and deliver products to the customer. These tasks include
making contact with potential buyers, negotiating, contracting,
transferring title, communicating, arranging financing, servicing the
product, and providing local inventory, transportation, and storage.
These tasks may be performed entirely by the manufacturer or entirely
by intermediaries, or they may be shared between them. The customer
may even undertake some of these functions; for example, customers
granted certain discounts might agree to accept larger inventories and
the associated storage costs.
Some channels are direct – the manufacturer must perform all the
marketing functions needed to make and deliver products. The
manufacturer’s direct sales force and online marketing channels are
examples. Others are indirect; that is, some type of intermediary (such
as a distributor or dealer) sells or handles the product.
Direct Channels
Direct distribution, common in business marketing, is a channel strategy
that does not use intermediaries. The manufacturer’s own sales force
deals directly with the customer, and the manufacturer has full
responsibility for performing all the necessary channel tasks. Direct
distribution is often required in business marketing because of the
nature of the selling situation or the concentrated nature of industry
demand. The direct sales approach is feasible when:
 1. The customers are large and well defined.
 2. The customers insist on direct sales
 3. Sales involve extensive negotiations with upper management
 4. Selling has to be controlled to ensure that the total product
package is properly implemented and to guarantee a quick response to
market conditions.
Indirect Channels
Indirect distribution uses at least one type of intermediary, if not more.
Business marketing channels typically include fewer types of
intermediaries than do consumer goods channels. Manufacturer’s
representatives and industrial distributors account for most of the
transactions handled in this way. Indirect distribution is generally found
where:
 1. Marketers are fragmented and widely dispersed
 2. Low transaction amounts prevail
 3. Buyers typically purchase a number of items, often different
brands, in one transaction.
Integrated Multichannel Models
Leading business marketing firms use multiple sales channels to serve
customers in a particular market. The goal of multichannel model is to
coordinate the activities of many channels, such as field sales
representatives, channel partners, call centres, and the Web, in order to
enhance the total customer experience and profitability. Consider a
typical sales cycle that includes the following tasks: lead generation,
lead qualification, negotiation and sales closure, fulfilment, and
customer care and support.

Triggered by a sales call, a customer’s response to direct

Lead
mail, or by a request for information through a website,
Generation
an initial contact with a prospect is made.

Lead Potential customer is screened: the prospect’s need for

Qualificatio the product or service, buying interest, funding, and time
n frame for making the purchase.

Preparation of bid and proposal to meet customer’s

Bid and
requirements (a complex task for large technical
Proposal
projects).

Negotiation
The negotiation of prices, terms, and conditions, followed
and Sales
by agreement on a binding contract.
Closure

For standardized product or service, delivery of offering to

Fulfilment customer. Configuration, customization, and installation
for more complex sales

Customer Post-sale problem resolution, customer guidance, and

Care and ongoing contact to insure customer retention, loyalty, and
Support growth.

In a multichannel system, different channels can perform different tasks

within a single sales transaction with a customer. For example, business
marketing firms might use a call centre and direct mail to generate
leads, field sales representatives to close sales, business partners (for
example, industrial distributors) to provide fulfilment (that is, deliver or
install product), and a website to provide post-sale support.
Channel Functions:

Functions Purpose

  Extending relationship, trust,

Exchanges of products, services, commitment between all parties –
information, technical, financial, Reducing the uncertainty
social matters.   Better positioned to
concentrate on other tasks
Reducing complexity from   Producers focus on their core
numbers of transactions, activities
frequency of contact by using   End user customers can
intermediaries obtained improved individual
support and service
  Producers can reduce the risk
Increasing value and competitive of purchase uncertainty
advantage   Intermediaries through their
services create the competitive
advantage
 Sorting -Middlemen obtain the supplies of goods from various
suppliers and sort them out into similar groups on the basis of size,
quality etc.
 Accumulation -In order to ensure a continuous supply of goods,
middlemen maintain a large volume of stock.
 Allocation -It involves packing of the sorted goods into small
marketable lots like 1Kg, 500 grams, 250 grams etc.
 Assorting -Middlemen obtain a variety of goods from different
manufacturers and provide them to the customers in the combination
desired by them.
 Product Promotion -Sales promotional activities are mostly
performed by the producer but sometimes middlemen also participate in
these activities like special displays, discounts etc.
 Negotiation -Middlemen negotiate the price, quality, guarantee and
other related matters about a product with the producer as well as
customer.
 Risk Taking -Middlemen have to bear the risk of distribution like risk
from damage or spoilage of goods etc. when the goods are transported
from one place to another or when they are stored in the god-owns.
 Hold Stock -Distribution channel members hold stock of a company’s
products in their own facilities. A wholesaler, for example, can support a
network of local retailers by holding stock, delivering goods to stores or
offering retailers a local collection service. This helps reduce a
company’s own stockholding costs and ensures products are readily
available close to the point of sale. By taking responsibility for delivery to
local customers, channel members also reduce a company’s logistics
costs.
 Provide Customer Support -Distributors of industrial or business-to-
business products may provide technical support and maintenance
services to a company’s customers. By handling installation, training,
scheduled servicing and maintenance to agreed-upon quality standards
through distributors, companies can ensure customers obtain essential
support without stretching their own service resources.
 Increase Market Coverage -Setting up a network of wholesalers and
retailers enables companies to reach territories they could not cover with
their own sales resources. This provides companies with a low-cost
method of expanding geographically without increasing its internal sales
resources. Members of the distribution channel with their own customer
base offer companies the opportunity to gain new business without
incurring sales and prospecting costs.
 Support Smaller Customers -Companies can use their distribution
channels to deal with their smaller customers, leaving their own sales
teams free to focus on dealing with large accounts. Distributors and
retailers may deal with small customers in a particular geographic region
or sell to a specific sector of the market. Companies must decide which
customers their channel partners can service as the retailer or distributor
then controls the relationship with the customer.
 Improve Customer Convenience -By developing an online channel,
companies can improve convenience for customers. A website is open
for business around the clock, so customers can order at any time
without having to search for a local stockist. An online channel also
enables companies to sell their goods in territories where they do not
have direct or indirect channel coverage.
Channel Functions Aligned With Customer Needs

Channel
Customer Needs
Function


1. Product
Information  1. Customers seek more information for new and/or
 technically complex products and those that are
2. Product characterized by a rapidly changing market environment.
Customizati  2. Some products must be technically modified or
on need to be adapted to meet the customer’s unique
 requirements.
3. Product  3. Because of its importance to the customer’s
Quality operations, product integrity and reliability might be given
Assurance special emphasis by customers.
 4. Lot
Size
  4. For products that have a high unit value or those
that are used extensively, the purchase represents a

sizable dollar outlay and a significant financial decision for
5. Assortme
the customers.
nt
 5. A customer may require a broad range of products,

including complementary items, and assign special value
6. Availabili
to one-stop shopping.
ty
 6. Some customer environments require the channel

to manage demand uncertainty and support a high level
7. After-
of product availability.
Sales
 7. Customers require a range of services from
Service
installation and repair to maintenance and warranty.

 8. A customer organization may require special
8. Logistics
transportation and storage services to support its
operations and strategy
Business Market Channel Design:
Channel design is a dynamic process of developing new channels where
none existed and modifying existing channels. The business marketer
usually deals with modification of existing channels, although new
products and customer segments may require entirely new channels.
Regardless of whether the manager is dealing with a new channel or
modifying an existing one, channel design is an active rather than a
passive task. Effective distribution channel do not simply evolve; rather,
they are developed by management, which takes action on the basis of
a well-conceived plan that reflects overall marketing goals.
Channel design is best conceptualized as a series of stages that the
business marketing manager must complete to be sure that all
important channel dimensions have been evaluated. The result of the
process is to specify the structure that provides the highest probability
of achieving the firm’s objective.

Step
End-User Focus: Define Customer Segments
1

Step Identify and Prioritize Customer’s Channel Requirements by

2 Segments

Step
Assess the Firm’s Capabilities to Meet Customer’s Requirements
3
Step
Benchmark Channel Offerings of Key Competitors
4

Step
Create Channel Solutions to Customer’s Latent Needs
5

Step
Evaluate and Select Channel Options
6

Step 1: Define Customer Segments

The primary goal of the distribution channel is to satisfy end-user needs,
so the channel design process should begin there. Step 1 is about
defining target market segments and isolating the customer buying and
usage behaviour in each segment (what they buy, how they buy, and
how they put their purchases to use).
Some business marketers err by considering their channel partners as
“customers and rarely looking beyond them”. To inform the channel
design process, however, the marketing strategist should centre on the
importance of the product from the customer’s perspective.
Step 2: Identify Customers’ Channel Needs by Segment
Identifying and prioritizing the channel function requirements for
customers in each market segment is next. This information should be
elicited directly from a sample of present or potential customers from
each segment. For example, large customers for information-technology
products might rank product customization, product quality assurance,
and after sales service as there top three needs, whereas
small customers may prioritize product information, assortment, and
availability as their most important needs. The business marketing
manager should also probe customers on their issues that might provide
strategy insights. For instance, how sensitive are customers to a two-
hour versus six-hour service response time, or how much value do they
perceive in a three-year versus one-year warranty.
Step 3: Assess the Firm’s Channel Capabilities
Once customer requirements have been isolated and prioritized, an
assessment is made of the strengths and weaknesses of the firm’s
channel. The central focus is on identifying the gaps between what
customers in a segment desire and what the channel is now providing.
Customers base their choice of a channel not on a single element, but
on a complete bundle of benefits (that is, channel functions). To that
end, the business-to-business firm should identify particular channel
functions, like aftersales support or availability where action could be
taken to enhance the customer value proposition.
Step 4: Benchmark to Competitors
What go-to-market strategies are key competitors using? In designing a
channel, cost considerations prevent the business marketer from closing
all the gaps on channel capabilities that may appear. However, a clear
direction for strategy is revealed by understanding the channel offerings
of competitors. For example, an aggressive competitor that goes to
market with its own team of account managers and dedicated service
specialists might demonstrate special strength in serving large corporate
customers. However, countless opportunities exist for smaller rivals to
counter this strategy by developing special channel offerings tailored to
small and medium-sized customers (for example, local markets succeed
in retailing their market leadership position in small towns despite the
aggressive challenge from malls and shopping marts.)
Step 5: Create Channel Solutions for Customers’ Latent Needs
Sometimes, a review of competitor offerings can alert the marketer to
opportunities for new offerings that may have special appeal to
customers. “At other times, customers’ needs may be latent and
unarticulated, and it is the channel steward’s responsibility to tap into
and surface those requirements.” Based on such an assessment, a
provider for information-technology equipment created an entirely new
channel option for the small and medium-sized customer segment.
Rather than selling equipment, this new channel takes responsibility for
installing, upgrading, and maintaining the equipment at the customers’
locations for an ongoing service fee.
Step 6: Evaluate and Select Channel Options
Channel decisions must ultimately consider the cost-benefit trade-offs
and the estimated profitability that each of the viable channel options
presents. Some of the channel gaps that are uncovered in this
assessment can be closed by the independent actions and investments
of the business-to-business firm (for example, adding to the service
support staff or the sales force). For the most part, however, the
greatest progress will come from the channel partners (for example,
distributors or representatives) working together and discussing how
channel capabilities can be aligned to customer needs. “The idea is to
enhance the value delivered to customers through collaborative action
among channel partners. If the partners can agree on how to pull it off
and, indeed, accomplish their redefined tasks,” they will squarely
respond to customer needs and advance the performance of the
channel. One important implication of the framework is that the design
of the channel must change as customer and competitor behaviour
changes. Rather than a static structure, channel management is an
ongoing process involving continuous adjustments and evolution.
When to Make a Channel Design Decision
 Developing a new product or product line
 Aiming an existing product at a new market
 Making a major change in some other component of the marketing
mix
 Establishing a new firm
 Adapting to changing intermediary policies that may inhibit
attainment of distribution objectives
 Dealing with changes in availability of particular kinds of
intermediaries
 Opening up new geographic marketing areas
 Facing the occurrence of major environmental changes
 Meeting the challenge of conflict or other behavioural problems
 Reviewing and evaluating
Design Criteria
Criteria for selecting and evaluating intermediaries
Both the firm and its distributors should recognize their obligations
before entering into an agreement. To improve the chances of success,
the supplier should ask several questions of potential distributors.
 1. What is distributor’s credit and financial condition?
 2. What is the distributor’s selling capability?
 3. Will the distributor forgo competitive products? Does it welcomes
the supplier’s products?
 4. What is the distributor’s general reputation among suppliers and
customers?
 5. Does the distributor have adequate market coverage?
 6. How competent is the distributor’s management?
 7. How does the distributor rate on aggressiveness, enthusiasm, and
taking initiative?
 8. Is the distributor the appropriate size to do business with us?
We have to consider the following factors for the selection of channel of
distribution:
Product -Perishable goods need speedy movement and shorter route of
distribution. For durable and standardized goods, longer and diversified
channel may be necessary. Whereas, for custom made product, direct
distribution to consumer or industrial user may be desirable. Also, for
technical product requiring specialized selling and serving talent, we
have the shortest channel. Products of high unit value are sold directly
by travelling sales force and not through middlemen.
Market
 1. For consumer market, retailer is essential whereas in business
market we can eliminate retailing.
 2. For large market size, we have many channels, whereas, for small
market size direct selling may be profitable.
 3. For highly concentrated market, direct selling is preferred whereas
for widely scattered and diffused markets, we have many channels of
distribution.
 4. Size and average frequency of customer’s orders also influence
the channel decision.
Customer and dealer analysis will provide information on the number,
type, location, buying habits of consumers and dealers in this case can
also influence the choice of channels. For example, desire for credit,
demand for personal service, amount and time and efforts a customer is
willing to spend-are all important factors in channels choice.
Middlemen
 1. Middlemen who can provide wanted marketing services will be
given first preference.
 2. The middlemen who can offer maximum co-operation in
promotional services are also preferred.
 3. The channel generating the largest sales volume at lower unit cost
is given top priority.
Company
 1. The company’s size determines the size of the market, the size of
its larger accounts and its ability to set middlemen’s co-operation. A
large company may have shorter channel.
 2. The company’s product-mix influences the pattern of channels.
The broader the product-line, the shorter will be the channel. If the
product-mix has greater specialization, the company can favour selective
or exclusive dealership.
 3. A company with substantial financial resources may not rely on
middlemen and can afford to reduce the levels of distribution. A
financially weak company has to depend on middlemen.
 4. New companies rely heavily on middlemen due to lack of
experience.
 5. A company desiring to exercise greater control over channel will
prefer a shorter channel as it will facilitate better co-ordination,
communication and control.
 6. Heavy advertising and sale promotion can motivate middlemen in
the promotional campaign. In such cases, a longer chain of distribution
is profitable.
Thus, quantity and quality of marketing services provided by the
company can influence the channel choice directly.
Marketing Environment -During recession or depression, shorter and
cheaper channel is preferred. During prosperity, we have a wider choice
of channel alternatives. The distribution of perishable goods even in
distant markets becomes a reality due to cold storage facilities in
transport and warehousing. Hence, this leads to expanded role of
intermediaries in the distribution of perishable goods.
Competitors -Marketers closely watch the channels used by rivals. Many
a time, similar channels may be desirables to bring about distribution of
a company’s products. Sometimes, marketers deliberately avoid
channels used by competitors. For example, company may by-pass retail
store channel (used by rivals) and adopt door-to-door sales (where
there is no competition).
Customer Characteristics -This refers to geographical distribution,
frequency of purchase, average quantity of purchase and numbers of
prospective customers.
Channel Compensation -This involves cost-benefit analysis. Major
elements of distribution cost apart from channel compensation are
transportation, warehousing, storage insurance, material handling
distribution personnel’s compensation and interest on inventory carried
at different selling points. Distribution Cost Analysis is a fast growing
and perhaps the most rewarding area in marketing cost analysis and
control.
Channel member performance evaluation
 Criterio
Frequently Used Operational Performance Measures
n

Gross sales. Sales by

Sales Actual sales/sales quota.
product and market
Performa Market share Price level
segment. Sales growth over
nce realized
time

Inventor
Average inventory
y Inventory turnover. On-time
maintained. Inventory/sales
mainten delivery
ratio
ance

Total number of Salespeople assigned by

Selling
salespeople. Salespeople geography. Account managers
capabiliti
assigned to the supplier’s assigned to strategic
es
products. customers.

Informati Sales data by customer.

Information on inventories and
on Information on end-user
returns.
provision needs.

Channel Strategy
As B2B organizations rush new products to market, failing to carefully
plan a channel strategy is a common mistake. Often the biggest
challenge with a new offering is forging a cross-functional alliance across
the enterprise that includes channel interests earlier in the process.
Unfortunately, many companies base their channel launch strategies on
what works for the direct sales force — only to discover after the fact
that they need to retool their plans post-launch to reflect partner-
specific needs. Today, we’re seeing more channel teams seeking an
invitation to the exclusive “product marketing table” where product-
specific strategy and launch decisions are made.
It’s crucial to establish formal alignment during launch planning to
ensure a channel strategy is developed and agreed upon. Specific
channel conversations must take place at this critical stage. Channel
marketing must provide insight on what makes partners tick rather than
leaving product teams to base channel strategy on incorrect
assumptions. This channel/product marketing alignment should pinpoint
a new offering’s best routes to market (e.g. ISVs, resellers, system
integrators, retailers, consultants) and ensure that the strategy delivers
a well-formed readiness and go-to-market plan. Serious decisions has
identified three areas of alignment that must be addressed to develop
channel business propositions and ensure channel readiness:
  Channel product alignment. Clearly define what market segments
will be targeted by partners; then, within those segments, determine the
distribution strategy – who should be selling what and where.
Additionally, strong and verifiable evidence should be provided showing
how this new product stacks up against its competition and
demonstrating why it’s the best option for the partner to sell and the
end-user to buy.
  Channel sales alignment. Working together, product marketing and
channel marketing should determine what the net margin will be for
partners on the new offering and whether additional supplier products
can be attached or complementary services added by the partner to
increase the deal size. This teamwork should extend to identifying what
channel competencies will be required to effectively address the needs
of target markets – and determining whether current training courses
provide sufficient coverage or new training paths/competency levels are
necessary.
  Channel marketing alignment. Partners sell and support what they
know, so building awareness for new offerings is critical. Our data
indicates that successful channel organizations spend up to one-third of
their budgets on marketing to partners. Channel marketing should
educate partners through business value propositions, while at the same
time extending a joint (supplier/partner) value proposition through the
partner to customers. Driving demand for partners is key to creating a
successful launch for a new product. Most suppliers create programs for
new products for partners to execute themselves, then layer incentives
and funding to entice and support partners as part of a lead generation
strategy.
Aligning channel and product marketing in the development of a product
channel strategy bridges a significant gap that exists for some
organizations. Addressing partner-specific needs is vital to create a clear
and compelling business proposition for channel partners and answer
the inevitable (often first) question from partners: “What’s in it for me?”
Having a strong answer to this question will accelerate adoption and get
more partners on board faster with a supplier’s launch of a new product.
For B2B organizations whose sales model includes a portion of their
business going through partners, getting the channel a seat at the table
is the ideal scenario for developing a new product channel strategy.
Leading channel organizations have found that specifically addressing
channel interests early in the product launch process, and establishing
interlock between product marketing and channel marketing, can make
the difference between success and failure when delivering products
through the channel.
Marketing Channel Structure B2B:

Selecting Right Business-to-Business Channel

A business to business or B2B market is characterized by close technical
and commercial dialogue between buyers and sellers. The manufacturer
or the service provider often needs to manufacture or serve according to
the customers’ requirements. For example, an industrial plastic
components’ manufacturer has to work directly with customers during
the design and development process while manufacturing the ordered
components.
The importance of the product to the buyers or the type, frequency and
quantity of purchasing largely influence the B2B distribution channel
structures. For instance, companies might buy routine purchases like
office stationeries through specialist retailers or distributors, because
these are not important for the production lines. On the contrary, a key
component to run the production line might need to be supplied directly
to the buyer within a specific deadline. What type of distribution channel
structure is suitable for your product or service depends on the sector of
the business, on the type of product or service and cost effectiveness.
We will shed light upon four basic structures of distribution channels
that are widely practiced in B2B markets:
Manufacturer – Business Customer
Direct channel from manufacturer to the user is suitable for products
with high technical content and high unit cost. Other rationales of opting
for this channel are:
 Direct channel might become necessary if there is no wholesale
service in the market where the manufacturer is operating and if the
manufacturer is catering to a small group of local customers. The
manufacturer has its own sales and distribution department, which can
negotiate sales, provide services, meet customers’ needs and capable to
operate like the wholesalers.
 The sales representative can both sell and install the product, e.g.
computer software. Sales branches can sell the products directly to the
small retailers and wholesalers. In a direct distribution channel, sales
branches or sales offices should be set up in the areas where demand is
high, especially in busy areas for better visibility and customers’
conveniences. It is also convenient for the sales force in providing
products and support services; as a result, they can meet customers’
needs faster. Sales offices do not keep stock so they act like agents and
pass on customers’ orders to the head office.
 Direct channel gives the manufacturer more control over its
distribution channel, which in turn, increases the efficiency and
effectiveness of the links between the manufacturers and customers.
They are likely to develop strong and longer business relationships.
Manufacturer – Business Distributor – Business Customer
Manufacturers or service providers who choose this less direct channel
appoint agents on commission basis. They take the help of agents
because of the agent’s relevant market knowledge, well established
contacts in the market and their superior buying/selling skills. Moreover,
the manufacturer or the service provider can train the agents.
Manufacturer – Manufacturer’s Representative -Business Customer
This less direct channel works well when the number of customers either
goes up or down. This channel is also helpful when the intermediary
functions increase. Building material industries usually follow this
distribution channel structure.
Manufacturer – Manufacturer’s Representative -Business Distributor -
Business Customer
This channel structure is particularly helpful for export markets. Agents
start by coordinating sales; distributors followed by filling the needs of
inventory and restocking facilities close to the point of customer
demands. A manufacturer and a retailer might also provide online
service along with their bricks and mortar operation. In this way, they
get the benefit of both direct and indirect selling. As a matter of fact,
multiple distribution channel users can reach more market segments.
However, it increases intra-channel competition and the trade members
might become less supportive because of that. A flexible and far-sighted
attitude in choosing the proper distribution channel is a necessity for
your business growth. Say someone starts being a distributor or an
agent of an international paint for a local market. The starting point
might also be as a paints retailer. After accumulating good learning
experiences about the trade, the business starts manufacturing its own
brand of paint for that local market. Over the passage of time, the
company evolves into an international manufacturer, retailer and
distributor. Today’s many corporate conglomerates once started as
intermediaries, in this way. SMEs in Oman can also reach other countries
through intermediaries in those countries or via international
intermediaries. Exactly the same way foreign brands have been reaching
Oman.
Variables Affecting Channel Structure
 1. Market Variable
 2. Product Variables
 3. Company Variables
 4. Intermediary Variables
 5. Environmental Variables
 6. Behavioural Variables
Market Variables
 Market Geography – location, geographical size and distance from
producer
 Market Size – number of customers in a market
 Market Density – number of buying units
 Market Behaviour – who buys and how, when and where customers
buy
Product Variables
 Bulk and Weight
 Perishability
 Unit Value
 Degree of Standardization
 Technical versus Non-technical
 Newness
Company Variables
 Size – the range of options is relative to a firm’s size
 Financial Capacity – the greater the capital, lower is the dependence
on intermediaries
 Managerial Expertise – intermediaries are necessary when
managerial experience is lacking
 Objectives & Strategies – marketing and objectives may limit use of
intermediaries
Intermediary Variables
 Availability – availability of intermediaries influences channel
structure
 Cost – cost is always a consideration in channel structure
 Services – services that intermediaries offer are closely related to the
selection of channel members
Environmental Variables
 Economic
 Socio Cultural
 Competitive
 Technological
 Legal
Behavioural Variables
 Develop congruent roles for channel members
 Be aware of available power bases
 Attend to the influence of behavioural problems that can distort
communication
Channel Intensity
It refers to the number of intermediaries through which a manufacturer
distributes its goods. Marketing channel intensity takes into account both
the variance and number of channels an organization may use to deliver
goods and services to consumers. As organizations develop their
marketing channel strategies, an important question arises regarding
distribution intensity. There is some freedom in most industries for a
firm to determine which channels they will use, and how much volume
each channel will receive. Weighing the pros and cons of various
channels, both in terms of the number of channels and the volume
within each channel, can have a significant strategic impact on a firm’s
position in a market.
There are three ways to frame the distribution intensity decision:
Intensive
An intensive distribution strategy seeks to distribute a product through
all available channels in an area. Usually, an intensive distribution
strategy suits items with wide appeal across broad groups of consumers,
such as convenience goods. This is the highest in both number of
channels and volume within each channel. Firms that choose an
intensive distribution strategy try to sell their products in as many
outlets as possible. Intensive distribution strategies are often used for
convenience offerings—products customers purchase on the spot
without much shopping around. Soft drinks and newspapers are an
example. You see them sold in all kinds of different places.
Selective
Selective distribution is distribution of a product through only a limited
number of channels. This arrangement helps to control price cutting.
Selective distribution focuses on narrowing down the number of
channels within the distribution strategy, but not the overall volume of
goods sold through those channels. This strategy focuses on fewer
channels yet retains a desire for higher volumes to capture scale
economies in production. Common channels in these circumstances are
channels where the firm can maintain strategic control of how the
products are sold, at what price, and in which regions. Selective
distribution strategies are suitable for shopping products such as
clothing, furniture, household appliances, computers, and electronic
equipment for which consumers are willing to spend time visiting
different retail outlets to compare product alternatives. Producers can
choose only those wholesalers and retailers that have a good credit
rating, provide good market coverage, serve customers well, and
cooperate effectively. Wholesalers and retailers like selective distribution
because it results in higher sales and profits than are possible with
intensive distribution where sellers have to compete on price.
Exclusive
Exclusive distribution is distribution of a product through one wholesaler
or retailer in a specific geographical area. Though marketers may
sacrifice some market coverage with exclusive distribution, they often
develop and maintain an image of quality and prestige for the product.
In addition, exclusive distribution limits marketing costs since the firm
deals with a smaller number of accounts. In exclusive distribution,
producers and retailers cooperate closely in decisions concerning
advertising and promotion, inventory carried by the retailers, and prices.
Exclusive distribution is typically used with products that are high priced,
that have considerable service requirements, and when there are a
limited number of buyers in any single geographic area. Exclusive
distribution allows wholesalers and retailers to recoup the costs
associated with long selling processes for each customer and, in some
cases, extensive after-sale service. Specialty goods are usually good
candidates for this kind of distribution intensity.
Technology and Channels
Technology has disrupted some of the logic behind these channel
decisions, as digital storefronts have grown to be highly influential,
easily accessible to global markets, and substantially cheaper than retail
space. As the rise of digital purchasing continues, and the cost of
shipping decreases, globalization will drive organizations more and more
towards channel strategies that optimize online exposure.
Channel Conflict and Resolution
 A channel conflict may be defined as an “A situation in which one
channel member perceives another channel member(s) to be engaged in
behaviour that prevents it from achieving its goals”.
 Conflict is opposition, disagreement or discards among the
organizations.
 It is needed to have positive effect as loopholes in the existing
system can be plugged timely and performance can be maximized.
 It can keep other channel members on their toes knowing that a
decline in performance might lead to a change in the channel
arrangements.
 Channel conflict arises when the behaviour of a channel member is
in opposition to its channel counterpart. It is opponent centred and
direct in which the goal or object sought is controlled by the
counterpart.
Conflict can be classified as:
 Vertical Conflict
 Horizontal Conflict
 Multi-channel Conflict
Vertical Conflict
 Vertical conflict occurs due to the differences in goals and objectives,
misunderstanding, and mainly due to the poor communication.
 Lack of role clarity and over dependence on the manufacturers. For
example, today the large distributors dominate the market and dictate
the terms. Hence there are often conflicts between these giant
distributors and manufacturers.
 Distributors expect manufacturers to maintain the product quality
and production schedules and in turn manufacturers expect distributors
to provide coordination functional services. If they fail to conform each
other’s expectations, channel conflict results.
Reasons for Vertical Conflict
Dual Distribution – manufacturers may bypass intermediaries and sell
directly to consumers and thus they compete with the intermediaries.
Over Saturation – manufacturers permit too many intermediaries in a
designated area that can restrict, reduce sales opportunities for
individual distributor and ultimately shrink their profit.
Partial Treatment – manufacturers often offer different services and
margins to different distributors even at same level or favour some
members
New Channels – manufacturers develop and use innovative that create
threat to establish channel participants
 No or inadequate sales support and training to intermediaries from
the manufacturers
 Irregular communication, non-cooperation and rude behaviour with
the channel member
Horizontal Conflict
These are the conflicts between the channel members at the same level,
i.e. two or more distributors. These conflicts can offer some positive
benefits to the consumers. Competition or price war between two
distributors can be in favour of consumers.
Reason Behind Horizontal Conflict
 Aggressive advertising and pricing by one distributor can affect
business of other distributors.
 Extra service offered by one distributor can attract customers of
others.
 Crossing the assigned territory and selling in other distributors area
 Unethical practices of one distributor can affect other and spoil the
brand image.
Multi-Channel Conflict
 It occurs when the manufacturer uses dual distribution strategy i.e.
the manufacturer uses two or more channel arrangements.
 Manufacturers can sell directly through their representatives. This
can affect the business of other distributor selling the manufacturer’s
brand.
 Stages of Conflict
Latent Conflict
 Some amount of discord exists but does not affect the service
objective.
 Disagreement could be on roles, expectations, perception,
communication
Perceived Conflict
 Discords become noticeable – channel partners are aware of the
opposition
 Channel members take the situation in their stride and go about
their normal business
 No cause for worry but the opposition has to be recognized
Felt Conflict
 Reaching the stage of worry, concern and alarm. Also known as
“Affective Conflict”
 Parties try to outsmart each other
 Cause could be economical or personal
 Needs to be managed effectively and not allowed to escalate
Manifest Conflict
 Reflects open antagonistic behaviour of channel partners.
Confrontation results.
 Initiative taken are openly opposed affecting the performance of the
channel system.
 May require outside intervention to resolve.
Resolving Conflicts

Conflict Resolution Styles Avoidance

 Used by weak channel members
 Problem is postponed or discussion avoided
 Relationships are not of much importance
 As there is no serious effort on getting anything done, conflict is
avoided
Aggression
 Also known as competitive or selfish style
 It means being concerned about one’s own goals without any
thought of others
 The dominating channel partner (may be the Principal) dictates
terms and condition to the others. Long term could be detrimental to the
system.
Accommodation
 A situation of complete surrender
 One party helps the other achieve its goals without being worried
about its own goals
 Emphasis is on full cooperation and flexibility in approach which may
generate matching feeling in the receiver.
 If not handled properly, can result in exploitation
Compromise
 Obviously both sides have to give up something to meet mid-way.
 Can only work with small and less serious conflicts.
 Used often in the earlier two stages
Collaboration
 Also known as a problem solving approach
 Tries to maximize the benefit to both parties while solving the
dispute
 Most ideal style of conflict resolution – a win-win approach
 Requires a lot of time and effort to succeed
 Sensitive information may have to be shared
Controlling Conflict and Motivating Channel Members
Cooperation between members in the channel can be achieved in two
main ways. One way is to exercise authority through the use of the
power that one organization may have over others. Another way is to
establish trust and a spirit of collaboration between organizations.
Through trust it is possible to develop a sense of commitment so that all
organizations attempt to support one another.
Organizations seek to influence inter organisational relationships through
a variety of communication strategies.
Influence Strategies

Power
Strategy Message
source

 1. Promise
strategy 1.Reward 2.Coercion 3
1.If you do what we wish we will reward you. 2.If you do
 2. strategy .Legitimacy 4.Referent
not do what we wish we will punish you. 3.You agreed,
3.Legalistic strategy ,
so you should do what we wish. 4.Please do what we
4.Request strategy reward, coercion 5.Exp
wish. 5.We will not mention what we wish. 6.If you do
Information ertise,
what we wish you will be rewarded (e.g. more
5.Exchange strategy reward 6.Expertise,
profitable).
6.Recommendation reward
strategy
These days, the use of relative power positions based on access to and
control of resources is no longer regarded as the preferred and
pervasive marketing management tool. With the focus turning to the
development and maintenance of buyer–seller relationships, trust and
commitment have emerged as significant contemporary managerial
concepts.
Motivating Channel Members
Distributors and representatives are independent and profit oriented.
They are oriented toward their customers and toward whatever means
are necessary to satisfy customer needs for industrial products and
services. Their perceptions and outlook may differ substantially from
those of the manufacturers they represent. As a consequence,
marketing strategies can fail when managers do not tailor their
programs to the capabilities and orientation of their intermediaries. To
manage the business marketing channel effectively, the marketer must
understand the intermediaries’ perspective and device ways to motivate
to perform in a way that enhances the manufacturer’s long-term
success. The manufacturer must continually seek support from
intermediaries, and the quality of that support depends on the
motivational techniques used.
Partnership
Channel member motivation begins with the understanding that the
channel relationship is a partnership. Manufacturers and intermediaries
are in business together; whatever expertise and assistance the
manufacturer can provide to the intermediaries improves total channel
effectiveness. One study of channel relationship suggested that
manufacturers may be able to increase the level of resources directed to
their products by developing a trusting relationship with their
representatives; by improving communication through recognition
programs, product training, and consultation with the representatives;
and by informing the representatives of plans, explicitly detailing
objectives, and providing positive feedback.
Another study of distributor-manufacturer working partnerships
recommended similar approaches. It also suggested that manufacturers
and their distributors engaged in joint annual planning that focuses on
specifying the cooperative efforts each firm requires of its partner to
reach its objectives and that periodically reviews progress toward
objectives. The net result is trust and satisfaction with the partnership as
the relationship leads to meeting performance goals.
Dealer Advisory Councils
One way to enhance the performance of all channel members is to
facilitate the sharing of information among them. Distributors or
representatives may be brought together periodically with the
manufacturer’s management to review distribution policies, provide
advice on marketing strategy, and supply industry intelligence.
Intermediaries can voice their opinions on policy matters and are
brought directly into the decision-making process.
Margins and Commission
In the final analysis, the primary motivating device is compensation. The
surest way to lose intermediary support is compensation policies that do
not meet industry and competitive standards. Representatives or
distributors who feel cheated on commissions or margins shift their
attention to products generating a higher profit. The manufacturer must
pay the prevailing compensation rates in the industry and must adjust
the rates as conditions change.
Intermediaries’ compensation should reflect the marketing task they
perform. If the manufacturer seeks special attention for a new industrial
product, most representatives require higher commissions. Many
industrial distributors charge separate fees for the value-added services
they provide. For this approach to work effectively, it is critical that the
client understands the value it is receiving for the extra charges.
Building Trust
The very nature of a distribution channel – with each member
dependent on another for success – can invite conflict. Conflict can be
controlled in various ways, including channel-wide committees, joint goal
setting, and cooperative programs involving a number of marketing
strategy elements. To compete, business marketers need to be effective
at cooperating within a network of organization – the channel.
Successful cooperation results from relationships in which the partners
have a strong sense of communication and trust. Robert M. Morgan and
Shelby D. Hunt suggest that relationship commitment and trust develop
when:
 Firms offer benefits and resources that are superior to what other
partner could offer
 Firms align themselves with other firms that have similar corporate
values
 Firms share valuable information on expectations, markets, and
performance
 Firms avoid taking advantage of their partner.
By following these prescriptions, business marketers and their channel
network can enjoy sustainable competitive advantages over their rivals
and their networks.
Channel Integration
Integrated Marketing is an approach to creating a unified and seamless
experience for consumers to interact with the brand/enterprise; it
attempts to meld all aspects of marketing communication such as
advertising, sales promotion, public relations, direct marketing, and
social media, through their respective mix of tactics, methods, channels,
media, and activities, so that all work together as a unified force. It is a
process designed to ensure that all messaging and communications
strategies are consistent across all channels and are centred on the
customer.
AAA -A planning process designed to assure that all brand contacts
received by a customer or prospect for a product, service, or
organization are relevant to that person and consistent over time.
AAAA -IMC is an approach to achieving the objectives of a marketing
campaign, through a well-coordinated use of different promotional
methods that are intended to reinforce each other. As defined by the
American Association of Advertising Agencies, integrated marketing
communications … recognizes the value of a comprehensive plan that
evaluates the strategic roles of a variety of communication disciplines
advertising, public relations, personal selling, and sales promotion and
combines them to provide clarity, consistency, and maximum
communication impact.
Importance of Channel Integration
 Bridge the gap
 Streamline the physical and information
 Reduces the uncertainty, cost and risk
 Degree of integration
 Better management
 Better coordination
 Barrier of other competitors
Types of Channel Integration:

 1. Horizontal Marketing System (HMS)

 2. Vertical Marketing System (VMS)
 3. Multi-Channel Marketing System (MMS)
Horizontal Marketing System (HMS)
A horizontal marketing system is a distribution channel arrangement
whereby two or more organizations at the same level join together for
marketing purposes to capitalize on a new opportunity. For example: a
bank and a supermarket agree to have the bank’s ATMs located at the
supermarket’s locations; two manufacturers combining to achieve
economies of scale otherwise not possible with each acting alone to
meet the needs and demands of a very large retailer; or two wholesalers
joining together to serve a particular region at a certain time of year.
According to businessdictionary.com, a horizontal marketing system is a
merger of firms on the same level in order to pursue marketing
opportunities. The firms combine their resources, such as production
capabilities and distribution, in order to maximize their earnings
potential.
Advantages of Horizontal Marketing System
 Horizontal integration of related businesses allows them to achieve
economies of scale by selling more of the same product through
geographic expansion.
 HMS includes the economies of the scope through synergies
achieved by sharing of resources common to different products and
reduction in the cost of international trade by operating factories in
foreign countries.
Disadvantages of Horizontal Marketing System
 The integration of business may result in problems related to size
such as lack of coordination.
 Conflicts between members
 Decrease in flexibility
Horizontal integration occurs when a company decides to merge, acquire
or take over another company in the same industry and at the same
stage of production. When a company can achieve the advantages of a
horizontal integration, the company can diversify its products or
services, sell those products or services to a larger market, reduce the
costs to produce its newly diversified products or services, and reduce
the amount of external competition.
When horizontal integration hampers a company, the worst
disadvantage the company can face is a reduction in overall value to the
firm because the expected synergies never materialize, despite the costs
of the horizontal integration. Other disadvantages can include legal
repercussions if the horizontal merger results in a company that may be
considered a monopoly and a reduction in flexibility due to the fact that
it is now a larger organization.
Vertical Marketing System (VMS):
A vertical marketing system (VMS) is one in which the main members of
a distribution channel work together as a unified group in order to meet
consumer needs. In conventional marketing systems, producers and
business distributors are separate businesses that are all trying to
maximize their profits. When the effort of one channel member to
maximize profits comes at the expense of other members, conflicts can
arise that reduce profits for the entire channel. To address this problem,
more and more companies are forming vertical marketing systems.
Vertical marketing systems can take several forms. In a corporate VMS,
one member of the distribution channel owns the other members.
Although they are owned jointly, each company in the chain continues
to perform a separate task. In an administered VMS, one member of the
channel is large and powerful enough to coordinate the activities of the
other members without an ownership stake. Finally, a contractual VMS
consists of independent firms joined together by contract for their
mutual benefit. One type of contractual VMS is a retailer cooperative, in
which a group of retailers buy from a jointly owned wholesaler. Another
type of contractual VMS is a franchise organization, in which a producer
licenses a wholesaler to distribute its products.
Advantages of Vertical Marketing System
 It allows you to invest in assets that are highly specialized.
 It gives you more control over your business.
 It allows for positive differentiation.
 It requires lower costs of transaction.
 It offers more cost control.
 It ensures a high level of certainty when it comes to quality.
 It provides more competitive advantages.
Disadvantages of Vertical Marketing System
 It can have capacity-balancing problems.
 It can bring about more difficulties.
 It can result in decreased flexibility.
 It can create some barriers to market entry.
 It can cause confusion within the business.
 It requires a huge amount of money.
 It makes things more difficult.
Multi-Channel Marketing System (MMS)
Multichannel marketing refers to the practice of engaging prospects,
leads and customers across a combination of indirect and direct
communication channels. A channel could be a device, medium, or
network. Multichannel marketing is important for the simple reason that
you must be where your customers are.
Module-4
Logistic Management:
LOGISTIC MANAGEMENT
supply chain management order fulfilmentLogistics management is the
governance of functions that helps organizations plan, manage and
implement processes to move and store goods. Logistics management
activities typically include inbound and outbound transportation
management, fleet management, warehousing, materials handling, ,
logistics network design, inventory control, supply/demand planning and
management of third-party logistics services providers.
distribution channel. In a manufacturing enterprise, the business process
starts with the flow of material from the suppliers to the manufacturing
plant and then to the customer through the Traditionally in the
functional organisation, the business process consists of discrete
activities such as procurement, manufacturing, and distribution under
the control of the respective departments. The departments may excel
in their respective functions, but as an organisation, their performance
may be dismal. This might happen because of three reasons:
 A lack of coordination in their activities
 Different goals to cherish
 No single agency could control them to cherish a common goal
The concept of logistics is based on the system approach. The flow of
material from a supplier to a manufacturing plant and finally to the end
customer is viewed as a single chain, ensuring efficiency and
effectiveness in sequential activities to achieve the objective of customer
satisfaction at a reduced cost.
Martin ChristopherLogistics recognises that all the activities of material
movement across the business process are interdependent and need
close coordination. These activities are to be managed as a system and
not as functional silos. The functional areas of logistics, termed
“Logistics Mix” by , consist of:

Importance of Logistics: Reduced Delivery Time

Reduced delivery time refers to a shortening of the period between a
customer ordering a product and that customer receiving the product.
When companies need to ship inventory (as e-commerce businesses
do), delivery time is a vital concern of both logistics and marketing. By
shortening delivery time, businesses can impress customers and create
loyalty while adding more value to their processes than competitors
have.
Pinpointing Customer Issues
With a highly efficient logistics strategy, companies can easily track
product orders and product shipment data. This allows a business to
spot exactly where a product has gone, what product was originally
ordered and shipped and what needs to happen to fix problems with the
order. With such expert tracking and communication procedures, a
business can easily placate an irate customer and turn a bad situation
into a good marketing opportunity.
Quality Control
Logistics is also important to manufacturers, because it allows for a high
level of control over production processes and immediate adaptations. A
company does not want to produce flawed products that have inherent
problems --few things are as damaging to a business's reputation. With
efficient logistics, a manufacturer can spot problems immediately and
quickly narrow down the issue to find the source and correct it.
Extra Services
Many businesses offer extra services as part of their marketing strategy;
these allow them to impress customers through advanced customer
service techniques. With modern logistics, companies can
offer advanced tracking options for product shipments that customers
can track at any time. Good logistics also allows for greater product
customization and tools for customers to use themselves.
Logistics has gained importance due to the following trends
 Raise in transportation cost.
 Production efficiency is reaching a peak
 Fundamental change in inventory philosophy
 Product line proliferated
 Computer technology
 Increased use or computers
 Increased public concern of products Growth of several new, large
retail chains or mass merchandise with large demands & very
sophisticated logistics services, by pass traditional channel &
distribution.
 Reduction in economic regulation
 Growing power of retailers
 Globalization
As a result of these developments, the decision maker has a number of
choices to work out the most ideal marketing logistics system.
Essentially, this system implies that people at all levels of management
think and act in terms of integrated capabilities and adoption of a total
approach to achieve pre-determined logistics objectives.
Furthermore Logistics has gained importance in the international
marketing with the following reasons:
 Transform in the customers attitude towards the total cost approach
rather than direct cost approach
 Technological advancement in the fields of information processing
and communication.
 Technological development in transportation and material handling.
 Companies are centralizing production to gain economies of scale.
 Most of the MNC organizations are restructuring their production
facilities on a global basis.
 In many industries, the value added by manufacturing is declining as
the cost of materials and distribution climbs.
 High volume data processing and transmission is revolutionizing
logistics control systems.
 With the advancement of new technologies, managers can now
update sales and inventory planning faster and more frequently, and
factories can respond with more flexibility to volatile market conditions.
 Product life cycles are contracting. Companies that have gone all out
to slash costs by turning to large scale batch production regularly find
themselves saddled with obsolete stocks and are unable to keep pace
with competitors‟ new-product introductions.
 Product lines are proliferating. More and more product line variety is
needed to satisfy the growing range of customer tastes and
requirements, and stock levels in both field and factory inevitably rise.
 The balance of power in distribution chain is shifting from the
manufacturers to the trader.
Importance of Logistics in Business
Inflows
You need supplies, raw materials and information flowing into your
business so you can use them to create or deliver your products or
services. If a delivery comes late or a computer goes down when you
are expecting vital information, your logistics are not working. You either
need to become a logistics expert or hire one to make sure you get what
you need on time. If you provide an office cleaning service, for example,
and your cleaning supplies don’t arrive on time, you can’t clean offices
that depend on you.
Internal Flow
Supplies, materials and information flow through your company once
they arrive. They must arrive on time at various workstations, desks and
offices so your employees can use them. For example, the financial
background check you perform on a company cannot be delayed if the
officer approving credit for the company has to meet a deadline.
Storage and Retrieval
Some items come into your company and must be stored until needed.
Physical products and supplies must be stored, and information must be
filed electronically or physically. When you need these items, you must
have a system for identifying and retrieving them. If a customer places a
special order for a product and the warehouse supervisor stores it until
you receive payment, you must be able to count on the supervisor to
find the item when you are ready for it.
Outflow
You make a living delivering your product or service to your customers.
That’s what they pay for. Whether you ship, deliver, transmit or
physically go to a customer’s home or business to perform a service, you
cannot afford any glitches in this function. If a vital machine part for the
repair of a customer’s air conditioning arrives, you must see that it gets
delivered to the customer’s site and that an installer is there at the same
time to install it.
Costs Are Significant
The economic forces of change are further acting to alter logistics cost
relationships and force careful re-planning of logistics systems around
the world. Trade barriers are falling as free trade is encouraged in
countries that previously had strictly managed economies. Tariffs are
being eliminated to allow the free flow of goods across political
boundaries, giving firms the opportunity to reposition their logistics
networks for lower costs and higher customer service. Finally, the world
economies seem to be on a wave of economic deregulation that will
heighten competition. Since transportation is frequently a target for
deregulation, logistics system costs will be affected.
Globalization of Industries
Globalization/internationalization of industries everywhere will depend
heavily on logistics performance and costs, as companies take more of a
world view of their operations. As this happens, logistics takes on
increased importance within the firm since logistics costs, especially the
transportation component, become a significant part of the total cost
structure. For example, if a firm seeks foreign suppliers for the materials
entering its product or foreign locations to build its products, the
motivation is to increase profit. Material and labour costs may be
reduced, but logistics costs are likely to increase due to increased
transportation and inventory costs. The trade-off, may lead to higher
profit by reducing materials, labour, and overhead costs at the expense
of logistics costs and tariffs. Outsourcing adds value, but it requires
more careful management of logistics costs and product flow times in
the supply channel. Functions of Logistics:

Order processing
It is an important task in functions of logistics operations. The purchase
order placed by a buyer to a supplier is an important legal document of
the transactions between the two parties. This document incorporates
the description or technical details of the product to supply, price,
delivery period, payment terms, taxes, and other commercial terms as
agree.
The processing of this document is important as it has a direct
relationship with the order or the performance cycle time, which
indicates the time when the order is received and when the materials
are received by the customer. The order processing activity consists of
the following steps:
 Order checking for any deviations in agrees upon or negotiated
terms
 Prices, payment and delivery terms.
 Checking the availability of materials in stock.
 Production and material scheduling for shortages.
 Acknowledging the order indicating deviations if any.
Inventory control
Inventory management is to keep enough inventories to meet customer
requirements, and simultaneously its carrying cost should be lowest. It is
basically an exercise of striking a balance between the customer service
for not losing market opportunity and the cost to meet the same.
The inventory is the greatest culprit in the overall supply chain of a firm
because of its huge carrying cost, which indirectly eats away the profits.
It consists of the cost of financing the inventory, insurance, storage,
losses, damages, and pilferage. The average cost of carrying inventory
varies from 10 to 25 percent of the total inventory per year depending
on the products.
Warehousing
Warehousing is the storing of finished goods until they are sold. It plays
a vital role in logistics operations of a firm. The effectiveness of an
organization’s marketing depends on the appropriate decision on
warehousing. In today’s context, warehousing is treated as switching
facility rather than a storage of improper warehousing management.
Warehousing is the key decision area in logistics. The major decisions in
warehousing are:
 Location of warehousing facilities
 Number of warehouses
 Size of the warehouse
 Warehouse layout
 Design of the building
 Ownership of the warehouse
Transportation
For movement of goods from the supplier to the buyer, transportation is
the most fundamental and important component of logistics. When an
order is placed, the transaction is not completed till the goods are
physically moved to the customer’s place. The physical movement of
goods is through various transportation modes. In logistics costs, its
share varies from 65 to 70 percent in the case of mass-consumed, very
low unit-priced products.
Firms choose the mode of transportation depending on the
infrastructure of transportation in the country or region. Cost is the most
important consideration in the selection of a particular mode of
transport. However, sometimes urgency of the good at the customer
end overrides the cost consideration, and goods are sent through the
fastest mode, which is an expensive alternative.
Material handling and storage system
The speed of the inventory movement across the supply chain depends
on the material handling methods. An improper method of material
handling will add to the product damages and delays in deliveries and
incidental overheads. Mechanization and automation in material handling
enhance the logistics system productivity. Other considerations for
selection of a material handling system are the volumes to be handled,
the speed required for material movement and the level of service to be
offered to the customer.
The storage system is important for maximum space utilization (floor
and cubic) in the given size of a warehouse. The material handling
system should support the storage system for speedy movement
(storage and retrieval) of goods in and out of the warehouse.
Logistical Packaging
Logistical or industrial packaging is a critical element in the physical
distribution of a product, which influences the efficiency of the logistical
system. It differs from product packaging, which is based on marketing
objectives. However, logistical packaging plays an important role in
damage protection, case in material handling and storage space
economy. The utilisation of load has a major bearing on logistical
packaging with regard to the packaging cost.
Information
Logistics is basically an information-based activity of inventory
movement across a supply chain. Hence, an information system plays a
vital role in delivering a superior service to the customers. Use of IT
tools for information identification, access, storage, analysis, retrieval
and decision support which is vital among the functions of logistics is
helping business firms to enhance their competitiveness.
Logistics strategy:
Firms spend a great deal of time finding ways to differentiate their
product offerings from those of their competitors. When management
recognizes that logistics impacts on a significant portion of a firm's costs
and that the result of decisions made about the supply chain yields
different levels of customer service, it is in a position to use this
information effectively to penetrate new markets, increase market share,
and increase profits.

The three strategies are in trade-off with each other. That is, a good
location strategy is dependent on the manner in which inventories are
managed and on the resulting inventory levels, and on the
transportation service selected. Inventory levels are dependent on the
number and location of facilities as well as the transportation service
selected. And so the interdependence goes. Hence, a triangle of logistics
strategy. Logistics network design is based on three objectives–cost
minimization, capital minimization, and logistics customer service
maximization. Not all of these objectives can be achieved simultaneously
since they may be in conflict. For example, minimizing costs and
simultaneously maximizing service are incompatible.
Objectives of marketing logistics
The General objectives of the logistics can be summarized as:
 1. Cost reduction
 2. Capital reduction
 3. Service improvement
The specific objective of an ideal logistics system is to ensure the flow of
supply to the buyer, the:
 1. Right product
 2. Right quantities and assortments
 3. Right places
 4. Right time
 5. Right cost / price and,
 6. Right condition
Market Logistic Decisions:
Market logistic includes planning the infrastructure to meet demand,
then implementing and controlling the physical flows of materials and
final goods from points of origin to points of use, to meet customer
requirements at a profit.
Interrelated aspects associated with market logistic:
 Physical Distribution
 Supply Chain Management (SCM)
 Value Network
 Demand Chain Planning
 Market Logistics
 Integrated Logistics Systems (ILS)
Market logistics planning has four steps:
 Deciding on the company’s value proposition to its customers.
 Deciding on the best channel design and network strategy for
reaching the customers.
 Developing operational excellence in sales forecasting, warehouse
management, transportation management, and material management.
 Implementing the solution with the best information system,
equipment, policies and procedures.
Market logistics objectives:

MARKETING AND LOGISTIC INTERFACE

Marketing Logistic
Marketing Activities Logistic Activities
Interface

  Forecasting
  Marketing Research   Customer Service

  Product Mix   Transport
 Transportation
  Pricing   Inventory
  Storage
  Promotion Processing
  Packing
  Sales Force   Material Handling
  Order
Management   Information
Fulfilment
 It means getting the right goods to the right place at the right time
for the least cost.
 Market-logistic cost interact and are often negatively related.
Many companies state their market logistics objectives as “getting the
right goods to the right places at the right time for the least cost.” This
means a market logistics system has to simultaneously provide
maximum customer service at the minimum distribution cost.
Maximum customer service implies large inventories, premium
transportation and multiple warehouses, all of these raise market-
logistics costs. A company cannot achieve market-logistics efficiency by
asking its logistics manager to minimize the logistics costs.
Some of the major market logistics objectives of a company are as
follows:
Logistics Decisions: Market logistics activities involve strong trade-offs,
decisions must be made on a total system basis. Customers are
interested in on-time delivery, suppliers desire to meet emergency needs
and also have willingness to take back defective goods and re-supply
them quickly at their costs. A company must then research the relative
importance of these service outputs.
Market Logistics and Cost:
Let us consider, a machine manufacturer has established the following
service standards:
 1. To deliver at least 95 percent of the dealer’s orders within 7 days
of order receipt.
 2. To fill the dealer’s orders with 99 percent accuracy.
 3. To answer dealer inquiries on orders with 99 percent accuracy.
 4. To answer that damage to merchandise in transit does not exceed
one percent.
Given above market—logistics objectives, the company must design a
system that will minimise the cost of achieving these objectives.
Each possible market logistics system may give rise to the following
empirical equation:

Where, M = Total market-logistics cost of proposed system. T = Total freight cost of proposed system. FW = Total fixed

warehouse cost of proposed system.

VW = Total variable warehouse costs (including inventory) or proposed system. S = Total cost of lost sales due to average

delivery delay under proposed system.

Choosing a market logistics system calls for examining the total cost (M)
associated with different proposed system and selecting the system that
minimises it. If it is difficult to measure S, the company should aim to
minimise T + FW + VW for a target level of customer service.
Market Logistics Decisions:
Four major decisions must be made with regard to market logistics:
 1. How should orders be handled? (Order Processing).
 2. Where should stocks be located? (Warehousing).
 3. How much stock should be held? (Inventory).
 4. How should goods be shipped? (Transportation).
Connection between Marketing and Logistics
Logistic Activities in Supply Chain Management:
Logistic as the Critical Element in Supply Chain Management
Nowhere in business marketing strategy is SCM more important than in
logistics. Logistics management is that part of supply chain management
that plans, implements, and controls the efficient, effective forward and
reverse flow and storage of goods, services, and related information
between the point of origin and the point of consumption in order to
meet customer’s requirement. Logistics management is an integration
function that coordinates and optimizes all logistic activities, as well as
integrates logistic activities with other functions including marketing,
sales, manufacturing, finance, and information technology.
Effective business marketing demands efficient, systematic delivery of
finished products to channel members and customers. The importance
of this ability has elevated the logistics function to a place of prominence
in the marketing strategy of many business marketers.
Distinguish between logistics and supply chain management
Logistics is a critical element in SCM. In fact, there is considerable
confusion about the difference between the discipline of SCM and
logistics. SCM is focused on the integration of all business processes that
add value for customers. The 1990’s witnessed the rising importance of
time-based competition; rapidly improving Information technology,
expanding globalisation, increasing attention to quality, and the
changing face of inter firm relationship. These Trends combined to
cause companies to expand their perspective on logistics to include all
the forms involved in creating a finished product and delivering it to the
buyer or user on time and in perfect condition. The SCM concept is an
integrating philosophy for coordinating the total flow of supply channel
from supplier to ultimate user. Logistics is critical, however, to business
marketers, because regardless of the orientation of the entire supply
chain, the firm relies on its logistics system to deliver product in a
timely, low cost manner.
Managing flow
The significance of the supply chain perspective and logistical
management is that the business marketing manager focuses attention
on the performance of all participants in the supply chain. The manager
also coordinates their efforts to enhance the timely delivery of the
finished product to the ultimate user at the lowest possible cost.
Inherent in the supply chain approach is the need to form close
relationship with the supply chain participants, including vendors,
transportation suppliers, warehousing companies, and distributors. The
focus of logistics in the SCM for business marketer is the flow of product
through the supply chain, with timely information driving the entire
process.
The Strategic Role of Logistics
In the past, logistics was viewed simply as a cost of doing business but
today, many companies view logistics as a critical strategic weapon that
can value to customer relationship. For many business marketers,
logistics is the primary marketing tool for gaining and maintaining
competitive superiority. These firms typically recognise that logistics
performance is an important part of marketing strategy, and they exploit
their logistics competencies. Companies that incorporate logistics
planning and management into long-term business strategies can
achieve significant benefits, which create real value for the company.
Sales-Marketing-Logistics Integration
The rising value of logistics as a strategic marketing weapon has
fostered the integration of the sales, marketing, and logistics functions
of many business marketers. In progressive firms, unified teams of
sales, production, logistics, information systems, and marketing
personnel develop integrated logistics programs to offer to potential
customers. Teams of specialists from each area make sales calls and
tailor logistics solutions to customer problems.
Just-in-Time systems
To serve a customer, business market is must be prepared to deliver
their products frequently and with precise timing. The reason is the
widespread adoption by manufacturing firms, like Honda of America, of
the just-in-time (JIT) inventory principle. Under this principle, suppliers
carefully coordinate deliveries with the manufacturer's production
schedule -often delivering products just hours before they are used. The
objective of a JIT system is to eliminate waste of all kinds from the
production process by requiring the delivery of the specified product at
the precise time and in the exact quantity needed. The quality must be
perfect -there is no opportunity to inspect products in the JIT process.
Because JIT attempts to relate purchases to production requirements,
the typical order size shrinks, and more frequently deliveries are
required. Increased delivery frequency presents a challenge to the
business marketing production and logistics system. However, business
marketers will have to meet this challenge, as many competitors now
complete on the basis of inventory turns and speed to market.

Elemen
Key Aspects
ts

The “product” of Logistic activities, customer service relates

Custome to the effectiveness in creating time and place utility. The
r service level of customer service provided by the supplier has a
direct impact on total cost market share, and profitability.

Order processing triggers the logistic process and directs

Order
activities necessary to deliver product to customers. Speed
processi
and accuracy of order processing effect costs and customers
ng
service level.

Logistics Information exchanged in the distribution process guides the

Commun activities of the system. it is the vital link between the firm's
ications logistic system and its customers.

The physical movement of products from source of supply

Transpor through production to customers is the most significant cost
tation area in logistics, and it involves selecting modes and specific
carriers as well as routing.

Providing storage space serves as a buffer between

Warehou
production and use. Warehousing may be used to enhance
sing
service and to lower transportation costs.

Inventory is used to make products available to customers

Inventor
and to ensure the correct mix of products is at the proper
y control
location at the right time.

The role of packaging is to provide protection to the product,

Packagin
to maintain product identity throughout the logistic process,
g
and to create effective product density.

Materials Materials handling increase the speed of, and reduces the
handling cost of, picking orders in the warehouse and moving
products between storage and the transportation carriers. It
 is a cost-generating activities that must be controlled.

Producti Utilised in conjunction with logistics planning, production

on planning ensures that products are available for inventory in
planning the correct assortment and quantity.

Plant
and
Strategic placement of plants and warehouses increases
warehou
customer service and reduces the cost of transportation.
se
location

Order Processing: Involve following activities:

 Order checking for any deviation in agreed on negotiation term
 Technical details – price, delivery period, payment terms, taxes etc.
 Checking the availability of material in stock (material requisition)
 Production and material scheduling for shortage
 Acknowledging the order, indicating deviation if any
It is routine operation but require great deal of planning, training of
people involved and investment to bring about efficiency and accuracy.
In a large organization a system capable of handling thousands of
voluminous orders with minimum human involvement or without human
involvement is a must involving shortened order fulfilment cycle to have
edge over rivals.
The order fulfilment process refers to all the steps companies must take
from the moment they receive an order until the items land in
customers’ hands. For many wholesale distribution companies, an order
fulfilment process might look like this:
 Order is received, either in person, on the phone, via email, etc.
 Order must be entered into back office systems (like an ERP or
accounting platform)
 Customer is notified that the order has been received.
 Order is sent to the warehouse. A paper order might be taken to the
warehouse as part of a batch, or it is sent directly from an invoicing or
sales order management application.
 Order is picked: a worker goes into the warehouse, finds the items in
the order, and picks them off the shelf.
 Order is packed to prepare for shipping.
 Order is shipped.
 Customer is notified that the order is on its way.
 Order arrives.
perfect order fill rateOne of the ways companies judge the efficiency of
their order fulfilment processes is by looking at the Perfect Order Metric.
A is one that is on time, complete, and undamaged, along with the
correct paperwork to accompany it. This metric is similar to , which
we’ve discussed on the blog before. Although companies all say they
strive for perfect orders every time, it’s a difficult thing to achieve. Here
are some insights and tips to help your business fulfil orders more
quickly, accurately and efficiently.
Order Fulfilment Process Challenges
Businesses face several challenges throughout the order fulfilment
process. These include challenges related to demand planning, inventory
management, supply chain optimization, logistics planning, and several
other complex concerns. However, at the risk of over-simplifying
matters, what it really boils down to is knowing and being able to make
effective decisions about what you have to sell, whether a customer is
likely to buy it, and how are you going to get it to them if they do.
Let’s break the problem down into its different parts:
 1. Demand Planning: Demand planning involves knowing in advance
what demand for a product will be, as well as demand shaping, or a
company’s efforts to try to generate demand, like marketing and
promotions.
 2. Inventory Management: Order fulfilment is all about meeting
customer expectations, and it’s hard to do that if you are out of stock on
the items customers want. Knowing what’s in stock and being able to
provide visibility on stock levels as the order is placed prevents
customers from being disappointed with backorders and delays.
 3. Supply Chain Execution: When items are low or out of stock, how
quickly can you get them back in stock? How quickly can your
manufacturers produce more product? From there, how long will it take
to get to your warehouses? These are supply chain execution questions
that can also impact order fulfilment.
 4. Logistics Planning: Once the items are ready to ship, how are you
going to get them to the customer? How long will it take? Will the items
be handled carefully so they arrive in one piece?
Strategies to Speed up Order Fulfilment Process
When it comes to speeding up order fulfilment, there are many steps
you can take to make a big impact. Start by looking at some of the
“quick wins” that don’t require a massive investment of dollars, but will
make a quick difference, such as classifying your inventory and ensuring
that it is stored as logically as possible.
The next step is to make sure that you are making the most of the
systems you already have in place. Many companies have the pieces in
place that are needed to improve their order fulfilment processes, but
are unable to get the most from these systems. Finally, you can also
look at making new investments in automation to speed up your order
handling times.
 1. Classify your inventory to ensure rapid handling: Grouping your
inventory from fastest moving to slowest moving helps to ensure that
you always have the right stock levels on your most important items. Put
the most popular items in a centrally located area of your warehouse to
ensure that they can be picked, packed and delivered to the shipping
dock in a minimal amount of time. Slower moving items can be stored in
a separate area. This more logical arrangement can really cut down on
the time it takes to process and fulfil orders.
 2. Integrate systems for more visibility into all aspects of order
fulfilment: In order to quickly fulfil an order, you need visibility into
several areas––demand forecasting, sales, inventory, and logistics just
to name a few. At a minimum, this requires some level of integration
between the sales order management system where the order is placed,
and the ERP system that maintains financial data, as well as the
inventory and logistics systems that that handle the processes for
picking, packing and shipping.
 3. Automate processes: After your systems are able to provide more
visibility into all aspects of the process, you should also look at how the
processes themselves can be sped up. Automation doesn’t necessarily
mean investing in robotics or conveyors; it can be as simple as investing
in scanners to more easily enter inventory into the system as it arrives in
your warehouse, or scanning it out as it leaves. And for smaller
businesses, the investment doesn’t have to be huge. There are even
applications that can be downloaded to a smart phone or tablet to
automate this process inexpensively.
Each of these methods has a dual benefit. Reclassifying inventory from
fastest moving to slowest will not only help save time in the order
fulfilment process, it will also save money in terms of labour costs in the
warehouse. Systems integration will help to improve the order fulfilment
process but also provide better reporting and analytics that can aid
decision-making and profitability. And automating processes speeds
order fulfilment but also provides more accurate data for future orders.
Transportation
 Process of moving an item from point A to point B.
 Safe, efficient, reliable and sustainable movement of persons and
goods over time and space.
Transportation in Logistic
 The operation of transportation determines the efficiency of moving
products.
 The progress in techniques and management principles improves the
moving load, delivery speed, service quality, operation costs, the usage
of facilities and energy saving
 Transportation takes a crucial part in the logistic operation
Transportation is usually the largest single logistical expense, and with
continually rising fuel cost, its importance will probably increase.
Typically, the transportation decision involves evaluating and selecting
both a mode of transportation and the individual carrier that will ensure
the best performance at the lowest cost. Mode refers to the type of
carrier – rail, truck, water, air, or some combination of the four.
Individual carriers have evaluated on rates and delivery performance.
The supply chain view is important in selecting individual carriers.
Carriers become an integral part of the supply chain, and close
relationship are important. One study found evidence that carriers’
operating performance improved when they were more involved in the
relationship between buyer and seller. By further integrating carriers into
the supply chain, the entire supply chain can improve its competitive
position. In this section we consider:
 The role of transportation in industrial supply chain
 The criteria for evaluating transportation options
Transportation and Logistical Service
A business marketer must be able to effectively move finished inventory
between facilities to channel intermediaries and to customers. The
transportation system is the link that binds the logistical network
together and ultimately results in timely delivery of products. Efficient
warehousing does not enhance customer service levels if transportation
is inconsistent or inadequate.
Transportation Performance Criteria
Cost of service is the variable cost of moving products from origin to
destination, including any terminal or accessory charges. The cost of
service may range from a little ₹0.5 per ton-km via water to as high as
₹25 per ton-km via airfreight. The important aspect of selecting the
transportation mode is not cost per se but cost relative to the objective
to be achieved. Bulk raw materials generally do not require prepaid
delivery service, so the cost of anything other than rail or water
transportation could not be justified. On the other hand, although
airfreight may be almost 10 times more expensive than motor airfreight,
the cost is inconsequential to a customer who needs an emergency
shipment of spare parts. The cost of premium (faster) transportation
modes may be justified by the resulting inventory reductions.
Speed of service refers to the elapsed time to move products from one
facility (plant or warehouse) to another facility (warehouse or customer
plant). Again, speed of service often over ides costs. Rail, a relatively
slow mode used for bulk shipments, requires inventory builds up at the
supplier’s factory and at the destination warehouse. The longer the
delivery time, the more inventory customers must maintain to service
their needs while the shipment is in transit. The slower modes involve
lower variable costs for product movement, yet they result in lower
service levels and higher investments in inventory. The faster modes
produce just the opposite effect. Not only must a comparison be made
between modes in terms of service but various carriers within a mode
must be evaluated on their “door-to-door” delivery time.
Service consistency is usually more important than average delivery
time, and all modes of transportation are not equally consistent.
Although air provides the lowest average delivery time, generally it has
the highest variability in delivery time relative to the average. The wide
variations in modal service consistency are particularly critical in
business marketing planning. The choice of transportation mode must
be made on the basis of cost, average transit time, and consistency if
effective customer service is to be achieved.
In summary, because business buyers often place a premium on
effective and consistent delivery service, the choice of transportation
mode is an important one -one where cost of service is often secondary.
However, the best decision on transportation carriers results from a
balancing of service, variable costs and investment requirements of
ordinary, verses expedited (rush order), shipments.
Importance of Transportation
 Without well-developed transportation system, logistic could not
bring its advantages into full play.
 A well operated logistic system could increase both the
competitiveness of the government and enterprises.
 Transportation system is the most important economic activity
among the components of business logistic system.
Transportation Functionality
Product Movement
 Temporal – product is locked during transit, hence inaccessible
 Financial – administration costs, salaries, maintenance costs
expended
 Environmental – fuel costs are high (creates air pollution,
congestion, noise pollution)
Product Storage
 When loading and unloading is more expensive than storage
 When storage space is limited (situation when inventory levels are
high)
Types of Transportation
Rail Transport
Advantages
 It is convenient mode of transport for travelling long distances
 Its operation is less affected by adverse weather like rains, fog etc.
Disadvantages
 It is not available in remote part of the country
 It involves heavy losses of life as well as goods in case of accident
 Road Transport
Advantages
 It is relatively cheaper mode of transportation as compared to other
modes
 It is flexible mode of transportation as loading and unloading is
possible at any destination
Disadvantages
 Due to limited carrying capacity, road transport is not economical for
long distance transportation of goods
Water Transport
Advantages
 It promotes international trades
 The cost of maintaining and constructing routes is very low most of
them are naturally made
Disadvantages
 It is slow moving mode of transport so it is not suitable for
perishable goods
 It is adversely affected by weather conditions
Air Transport
Advantages
 It is fastest mode of transport
 It is the most convenient of transport during natural calamities
Disadvantages
 It is relatively more expensive mode of transport
 It is not suitable for shirt distance travel
Warehousing
Warehouses or distribution centres are places where raw materials,
semi-finished or finished goods are stored. They represent an
interruption in the flow of material and thus add cost to the system.
Items should be warehoused only if there is an offsetting benefit gained
from storing them.
Warehouses include plant warehouses, regional warehouses, and local
warehouses. They may be owned and operated by the supplier or
intermediaries such as wholesalers, or they may be public warehouses.
The latter offer a general service to their public that includes providing
storage space and warehouse services. Some warehouses specialize in
the kinds of services they offer and the goods they store.
Warehousing and warehouse management are part of a logistics
management system, which is itself a component in supply chain
management. Although viewed by some as simply a place to store
finished goods, inbound functions that prepare items for storage and
outbound functions that consolidate, pack and ship orders provide
important economic and service benefits to both the business and its
customers.
Central Location
A warehouse provides a central location for receiving, storing and
distributing products. As each inbound shipment arrives, responsibility
for the goods transfers to warehouse personnel; products are identified,
sorted and dispatched to their temporary storage location. Storage isn’t
a static “thing” but rather a process that includes security measures and
maintaining an environment that preserves the integrity and usefulness
of the items. Once it’s time to move items, each order is retrieved,
grouped, packaged and checked for completeness before being
dispatched to their new destination.
Value-Adding Operation
The objective of a logistics system is to reduce cycle times and overall
inventories, lower costs and most importantly, improve customer
service. Warehousing increases the utility value of goods by providing a
means to have the right products available at the right place in the right
time. Operations such as order consolidation, order assembly, product
mixing and cross-docking that take place within the warehouse structure
also add value to the overall logistics system.
Economic Benefits
Warehouses provide economies of scale through efficient operations,
storage capacity and a central location. Economic benefits are realized,
for example, through consolidation and accumulation operations.
Consolidation operations cut outbound delivery costs for both the
business and its customers. Instead of shipping items individually from
multiple sources, items are delivered to a central warehouse, packaged
together and shipped back out as a complete order. Accumulation
operations allow a warehouse to act as a buffer, balancing supply and
demand for seasonal and long-term storage. This can be vital to
business profitability when demand for a product is year-round but the
product may only be available at certain times of the year.
Service Benefits
Warehouses can serve as part of a contingency plan to ensure outbound
orders are filled in full and on time. A practice called safety stocking
allows businesses to maintain a predetermined number of inventory
items at its warehouse. On the inbound side, safety stocking means that
an emergency such as a transportation delay or a shipment containing
defective or damaged goods won’t delay filling and shipping customers
order. On the outbound side, safety stocking is insurance against out-of-
stock items. The service function that warehouses perform can be
classified into two kinds:
 The general warehouse where goods are stored for long periods and
where the prime purpose is to protect goods until they are needed.
There is minimal handling, movement, and relationship to
transportation. Furniture storage or a depository for documents is
examples of this type of storage. It is also the type used for inventories
accumulated in anticipation of seasonal sales.
 The distribution warehouse has a dynamic purpose of movement and
mixing. Goods are received in large-volume uniform lots, stored briefly,
and then broken down into small individual orders of different items
required by the customer in the marketplace. The emphasis is on
movement and handling rather than on storage. This type of warehouse
is widely used in distribution systems. The size of the warehouse is not
so much its physical size as it is the throughput or volume of traffic
handled.
Role of warehouses
Warehouses serve three important roles: Transportation consolidation
As discussed before, transportation costs can be reduced by using that
concept of warehouse. This is accomplished by consolidating small (LTL)
shipments into large (TL) shipments.
Consolidation can occur in both the supply and distribution systems. In
physical supply, LTL shipments from several suppliers can be
consolidated at a warehouse before being shipped as TL to the factory.
In physical distribution, TL shipments can be made to a distant
warehouse and LTL shipments made to local users.
Product mixing
Although transportation consolidation is concerned with the reduction of
transportation costs, product mixing deals with the grouping of different
items into an order and the economics that warehouse can provide in
doing this. When customers place orders, they often want a mix of
products that are produced in different locations.
Without a distribution centre, customers would have to order from each
source and pay for LTL transport from each source. Using a distribution
centre, orders can be placed and delivered from a central location.
Service
Distribution centres improve customer service by providing place utility.
Goods are positioned close to markets so the markets can be served
more quickly.
Inventory Management
Inventory – raw materials, component parts, work-in-process, or
finished products that are held at a location in the supply chain.
Inventory is an idle stock of physical goods that contain economic value,
and are held in various forms by an organization in its custody awaiting
packing, processing, transformation, use or sale in a future point of
time.
Any organization which is into production, trading, sale and service of a
product will necessarily hold stock of various physical resources to aid in
future consumption and sale. While inventory is a necessary evil of any
such business, it may be noted that the organizations hold inventories
for various reasons, which include speculative purposes, functional
purposes, physical necessities etc.
From the above definition the following points stand out with reference
to inventory:
 All organizations engaged in production or sale of products hold
inventory in one form or other.
 Inventory can be in complete state or incomplete state.
 Inventory is held to facilitate future consumption, sale or further
processing/value addition.
 All inventoried resources have economic value and can be
considered as assets of the organization.
supply chain management VMI Inventory Management -Inventory
management and are the backbone of any business operations. With the
development of technology and availability of process driven software
applications, inventory management has undergone revolutionary
changes. In the last decade or so we have seen adaptation of enhanced
customer service concept on the part of the manufacturers agreeing to
manage and hold inventories at their customers end and thereby affect
Just in Time deliveries. Though this concept is the same in essence
different industries have named the models differently. Manufacturing
companies like computer manufacturing or mobile phone manufacturers
call the model by name -Vendor Managed Industry while Automobile
industry uses the term JIT -Just in Time whereas apparel industry calls
such a model by name -ECR -Efficient consumer response. The basic
underlying model of inventory management remains the same.
Different Types of Inventory
Inventory of materials occurs at various stages and departments of an
organization. A manufacturing organization holds inventory of raw
materials and consumables required for production. It also holds
inventory of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at plant, FG
Stores, distribution centres etc. Further both raw materials and finished
goods those that are in transit at various locations also form a part of
inventory depending upon who owns the inventory at the particular
juncture. Finished goods inventory is held by the organization at various
stocking points or with dealers and stockiest until it reaches the market
and end customers.
Besides Raw materials and finished goods, organizations also hold
inventories of spare parts to service the products. Defective products,
defective parts and scrap also forms a part of inventory as long as these
items are inventoried in the books of the company and have economic
value.
Independent Demand
An inventory of an item is said to be falling into the category of
independent demand when the demand for such an item is not
dependent upon the demand for another item. Finished goods Items,
which are ordered by External Customers or manufactured for stock and
sale, are called independent demand items.
Independent demands for inventories are based on confirmed Customer
orders, forecasts, estimates and past historical data.
Dependant Demand
If the demand for inventory of an item is dependent upon another item,
such demands are categorized as dependant demand. Raw materials
and component inventories are dependent upon the demand for
Finished Goods and hence can be called as Dependant demand
inventories.
Types of Inventory by Function

INPUT PROCESS OUTPUT

Finished
Raw Materials Work In Process
Goods

Consumables Semi-Finished Production in Finished

required for various stages, lying with various Goods at
processing. Eg : Fuel, departments like Production, WIP Distribution
Stationary, Bolts & Stores, QC, Final Assembly, Paint Centres
Nuts etc. required in Shop, Packing, Outbound Store throughout
manufacturing etc. Supply Chain

Finished
Maintenance Items/Consumables
Production Waste and Scrap Goods in
transit

Finished
Packing Materials Rejections and Defectives Goods with
Stockiest

and Dealers

Local purchased Items required for

production Spare Parts Stocks & Bought Out items

Defectives, Rejects and Sales Returns

Repaired Stock and

Parts

Sales Promotion & Sample Stocks

How Inventory is used

 Anticipation or seasonal inventory
 Safety stock – buffer demand fluctuation
 Lot-size or cycle stock – take advantage of quantity discounts or
purchasing efficiencies
 Pipeline or transportation inventory
 Speculative or hedge inventory protects against some future events
like labour strike
 Maintenance, repair and operational inventory (MRO)
Objective of Inventory Management
 The objective of inventory management is to strike a balance
between inventory investment and customer service.
 Provide acceptable level of customer service (on-time delivery)
 Allow cost-efficient operations
 Minimise inventory investment
Functions of Inventory management
 To meet anticipated demand
 To smooth production requirements
 To decouple operations
 To protect against stock-out
 To take advantage of order cycles
 To help hedge against price increase
 To permit operations
 To take advantage of quantity discounts
Need for Inventory Management
Inventory is a necessary evil that every organization would have to
maintain for various purposes. Optimum inventory management is the
goal of every inventory planner. Over inventory or under inventory both
cause financial impact and health of the business as well as effect
business opportunities.
Inventory holding is resorted to by organizations as hedge against
various external and internal factors, as precaution, as opportunity, as a
need and for speculative purposes.
Most of the organizations have raw material inventory warehouses
attached to the production facilities where raw materials, consumables
and packing materials are stored and issue for production on JIT basis.
The reasons for holding inventories can vary from case to case basis.
Meet variation in Production Demand
Production plan changes in response to the sales, estimates, orders and
stocking patterns. Accordingly the demand for raw material supply for
production varies with the product plan in terms of specific SKU as well
as batch quantities. Holding inventories at a nearby warehouse helps
issue the required quantity and item to production just in time.
Cater to Cyclical and Seasonal Demand
Market demand and supplies are seasonal depending upon various
factors like seasons; festivals etc and past sales data help companies to
anticipate a huge surge of demand in the market well in advance.
Accordingly they stock up raw materials and hold inventories to be able
to increase production and rush supplies to the market to meet the
increased demand.
Economies of Scale in Procurement
Buying raw materials in larger lot and holding inventory is found to be
cheaper for the company than buying frequent small lots. In such cases
one buys in bulk and holds inventories at the plant warehouse.
Take advantage of Price Increase and Quantity Discounts
If there is a price increase expected few months down the line due to
changes in demand and supply in the national or international market,
impact of taxes and budgets etc., the company’s tend to buy raw
materials in advance and hold stocks as a hedge against increased costs.
Companies resort to buying in bulk and holding raw material inventories
to take advantage of the quantity discounts offered by the supplier. In
such cases the savings on account of the discount enjoyed would be
substantially higher that of inventory carrying cost.
Reduce Transit Cost and Transit Times
In case of raw materials being imported from a foreign country or from
a faraway vendor within the country, one can save a lot in terms of
transportation cost buy buying in bulk and transporting as a container
load or a full truck load. Part shipments can be costlier.
In terms of transit time too, transit time for full container shipment or a
full truck load is direct and faster unlike part shipment load where the
freight forwarder waits for other loads to fill the container which can
take several weeks.
There could be a lot of factors resulting in shipping delays and
transportation too, which can hamper the supply chain forcing
companies to hold safety stock of raw material inventories.
Long Lead and High demand items need to be held in Inventory
Often raw material supplies from vendors have long lead running into
several months. Coupled with this if the particular item is in high
demand and short supply one can expect disruption of supplies. In such
cases it is safer to hold inventories and have control.
Effective Inventory Management
 To be effective, management must have the following:
 A system to keep track of inventory on hand and on order
 A reliable forecast of demand
 Knowledge of lead times and its variability
 Reasonable estimates of
 Inventory holding (carrying cost)
 Ordering cost
 Shortage cost
 A classification system for inventory items
Components of Inventory Cost
Ordering Cost
Cost of procurement and inbound logistics costs form a part of Ordering
Cost. Ordering Cost is dependant and varies based on two factors -The
cost of ordering excess and the Cost of ordering too less. Both these
factors move in opposite directions to each other. Ordering excess
quantity will result in carrying cost of inventory. Whereas ordering less
will result in increase of replenishment cost and ordering costs.
These two above costs together are called Total Stocking Cost. If you
plot the order quantity vs the TSC, you will see the graph declining
gradually until a certain point after which with every increase in quantity
the TSC will proportionately show an increase. This functional analysis
and cost implications form the basis of determining the Inventory
Procurement decision by answering the two basic fundamental questions
-How Much to Order and When to Order? How much to order is
determined by arriving at the Economic Order Quantity or EOQ?
Carrying Cost Inventory storage and maintenance involves various types of costs namely:
 Inventory Storage Cost
 Cost of Capital
Inventory carrying involves Inventory storage and management either
using in house facilities or external warehouses owned and managed by
third party vendors. In both cases, inventory management and process
involves extensive use of Building, Material Handling Equipment, IT
Software applications and Hardware Equipment coupled managed by
Operations and Management Staff resources.
Inventory Storage Cost
Inventory storage costs typically include Cost of Building Rental and
facility maintenance and related costs. Cost of Material Handling
Equipment, IT Hardware and applications, including cost of purchase,
depreciation or rental or lease as the case may be. Further costs include
operational costs, consumables, communication costs and utilities,
besides the cost of human resources employed in operations as well as
management.
Cost of Capital
Includes the costs of investments, interest on working capital, taxes on
inventory paid, insurance costs and other costs associate with legal
liabilities. The inventory storage costs as well as cost of capital is
dependent upon and varies with the decision of the management to
manage inventory in house or through outsourced vendors and third
party service providers.
Current times, the trend is increasingly in favour of outsourcing the
inventory management to third party service provides. For one thing the
organizations find that managing inventory operations requires certain
core competencies, which may not be in line with their business
competencies. They would rather outsource to a supplier who has the
required competency than build them in house.
Secondly in case of large-scale warehouse operations, the scale of
investments may be too huge in terms of cost of building and material
handling equipment etc. Besides the project may span over a longer
period of several years, thus blocking capital of the company, which can
be utilized into more important areas such as R & D, Expansion etc. than
by staying invested into the project.
Inventory Classification
Every unit of inventory has an economic value and is considered an
asset of the organization irrespective of where the inventory is located
or in which form it is available. Even scrap has residual economic value
attached to it. Depending upon the nature of business, the inventory
holding patterns may vary. While in some cases the inventory may be
very high in value, in some other cases inventory may be very high in
volumes and number of SKU. Inventory may be help physically at the
manufacturing locations or in a third party warehouse location.
Inventory Controllers are engaged in managing Inventory. Inventory
management involves several critical areas. Primary focus of inventory
controllers is to maintain optimum inventory levels and determine
order/replenishment schedules and quantities. They try to balance
inventory all the time and maintain optimum levels to avoid excess
inventory or lower inventory, which can cause damage to the business.
ABC Classification
Inventory in any organization can run in thousands of part numbers or
classifications and millions of part numbers in quantity. Therefore
inventory is required to be classified with some logic to be able to
manage the same. In most of the organizations inventory is categorized
according to ABC Classification Method, which is based on pareto
principle. Here the inventory is classified based on the value of the units.
The principle applied here is based on 80/20 principles. Accordingly the
classification can be as under:
 A Category Items Comprise 20% of SKU & Contribute to 80% of $
spend.
 B Category Items Comprise 30% of SKU & Contribute to 15% of $
spend.
 C Category Items Comprise 50% of SKU & Contribute to 5% of $
spend.
Advantages of ABC Classification
 This kind of categorization of inventory helps one manage the entire
volume and assign relative priority to the right category. For Example A
Class items are the high value items. Hence one is able to monitor the
inventory of this category closely to ensure the inventory level is
maintained at optimum levels for any excess inventory can have huge
adverse impact in terms of overall value.
 A Category Items: Helps one identify these stocks as high value
items and ensure tight control in terms of process control, physical
security as well as audit frequency.
 It helps the managers and inventory planners to maintain accurate
records and draw management’s attention to the issue on hand to
facilitate instant decision-making.
 B Category Items: These can be given second priority with lesser
frequency of review and less tightly controls with adequate
documentation, audit controls in place.
 C Category Items: Can be managed with basic and simple records.
Inventory quantities can be larger with very few periodic reviews.
Disadvantages
 Inventory Classification does not reflect the frequency of movement
of SKU and hence can mislead controllers.
 B & C Categories can often get neglected and pile in huge stocks or
susceptible to loss, pilferage, slackness in record control etc.
Models of Inventory
Economic Order Quantity Models
The question of how much to order is frequently determined by using an
Economic Order Quantity (EOQ) model. EOQ model identify the optimal
order quantity by minimising the sum of certain annual costs that vary
with order size. Three order size models are:
 The basic economic order quantity model
 The economic production quantity model
 The quantity discount model
The Economic Order Quantity Model Assumptions:
 Only one product is involved
 Annual demand requirements are known
 Demand is even throughout the year
 Lead time does not vary
 Each order is received in a single delivery
 There are no quantity discounts
EOQ model inventory cycle:
The inventory cycle begins with receipt of an order of Q units, which are
withdrawn at a constant rate over time. When the quantity on hand is
just sufficient to satisfy demand during lead time, an order for Q units is
submitted to the supplier. Because it is assumed that both the usage
rate and lead time don’t vary, the order will be received at the precise
instant that the inventory on hand falls to zero. Thus, orders are timed
to avoid both excess and stock outs.
The Economic Production Quantity Model
 Production done in batches or lots
 Capacity to produce a part exceeds the part’s usage or damage rate
 Assumptions of EPQ are similar to EOQ except orders are received
incrementally during production
Assumption:
 Only one item is involved
 Annual demand is know
 Usage rate is constant
 Usage occurs continually but production occurs periodically
 Production rate is constant
 Lead time does not vary
 No quantity discounts
Quantity Discount Model
 Quantity discounts are price reductions for large order offered to
customers to induce them to buy in large quantities. In this case the
price per unit decreases as order quantity increases.
 If the quantity discounts are offered, the buyer must weigh the
potential benefits of reduced purchase price and fewer orders that will
result from buying in large quantities against the increase in carrying
cost caused by higher average inventories.
 The buyer’s goal with quantity discounts is to select the order
quantity that will minimise the total cost, where the total cost is the sum
of carrying cost, ordering cost and purchasing cost
Factors Leading to Inventory Inefficiencies
In any company inventory management is one area that the
managements always focus on when it comes to improving business
efficiencies and cutting costs. An inventory reduction drive always yields
results, which are visible and releases cash back into business. Does this
mean that inventory management is inefficient? The answer can be a
yes and a no.
Inventory management function is dependent upon physical operations
involving multiple locations and agencies and processes. The inter
dependence upon transactions which are sequential and parallel,
renders inventory susceptible to inefficiencies occurring in operations,
transactions, and documentation over a period of time.
Another possible factor that can hamper the inventory efficiencies is the
system setup that is used to manage the inventory. Quite often one can
find that the system setup and process defined in the system is not user
friendly and cumbersome. An efficient system should define and guide
the physical process as well as documentation process. The system
process should in turn be developed based on the business process
requirement. In many cases the operations are made to suit the system
setup, which already exists in some basic form and not suited to the
particular business process on hand.
Poor system setup that does not match with the shop floor warehouse
set up renders operations in efficient. It is very common to come across
complaints from users with regard to non-availability of features to work
around the processes; at times processes are lengthy and cumbersome
leading to operational delays. Non availability of different reports and
loops and bugs in the system can often push the operations teams to
find shortcut methods to bypass the system processes and carry on with
the work, resulting in inventory inefficiencies as well as inefficient
operations.
In cases where a company has outsourced the inventory management
to a third party service provider, the inventory management
complications increase manifold. You have the company’s ERP or
inventory system on one hand and the third part service provider’s
inventory management system or warehouse system on the other hand.
At any given point of time both have to be reflecting the same inventory
accuracy and also match with physical stock available on shop floor, but
this is not the case always. In cases where the systems are interfaced
too inventory in one system cannot mirror the other and reconciling
transactions between the two systems can be cumbersome and time
consuming.
Health of the inventory accuracy as well as inventory management can
also depend upon the inventory strategy of the company and its outlook.
A few companies treat inventory to be a necessary evil and just about
ensure processes are compliant and inventory audits are regularly held.
They do not deal with and treat inventory as an important asset that
needs to be managed and reviewed to keep it lean and accurate.
Those companies, which are aware of the implications and benefits that
a lean inventory management practice can have on their business, strive
to build good management practices and keep finding ways to optimize
the processes. Any efficiency brought about with change in processes
adds to the company’s profits. Hence they give attention to and invest in
driving inventory management strategy and practices, which are
benchmarked against the best in the industry.
Decisions with regard to level of inventory to be carried, who owns and
carries the inventory in the supply chain are some of the key decisions
that drive efficiencies in inventory management. Besides this technology
can also bring about process improvements speeding up the sales and
delivery processes and to a certain extent reduces manpower resources
and associated costs too.
Inventory management is an ongoing and dynamic process. To keep out
the inefficiencies in systems, processes and physical operations, calls for
active management participation and continuous improvement in all
processes and systems that are involved in inventory management.
Factors affecting Inventory Operations
Inventory management operations are increasingly being outsourced to
third party service providers, thereby ensuring that the investments and
costs in managing the inventories are reduced. This is a welcome trend
provided the company’s focus on overseeing and reviewing both
inventory management as well as inventory operations periodically to
ensure proper controls are maintained and processes followed.
Inventory management entails study of data on movement of inventory,
its demand pattern, supply cycles, sales cycles etc. Active management
calls for continuous analysis and management of inventory items to
target at lean m inventory Management.
Inventory Management function is carried out by the inventory planners
in the company in close coordination with procurement, supply chain
logistics and finance, besides marketing departments.
The efficiencies of inventory management are largely dependent upon
the skills and knowledge of the inventory planners, the focus and
involvement of management and the management policies coupled with
the inventory management system.
However inventory operations management is not under the control of
the inventory management team but rests with the third party service
providers. In this section of the article we aim to uncover few of the
critical areas and action points on the part of operations that can impact
the inventory of the company. Unskilled Labour and Staff: Inventory
operations management is a process-oriented operation. Every task and
action required to be carried out by the operatives will impact the
inventory as well as the delivery lead times and other parameters.
Therefore knowledge of what one is required to do and the effect of the
action should be known to the operatives who are on the shop floor. For
Example: If an operative is given a put away task, he should know how
and where he should put away the pallet, how to scan the pallet ID and
confirm it back to the system. Besides he should also know the impact
of not completing any of these actions or doing something wrong. The
impact his action will have on the system as well as physical inventory
should be clear to the operative.
Secondly different inventory items would have to be handled differently.
Operatives who are carrying out the task should know why and what is
required to be done. They should also know the consequences of not
following the process. A pallet might have to be scanned for the pallet id
and put away on a floor location, while a carton might have to be
opened and scanned for individual boxes inside and put away into a bin.
The operatives should be trained on the entire process and understand
why and what he is doing.
The WMS systems are quite operational and task intensive. Where the
warehouses are being managed on RF based systems, the operatives
should be able to manage the RF readers, understand how to access
and complete transactions through the RF Guns.
Often it is noticed that when the warehouse operations are being
managed by a third party service provider and the principle customer is
not present at the location, the quality of staff and operatives is
compromised and people are not given adequate training before being
allocated their responsibility. Such situations can lead to inventory
discrepancies.
In adequate SOP, Training and emphasis on processes compliance:
When an inventory management project kicks off at a third party
warehouse location, both the principle customer as well as the third
party service provider work on the project and setup basic processes,
document them in Standard Operating Procedures and conduct training
as a part of the project management methodology.
However over a period of time the nature of business requirements
changes, resulting in change in the operating processes. These do not
get documented in terms of amendments and the SOPs become
outdated. Thereafter one finds that the new comers who are introduced
on the shop floor are required to learn the processes by working along
with others whereas no training or SOP document is provided to him for
reference. With the result they often have half-baked knowledge of the
processes and carry on tasks not knowing why they are doing and what
they are required to do.
This situation is very dangerous for the health of the inventory and it
shows slackness in the attitude of the third party service provider.
Continuation of such a situation will lead to bad housekeeping, inventory
mismatches, and discrepancies and also affect the service delivery and if
left unchecked can lead to theft, pilferage and misuse of inventory.
In any third party owned inventory operations warehouse, the principle
client should ensure that periodic review and training is conducted for all
staff. Inventory operations should be periodically reviewed and inventory
counts and audits carried out regularly.
Operational Challenges in Inventory Management
The latest trend in all industries has been to outsource inventory
management functions to Third Party Service providers. Companies
outsource both Raw Material Inventory as well as Finished Goods to the
Service Provider. In case of finished goods inventory, depending upon
the supply chain design, there may be multiple stocking points at
national, regional and state levels. In such an event each of the
warehouses a different service provider may manage operations, as one
may not be able to find a supplier having operations all over the
country. Therefore the inventory in such a situation will be managed in
the Company’s system as well as in the Service provider’s system.
Inventory management and control becomes a critical function especially
in such situations where multi locations and multiple service providers
are involved.
To ensure Inventory control is maintained across all locations, following
critical points if focused upon will help:
 Establish and outline Operations Process for Service Providers: Draw
up SOP -Standard Operating procedure detailing warehouse operations
process, warehouse inventory system process as well as documentation
process.
Especially in a 3rd Party Service Provider’s facility, it is important to have
process adherence as well as defined management, authorization and
escalation structure for operations failing which inventory operations will
not be under control.
 Establish inventory visibility at each of the location through MIS
Reports: Draw up list of reports and MIS data for all locations and
ensure they are mailed to a central desk in the inventory team for daily
review. The inventory team leader should analyse daily reports of all
locations and highlight any non-conformity and resolve them as well as
update the management.
 Initiate Daily Stock count procedure to be carried out at all of the
locations and reported back to the inventory desk. Daily stock count
should be able to reflect location accuracy, stock accuracy as well as
transaction summary for the day.
 Monthly audits and inventory count should be implemented at all
locations without fail and insist on one hundred percent adherence.
 Quarterly inventory -wall-to-wall count or half yearly and annual
wall-to-wall count should be implemented depending upon the volume
of transactions as well as value of transactions at each location.
 Central Inventory team to be responsible for ensuring review of all
reports and controlling inventories at all locations.
 Inventory reconciliation -involves reconciling physical inventory at
site with the system inventory at 3PL Site and then reconciling 3PL
System stocks with company’s system stock.
 Visiting major sites and being present during physical stock audits on
quarterly or half yearly basis is very important.
 Lastly keep reviewing processes and ensure training and re training
is carried out regularly and at all times at site so that a process oriented
culture is imbibed and all operating staff understand the importance of
maintaining processes as well as inventory health.
 Inventory is nothing but money to the company. If 3PL vendor is
managing the inventory, needless to say you should have your
processes in place to be able to control and maintain inventory health.
Reverse Logistics and cost control in SCM
Increasingly, companies must deal with the flow of goods coming back
from the final customer or other companies in the distribution channel.
This reverse flow of goods is due to the increased quality demands of
customers in the goods they purchase and to financial pressure on
distributors to reduce slow-moving or unwanted inventories.
The eleventh edition of the APICS Dictionary defines reverse logistic a
complete supply chain dedicated to the reverse flow of products and
materials for the purpose of return, repair, remanufacture and/or
recycling.
In some distribution channels, reverse logistics can represent major
costs, which are growing partly due to the increased use of the Internet.
In addition to this, companies are being forced to take responsibility for
the return packaging. There are two main categories of reverse logistics:
 Asset recovery, which is the return of actual products.
 Green reverse logistics, which represents the responsibility of the
supplier to dispose of packaging materials or environmentally sensitive
materials such as heavy metals and other restricted materials.
The costs of green reverse logistics are reduced through the use of
reusable packaging, such as bins or racks rather than corrugated
containers, or an overall reduction in the amount of packaging.
Environmentally sensitive materials can be sorted and either reused in
manufacturing or disposed of in the most cost-effective method
possible, hopefully avoiding landfalls. Refillable beverage container
reduces the need for landfill space but imposes a cost on the producer
for sorting and handling.
Reducing costs associated with asset recovery involves coordinating the
handling of the materials perhaps with the outbound flow of new goods.
Information on the returned materials is necessary to ensure proper
reuse or disposal of the materials. If the return will generate a credit to
the sender, then this will also require information.
An example of this working quite well occurs with the replacement of a
starter motor, which should be the same size and model as the
replacement, is placed in the original carton and sent back to the
supplier for a credit. The carton will have all the information describing
the motor and can be sued for identification as it travels back to the
builder. To reduce costs, distributors will coordinate the outbound
shipments of new motors with the return of old motors for rebuilding.
Hidden Opportunities for Supply Chain Cost Reductions
Of course hidden costs, if you can find them, mean hidden
opportunities. In the management of returns, costs you can look for and
aim to eliminate or reduce include the following:
 Labour costs associated with customer relations (where there is a
return, there may be an unhappy customer who must be appeased)
 Customer service labour costs (identifying warranty eligibility,
determining what return and credit rules apply in each individual case)
 Transaction costs
 Transport and shipping costs
 Warehouse and storage costs
Much depends upon the nature of your supply chain operation of course.
Some industries experience more returns than others. The impact of
returns too, can differ from one industry or organisation to another.
That’s why the most important first step in improving reverse logistics
management is to dig down and understand the true costs of product
returns in your operation.
The Causes of Excessive Costs in Reverse Logistics
Unlike the forward flow of products through your supply chain,
management and streamlining of the reverse process is seldom seen as
a priority. That’s typically for the following reasons:
 Unlike customer orders, there is usually no deadline for returns to
arrive at their destination
 Products are moving against the normal flow, making for challenging
process integration
 For many organisations, it’s very difficult to forecast and plan for
return volume
 Returns are typically seen as an inevitable cost and a low priority for
management action
 These characteristics conspire to hide the costs of returns, making it
difficult to see exactly where and when they impact budgets, which are
geared towards a one-way flow of goods and materials.
Improving Reverse Logistics Management
Some companies that successfully manage reverse logistics have
implemented automated process management. Others have formed
dedicated reverse logistics functions, employing a team of people who
do nothing else but manage the return of unwanted, damaged or
recalled products. Another possibility, if your organisation handles a high
volume of returns, is to outsource reverse logistics to a 3PL partner.
Whatever approach you take though, the important thing is to create a
clear dividing line between the processes for outbound orders and those
for returns. That’s the bit which many companies miss and as a result,
struggle to get visibility of costs attributable to product return.
Minimising Returns for Supply Chain Cost Reductions
Of course, the best solution of all is to eliminate or dramatically reduce
the number of returns your company has to handle. In order to do that,
you’ll still need to improve traceability as a first step.
Once you have visibility of return volumes and reasons for return, you
can put the necessary effort into understanding root causes and finding
ways to diminish their impact. This may require the development of
initiatives to improve manufacturing, storage, transportation, and/or
customer service in relation to outbound product supply.
Putting It All Together
For most supply chain organizations, improving reverse logistics and
reducing its cost will require steps to prevent or minimise returns, taken
in conjunction with measures to streamline the reverse supply chain.
As with most cost reduction efforts, you’ll probably have to spend
initially, in order to save. If reverse logistics was easy, every company
would excel in its management and execution and I wouldn’t be writing
about the issues. Few things worth doing are easy though, so why not
at least take a look for the hidden costs in your product-return
processes? You might find there are some decent savings to be had
enough perhaps, to do more than just look.
***************The End**************
All The Best
B2B Marketing:
B2B (business-to-business) marketing is marketing of products to
businesses or other organizations for use in production of goods, for use
in general business operations (such as office supplies), or for resale to
other consumers, such as a wholesaler selling to a retailer.
Importance of Business Marketing:
Business market serve the largest market of all: The rupee volume of
transactions in the industrial or business market significantly exceeds
that of the ultimate consumer market. In the business market, a single
customer can account for an enormous level of purchasing activity.
Getting Word Out
For a business to succeed, the product or service it provides must be
known to potential buyers. Without marketing, the potential customers
may never be aware of the business offerings and the business may not
be given the opportunity to progress and succeed.
Higher Sales
Once the product, service or company gets the response from prospects,
it increases your chances that consumers will make a purchase. As
awareness becomes a reality, it is also the point where new customers
start to spread the word, telling friends and family about this amazing
new product they discovered. Sales will steadily increase as the word
spreads. Without employing marketing strategies, these sales may not
have ever happened; without sales, a company cannot succeed.
Company Reputation
The success of a company often rests on a solid reputation. Marketing
builds brand name recognition or product recall with a company. As your
reputation grows, the business expands and sales increase. The
reputation of your company is built through active participation in
community programs.
Healthy Competition
Marketing also fosters an environment in the marketplace for healthy
completion. Marketing helps keep pricing competitive for a business to
try to win over consumers before its competition does. Without
competition, well-known companies would continue to sell while lesser
known companies or new companies would stand little chance of ever
becoming successful. Marketing facilitates the healthy competition that
allows small businesses and new businesses to be successful enter and
grow in the marketplace.
Business Marketing vs Consumer Marketing: Business Marketing

Business Marketing refers to the sale of either products or services or

both by one organization to other organizations that further resell the
same or utilize to support their own system. Examples -(Industrial
marketing)
 1. Office furniture (Cabinets, desks, workstations, drawers) -End
user will not purchase workstations for his own use at home.
 2. Bulk SMS service (utilized by organizations)
Consumer Marketing
On the other hand refers to the transaction of goods and services
between organizations and potential customers. In consumer markets,
products are sold to consumers either for their own use or use by their
family members.
Examples –
 1. Fast Moving Consumer Goods (FMCG) -Fast moving consumer
goods are items that are sold quickly to the end-users generally at
nominal costs. Example -Aerated drinks, grocery items and so on.
 2. Consumer Durables -Goods that a consumer uses for a
considerable amount of time rather than consuming in one use are
categorized under Consumer Durables.
Consumer Durables are further categorized into -White Goods and
Brown Goods
 a) White Goods -(Refrigerators, Microwaves, air conditioners and so
on (Majorly all household appliances)
 b) Brown Goods -(Television, CD Players, Radio, Game Consoles
(Majorly used for entertainment and fun)
 3. Soft Goods -Soft goods are products which have a shorter lifecycle
and their value decreases after every use. E.g. shirts, clothes, shoes.
Difference between Business Marketing and Consumer Marketing:

Areas of
differen B2B market Consumer Market
ce

  Geographically
Market concentrated   Geographically disbursed
characteri
stics   Relatively fewer   Mass market
buyer
Product   Technical complex
characteri  Standardized
stics   Customized

Promotional char  Emphasis on personal

 Emphasis on mass media
acteristics selling

  Competitive
building  List price or MRP
Price
characteri   Negotiated prices
stics
 List prices for standard
products

  Service, timely
Service availability
characteri  Somewhat important
stics   Extremely
important

Channel  More direct  Indirect

characteri
stics  Fewer intermediaries  Multiple layer of intermediaries

 Involvement of various
functional area from  Involvement of family members
both the ends

 Purchase decisions are  Purchase decisions are mostly

performance based and based on psychological/social/
Buying
rational physiological need
behaviour
 Relatively less technical
 Technical expertise
expertise is required

 Stable interpersonal
 Non personal relationship
relationship

Type of Business Customers:

Commercial Institutional Governmental

Customers Customers Customers
 Schools, colleges,
Manufacturers Federal government
universities

Construction Health-care
· Non-defence
companies organization

Service firms Libraries · Defence

Transportation companies Foundations State government

Selected professional
Art galleries Local government
groups

Wholesalers Clinics · Counties

Retailers · Townships

1. Commercial Enterprises as Customers

Commercial enterprises include manufacturers, construction companies,
service firms (for example, hotels), transportation companies, selected
professional groups (for example, dentists), and resellers (wholesalers
and retailers purchasing equipment and supplies to use in their
operations).
Commercial enterprises can be divided into three categories: Users

Users purchase industrial products or services to produce other goods or

services that are, in turn, sold in the business or consumer markets.
Original Equipment Manufacturers (OEMs)
The OEM purchases industrial goods to incorporate into other products it
sells in the business or ultimate consumer market.
Dealers and Distributors
Dealers and Distributors include commercial enterprises that purchase
industrial goods for resale (in basically the same form) to users and
OEMs. The distributors accumulate, stores, and sell a large assortment
of goods to industrial users, assuming title to the goods it purchases.
A Concentration of Customers
Because manufacturing operations are so concentrated in India, the
business marketer normally serves far fewer but far larger customers
than does a consumer products marketer. In addition to concentration
to size, business marketers are also concentrated geographically.
2. Government Units as Customers
Total money spent on public services by the Centre, state and local
governments constitute government spending or expenditure. In other
words, money spent by the government on providing goods and services
such as defence, judicial and education system to its citizens is total
government spending.
3. Institutions as Customers
Institutional customers comprise the third sector of the business market.
They make up a sizable market – total expenditures on public
elementary and secondary schools. Schools and health-care
organizations make up a sizable component of the institutional market,
which also includes colleges and universities, libraries, foundations, art
galleries and clinics.
Business customers can also be classified as:

1. Producers:
Producers are companies that purchase goods and services that they
transform into other products. They include both manufacturers and
service providers. Example -Procter & Gamble, General Motors,
McDonald’s, Dell, Delta Airlines, restaurants, dentist, doctor etc. All
these businesses have to buy certain products to produce the goods and
services they create.
2. Resellers:
Resellers are companies that sell goods and services produced by other
firms without materially changing them. They include wholesalers,
brokers, and retailers. Walmart and Target are two big retailers you are
familiar with. Large wholesalers, brokers, and retailers have a great deal
of market power.
3. Government:
Business-to-government (B2G) markets, or when companies sell to local,
state, and governments, represent a major selling opportunity, even for
smaller sellers. In fact, many government entities specify that their
agencies must award a certain amount of business to small businesses,
minority-and women-owned businesses, and businesses owned by
disabled veterans.
4. Institutions
Institutional markets include non-profit organizations such as the Red
Cross, Churches, Hospitals, Charitable organizations, Private colleges,
Civic clubs, and so on. Like government and for-profit organizations,
they buy a huge quantity of products and services. Holding costs down
is especially important to them. The lower their costs are, the more
people they can provide their services to.
Type of Business Products: Business products are sold to other
businesses, as opposed to convenience, shopping, and specialty
products, which are sold to consumers.
Entering goods and services
Entering goods become part of the finished product. These categories of
goods consist of raw materials and manufactured materials and parts.
Their cost is an expensive item assigned to the manufacturing process.
Raw Materials
Raw materials include both farm products and natural products. Raw
materials are processed only to the level required for economical
handling and transport; they basically enter the buying organization’s
production process in their natural state.

Manufactured Materials and Parts

In contrast to raw materials, manufactured materials and parts undergo
more initial processing. Component materials such as textiles or sheet
steel have been processed before reaching a clothing manufacturer or
automaker but must be processed further before becoming part of the
finished consumer product.
B2B Products

Foundation Goods
The distinguishing characteristic of foundation goods is that they are
capital items. As capital goods are used up or worn out, a portion of
their original cost is assigned to the production process as a depreciation
expense. Foundation goods include installation and accessory
equipment.
Installations
Installations include the major long-term investment items that underlie
the manufacturing process, such as buildings, land rights, and fixed
equipment. Large computers and machine tools are examples of fixed
equipment. The demand for installations is shaped by the economic
climate (for example, favourable interest rates) but is driven by the
market outlook for a firm’s products.
Accessory Equipment
Accessory equipment is generally less expensive and is short-lived
compared with installations, and it is not considered part of the fixed
plant. This equipment can be found in plant as well as in the office.
Portable drills, personal computers, and photocopying machines
illustrate this category.
Facilitating Goods
Facilitating goods are the supplies and services that support
organizational operations. Because these goods do not enter the
production process or become part of the finished product, their costs
are handled as expense items.
Supplies
Virtually every organization requires operating supplies, such as printer
cartridges, paper, or business forms, and maintenance and repair items,
such as paint and cleaning materials. These items generally reach a
broad cross section of industrial users. In fact, they are similar to the
kinds of supplies that consumers might purchase at a hardware or
discount store.
Services
As the service sector in India is contributing to about a quarter of total
employment, the service firms have expanded sophistically in relation to
the scale and expertise that individual staff and service groups have
within integrated companies. To capture the skills of the specialist and
to direct attention to what they do best, many firms are shifting or
“outsourcing” selected service functions to outside suppliers.
Understanding Business Market & Environment:
When determining the best way to market a product, the marketing
team must analyse the marketing environment. Obviously, the
marketing team must understand the market they wish to sell to, and
what is the best way to market to those customers.
Business marketing
It is the practice of individuals, or organizations, including commercial
businesses, governments and institutions, facilitating the sale of their
products or services to other companies or organizations that in turn
resell them, use them as components in products or services they offer,
or use them to support their operations. It is also the task of selecting,
developing and managing customer relationships for the advantage of
both customer and supplier, with regard to their respective skills,
resources, technologies, strategies and objectives.
Business environment
Business Environment consists of all those factors that have a bearing
on the business, such as the strengths, weaknesses, internal power
relationships and orientations of the organization; government policies
and regulations; nature of the economy and economic conditions;
sociocultural factors; demographic trends; natural factors; and, global
trends and cross-border developments.
Concept of Business Environment
A business firm is an open system. It gets resources from the
environment and supplies its goods and services to the environment.
There are different levels of environmental forces. Some are close and
internal forces whereas others are external forces. External forces may
be related to national level, regional level or international level. These
environmental forces provide opportunities or threats to the business
community. Every business organization tries to grasp the available
opportunities and face the threats that emerge from the business
environment. Business organizations cannot change the external
environment but they just react. They change their internal business
components (internal environment) to grasp the external opportunities
and face the external environmental threats.
Types of Environment:
On the basis of the extent of intimacy with the firm, the environmental
factors may be classified in to different types or levels. As indicated
below, there are, broadly, two types of environment, the internal
environment, i.e., factors internal to the firm and external environment,
i.e., factors external to the firm which have relevance to it.

The internal factors are generally regarded as controllable factors

because the company has control over these factors; it can alter or
modify such factors as its personnel, physical facilities, organization and
functional means, such as marketing mix, to suit the environment.
The external factors, on the other hand, are, by and large, beyond the
control of a company. The external or environmental factors such as the
economic "factors, sociocultural factors, government and legal factors,
demographic factors, geo-physical factors etc.; are, therefore, generally
regarded as uncontrollable factors.
Internal Environment
The important internal factors which have a bearing on the strategy and
other decisions are outlined below.
Value System
The value system of the founders and those at the helm of affairs has
important bearing on the choice of business, the mission and objectives
of the organization, business policies and practices. It is a widely
acknowledged fact that the extent to which the value system is shared
by all in the organization is an important factor contributing to success.
The value system and ethical standards are also among the factors
evaluated by many companies in the selection of suppliers, distributors,
collaborators etc.
Vision, Mission and Objectives
The business domain of the company, priorities, direction of
development, business philosophy, business policy etc., is guided by the
vision mission and objectives of the company.
Management Structure and Nature
The organizational structure, the composition of the Board of Directors,
extent of professionalization of management etc., are important factors
influencing business decisions. Some management structures and styles
delay decision making while some others facilitate quick decision
making.
Internal Power Relationship
Factors like the amount of support the top management enjoys from
different levels of employees, shareholders and Board of Directors have
important influence on the decisions and their implementation. The
relationship between the members of Board of Directors and between
the chief executive and the Board are also critical factors.
Human Resources
The characteristics of the human resources like skill, quality, morale,
commitment, attitude etc., could contribute to the strength -and
weakness, of an organization. Some organizations find it difficult to carry
out restructuring or modernization because of resistance by employees
whereas they are smoothly done in some others.
Company Image and Brand Equity
The image of the company matters while raising finance, forming joint
ventures or other alliances, soliciting marketing intermediaries, entering
purchase or sale contracts, launching new, products etc. Brand equity is
also relevant in several of these cases.
Miscellaneous Factors
There are a number of other internal factors which contribute to the
business success/failures or influence the decision-making. They include
the following.
 1. Physical Assets and Facilities like the production capacity,
technology and efficiency of the productive apparatus, distribution
logistics etc., are among the factors which influence the competitiveness
of a firm.
 2. R & D and Technological Capabilities, among other things,
determine a company's ability to innovate and compete.
 3. Marketing Resources like the organization for marketing, quality of
the marketing men, brand equity and distribution network have direct
bearing on marketing efficiency. They are important also for brand
extension, new product introduction etc.
 4. Financial Factors like financial policies, financial position and
capital structure are also important internal environment affecting
business performances, strategies and decisions.
External Environment
As stated earlier, the external business environment consists of a micro
environment and a macro environment.
Micro Environment
The micro environment consists of the actors in the company's
immediate environment that affects the performance of the company.
These include the suppliers, marketing intermediaries, competitors,
customers and the publics." The macro environment consists larger
societal forces that affect all the actors in the company's micro
environment namely, the demographic, economic, natural, technical,
political and cultural forces."
Suppliers
An important force, in the micro environment of a company is the
suppliers, i.e., those who supply the inputs like raw materials and
components to the company. The importance of reliable source/sources
of supply to the smooth functioning of the business is obvious.
Uncertainty regarding the supply or other supply constraints often
compels companies to maintain high inventories causing cost increases.
Customers
As it is often exhorted, the major task of a business is to create and
sustain customers. A business exists only because, of its customers.
Monitoring the customer sensitivity is, therefore, a prerequisite for the
business success. A company may have different categories of
consumers like individuals, households, industries and other commercial
establishments, and government and other institutions.
Competitors
A firm's competitors include not only the other firms which market the
same or similar products but also all those who compete for thee
discretionary income of the consumers.
The competition among such alternatives which satisfy a particular
category of desire is called generic competition. If the consumer decides
to go in for a T.V., the next question is which form of the T.V black and
white .or Colour with remote control or without it etc. In other words,
there is a product form competition. Finally, the consumer encounters
the brand competition i.e. the competition between the different brands
of the same product form.
Module-II
Segmentation of Business Market Introduction

A market segment represents “a group of present or potential customers

with some common characteristics which is relevant in explaining (and
predicting) their response to a supplier’s marketing stimuli.” Effective
segmentation of markets is the first step in crafting a marketing strategy
because the characteristics and needs of each segment will define the
direction and focus of the marketing program. Segmentation that is
done well provides the necessary information for understanding what
elements of the marketing mix are going to be critical in satisfying the
target customers in those segments.

Segmentation Challenges in Business-to-Business Markets:

Business-to-business markets are characterised in a number of ways

that makes them very different to their consumer cousins. Below we
summarise the main differences between consumer and business-to-
business markets, and set out the implications for market segmentation:
 1) B2B markets have a more complex decision-making unit: In most
households, even the most complex and expensive of purchases are
confined to the small family unit, while the purchase of items such as
food, clothes and cigarettes usually involves just one person. Other than
low-value, low-risk items such as paperclips, the decision-making unit in
businesses is far more complicated. The purchase of a piece of plant
equipment may involve technical experts, purchasing experts, board
members, production managers and health and safety experts, each of
these participants having their own set of (not always evident) priorities.
 2) B2B buyers are more “rational”: In business-to-business markets
it is critical to identify the drivers of customer needs. These often boil
down to relatively simple identifiers such as company size, volume
purchased or job function. These identifiers often enable needs and
therefore segments to be quite accurately predicted.
 3) B2B products are often more complex: Just as the decision-
making unit is often complex in business-to-business markets, so too are
b2b products themselves. Even complex consumer purchases such as
cars and stereos tend to be chosen on the basis of fairly simple criteria.
Conversely, even the simplest of b2b products might have to be
integrated into a larger system, making the involvement of a qualified
expert necessary. Whereas consumer products are usually standardized,
b2b purchases are frequently tailored.
 4) B2B target audiences are smaller than consumer target
audiences: Almost all business-to-business markets exhibit a customer
distribution that confirms the Pareto Principle or 80:20 rule. A small
number of customers dominate the sales ledger.
 5) Personal relationships are more important in b2b markets: A small
customer base that buys regularly from the business-to-business
supplier is relatively easy to talk to. Sales and technical representatives
visit the customers. People are on first-name terms. Personal
relationships and trust develop. It is not unusual for a business-to-
business supplier to have customers that have been loyal and committed
for many years.
 6) B2B buyers are longer-term buyers: Whilst consumers do buy
items such as houses and cars which are long-term purchases, these
incidences are relatively rare. Long-term purchases – or at least
purchases which are expected to be repeated over a long period of time
– are more common in business-to-business markets, where capital
machinery, components and continually used consumables are
prevalent. In addition, the long-term products and services required by
businesses are more likely to require service back-up from the supplier
than is the case in consumer markets.
 7) B2B markets drive innovation less than consumer markets: B2B
companies that innovate usually do so as a response to an innovation
that has happened further upstream. In contrast with FMCG companies,
they have the comparative luxury of responding to trends rather than
having to predict or even drive them.
 8) B2B markets have fewer behavioural and needs-based segments:
The small number of segments typical to b2b markets is in itself a key
distinguishing factor of business-to-business markets.
Segmentation Process:
The benefits of B2B segmentation are not hard to grasp. The challenge
is arriving at the most effective groupings.
A common approach in business-to-business markets is to apply a
market segmentation based on company size. The consumption levels of
business-to-business customers are so widely different that this often
makes sense due to large companies usually thinking and acting
differently to small ones. A further sophistication may be to classify
customers into those who are identified as strategic to the future of
the business, those who are important and therefore key and those who
are smaller and can be considered more of a transactional typology.
These “demographic” segmentations, sometimes referred to as
“firmographic” in business-to-business markets, are perfectly reasonable
and may suffice. However, they do not offer that sustainable competitive
advantage that competitors cannot copy. A more challenging
segmentation is one based on behaviour or needs. Certainly large
companies may be of key or strategic value to a business but some want
a low cost offer stripped bare of all services while others are demanding
in every way. If both are treated the same, one or both will feel
unfulfilled in some way and be vulnerable to the charms of the
competition.
It is not easy to jump straight into a fully-fledged needs-based
segmentation. Most companies are starting with some history of
involvement in segmentation, even if it is only a north/south split of its
sales force. Companies move down the road of segmentation learning all
the way.
The Road To A Needs-based Segmentation

There may be problems in developing a needs-based segmentation but

this is at least an aspiration to drive towards. The question is “how?”
The starting point of any business-to-business segmentation is a good
database. A well-maintained database is high on the list in any audit of
marketing excellence in a business-to-business company. The database
should, as a minimum, contain the obvious details of correct address
and telephone number together with a purchase history. Ideally it
should also contain contact names of people involved in the decision-
making unit, though this does present problems of keeping it up to date.
Management is frequently blissfully unaware of the parlous state of its
databases as it is rarely involved in inputting and maintaining data.
Sometimes the best database in the company is the Christmas card list
held close to the chest of every sales person.
Using Statistics for Segmentation
The classification data on questionnaires provides demographic data
while questions in the body of the interview determine aspects of
behaviour. Cross tabulations of data on these criteria allow us to see the
different responses amongst groups of respondents. This is market
segmentation at its simplest level and every researcher uses the
computer tabulations of findings to establish groups of respondents with
marked differences.
Factor Analysis:
Using a technique known as factor analysis, statisticians can work out
which groups of attributes best fit together. Looking through the
different statements or attributes that make up these groupings it is
usually possible to see common themes such as people who want low
prices with few extras, people who want lots of services or add-ons and
are prepared to pay for them, people who are concerned
about environmental issues and so on. Factor analysis reduces the large
number of attributes to a smaller but representative sub-set. These sub-
sets are then given labels such as “price fighters”, “service seekers” and
any other such terms that help the marketing team know exactly who
they are addressing.
Cluster Analysis:
The groupings of needs that have been worked out by factor analysis
are now run through further computations using a technique known as
cluster analysis. These factors are presented to the cluster analysis
whose algorithms rearrange the data into the partitions that have been
specified and so determine how neatly the population fits into the
different groupings.
Organizational Buying and Buying Behaviour:
Organization buying behaviour is defined as the rational decision-making
process in which organization buys goods and services when they have
need of any goods or service for their organization. The purchased
products and services get identified, evaluated, and chosen among
alternative brands and suppliers. Organizational buying is similar to the
consumer buyer behaviour without any major differences. Organizations
buy the products and services for the betterment of organizational
objectives such as manufacture and deliver goods and services to
members, customers or the community.
Nature/ Characteristics of Organizational Buying Behaviour
  Every organization is unique – As different organization have
different organizational structure, culture, values, objectives and
resources. Therefore, they also have a unique set of needs, demands
and exhibit unique buying behaviour.
  There is long time lag between efforts and results – In the process
of individual buying, the time taken between a purchase decision and
sales transaction is shorter than industrial buying. This is due to the
extra formalities and procedures that are to be followed in organizational
buying process. For example, asking quotations, evaluating tenders,
preparing bulk orders etc.
  It is a rational as well as emotional activity – Due to presence of
human beings in the purchase process, it rise to emotional element
involved in buying. As industrial buyer may select the quantity and
quality of a product on the basis of specified organization norms but
may choose a dealer on the basis of his personal or political affiliation or
past experience with the dealer.
  It is a formal activity – Organization buying involves a formal
contract between the buyer and seller. It is an formal activity which
requires the buyer to follow rules and procedures laid down by the
organization regarding the type, quality, quantity, terms of payment,
delivery time etc. while making a purchase decision.
  It is a multi-person activity – Buying decisions in an organization
are generally taken by a team of qualified personnel also referred to as
buying centre where each individual plays different buying roles.
Organizational buying behaviour is a process, not an isolated act or
event. Tracing the history of a procurement decision uncovers critical
decision points and evolving information requirements. In fact,
organizational buying involves several stages, each of which yields a
decision.
Organisational Buying Stages

Stage Description

1. Problem Managers at P&G need new high-speed packaging

Recognition equipment to support a new product launch

2. General Production managers’ work with a purchasing manager

Description of to determine the characteristics needed in the new
Need packaging system.

3. Product An experienced production manager assists a

 purchasing manager in developing a detailed and
Specifications
precise description of the needed equipment.

After conferring with production managers, a

4. Supplier
purchasing manager identifies a set of alternative
Search
suppliers that could satisfy P&G’s requirement.

5. Acquisition Alternative proposals are evaluated by a purchasing

and Analysis manager and a number of members of the production
of Proposals department.

6. Supplier Negotiations with the two finalists are conducted, and a

Selection supplier is chosen.

7. Selection of A delivery date is established for the production

Order Routine equipment.

8. After equipment is installed, purchasing and production

Performance managers evaluate the performance of the equipment
Review and the service support provided by the supplier.

Problem Solving
The first stage of the business buying process is to identify the need of
the organization which will be met by purchasing any goods or services.
Problem recognition can result from internal or external stimuli.
Internally, the company may take a decision to launch a new product
that requires new production equipment and materials. Or, a machine
may break down and need another new part. Externally, the buyer gets
some new ideas at a trade show, see an ad, or receive a call from a
seller who offers best products at low price.
General Need Description
After the need is recognized, the buyers prepare a general need
description which reports both characteristics and quantity needed and
item for the organization. For standard items, this process presents very
few problems but for complex problems the buyer needs to work with
the other engineers, users, consultants in order to define the item.
Product Specification
In this stage, the buying organization decides and specifies the technical
product features for the needed item. Product value analysis is the
approach that helps to reduce the cost in which the components are
studied. After studying it carefully they can be redesigned, standardized
or made by fewer cost methods of production. The team will decide best
product features and specifies them accordingly.
Supplier Search
In this stage, the buyer conducts supplier search to find the best sellers.
The buyer can assemble a list of qualified suppliers by analysing trade
directories, doing computer searches or contacting other companies for
recommendation letters.
Proposal Solicitation
The stage of the business buying in which the buyer ask qualified
suppliers to submit proposals is called proposal solicitation. In the next
stage suppliers send only a catalogues or a salespersons. However,
when the item is complex or expensive, the buyer asks for the detailed
written proposals or formal presentations for each potential supplier.
Supplier Selection
In this stage, the buyer reviews proposals and choose a supplier or
suppliers. During supplier selection, the buying centre often will prepare
up a list of the desired supplier trait and their relative importance.
Such trait includes product and service quality, reputation, on-time
delivery, ethical corporate behaviour, honest communication and
competitive prices.
Order-Routine Specification
This is the stage of buying process in which the buyer choose the final
supplier by listing various things like technical specifications, quantity
needed, expected time of delivery, return policies, and warranties.
Performance Review
The stage of buying process in which the buyer analyse the supplier's
performance on the basis of different criteria and decides to continue,
modify or drop the arrangement. The seller's job is to observe and
examine the same factors used by the buyer to make sure that the seller
is giving the expected satisfaction.
The purchasing process begins when someone in the organization
recognizes a problem that can be solved or an opportunity that can be
captured by acquiring specific product. Problem recognition can be
triggered by internal or external forces.
The Search Process
Once the organization has defined the product that meets its
requirements, attention turns to this question: Which of the many
possible suppliers are promising candidates? The organization invests
more time and energy in the supplier search when the proposed product
has a strong bearing on organizational performance. When the
information needs of the buying organization are low, stage 4 and 5
occur simultaneously, especially for standardized items. In this case, a
purchasing manager may merely check a catalogue or secure an update
price from the internet. Stage 5 emerges as a distinct category only
when the information needs of the organization are high. Here, the
process of acquiring and analysing proposals may involve purchasing
managers, engineers, users, and other organizational members.
Supplier Selection and Performance Review
After being selected as a chosen supplier (stage 6) and agreeing to
purchasing guidelines (stage 7), such as required quantities and
expected time of delivery, a marketer faces further tests. A performance
review is the final stage in the purchasing process. The performance
review may lead the purchasing manager to continue, modify, or cancel
the agreement. A review critical of the chosen supplier and supportive of
rejected alternatives can lead members of the decision-making unit to
re-examine their position. If the product fails to meet the needs of the
using department, decision makers may give further consideration to
vendors screened earlier in the procurement process. To keep a new
customer, the marketer must ensure that the buying organization’s need
have been completely satisfied. Failure to follow through at this critical
stage leaves the marketer vulnerable.
Buying Situation

New A situation requiring the purchase of a product for the first

Task time

Modifie
A situation where the purchaser wants some changes in the
d
original good or service
Rebuy

Straigh A situation in which the purchaser reorders the same goods or

 services without looking for new information or investigating
t Rebuy
other suppliers

Therefore, attention must centre on buying situations rather than on

products. Three types of buying situations have been delineated:
 1. New Task – In the new-task buying situation, organization
decision makers perceive the problem or need as totally different from
previous experience; therefore, they need a significant amount of
information to explore alternative ways of solving the problem and
searching for alternative suppliers.
When confronting a new-task buying situation, organizational buyers
operate in a stage of decision making referred to as extensive problem
solving. The buying influentials and decision makers lack well-defined
criteria for comparing alternative products and suppliers, but they also
lack strong predispositions toward a particular solution. In the consumer
market, this is the same type of problem solving an individual or
household might follow when buying a first home.
 2. Straight Rebuy – When there is a continuing or recurring
requirement, buyers have substantial experience in dealing with the
need and require little or no new information. Evaluation of new
alternative solutions is unnecessary and unlikely to yield appreciable
improvements. Thus, a straight rebuy approach is appropriate.
Routine problem solving is the decision process organizational buyers
employ in the straight rebuy. Organizational buyers apply well-
developed choice criteria to the purchase decision. The criteria have
been refined over time as the buyers have developed predisposition
toward the offerings of one or a few carefully screened suppliers.
 3. Modified Rebuy – In the modified rebuy situation, organizational
decision makers feel they can derive significant benefits by re-evaluating
alternatives. The buyers have experience in satisfying the continuing or
recurring requirement, but they believe it is worthwhile to seek
additional information and perhaps to consider alternative solutions.
Several factors may trigger such a reassessment. Internal forces include
the search for quality improvements or cost reductions. A marketer
offering cost, quality, or service improvements can be an external
precipitating force. The modified rebuy situation is most likely to occur
when the firm is displeased with the performance of present suppliers
(for example, poor delivery service).
Limited problem solving best describes the decision-making process for
the modified rebuy. Decision makers have well-defined criteria but are
uncertain about which suppliers can best fit their needs. In the
consumer market, college students buying their second computer might
follow a limited problem-solving approach.
The Buying Centre
The concept of the buying centre provides rich insights into the role of
group forces in organizational buying behaviour. The buying centre
consists of individuals who participate in the purchasing decision and
share the goals and risk arising from the decision. The size of the buying
centre varies, but an average buying centre includes more than four
person per purchase; the number of people involved in all stages of one
purchase may be as many as 20.
The composition of the buying centre may change from one purchasing
situation to another and is not prescribed by the organizational chart. A
buying group evolves during the purchasing process in response to the
information requirements of the specific situation. Because
organizational buying is a process rather than an isolated act, different
individuals are important to the process at different times. A design
engineer may exert significant influence early in the process when
product specifications are being established; others may assume a more
dominant role in later phases. A salesperson must define the buying
situation and the information requirements from the organization’s
perspective in order to anticipate the size and composition of the buying
centre. Again, the composition of the buying centre evolves during the
purchasing process, differs from firm to firm, and varies from one
purchasing situation to another.
Isolating the Buying Situation
First steps in defining the buying centre is the buying situation and
determining whether the firm is in the early or later stages of the
procurement decision-making process. The product, intensive-care
monitoring systems, is complex and costly. Buying centre members are
drawn from five functional areas, each participating to varying degrees
in the process. A marketer who concentrated exclusively on the
purchasing function would be overlooking key buying influentials.

The Involvement of Buying Centre Participants at Different Stages of

the Procurement Process
Stages of Procurement Process for a Medical Supplier

Buying Selectio
Identific Establish Identification and
Centre n of
ation of ment of Evaluation of
Participan Supplier
Need Objective Buying Alternatives
ts s

Physicians High High High High

Nursing Low High High Low

Administrati
Moderate Moderate Moderate High
on

Engineering Low Moderate Moderate Low

Purchasing Low Low Low Moderate

Predicting Composition
A marketer can also predict the composition of the buying centre by
projecting the effect of the industrial product on various functional areas
in the organization. If the procurement decision will affect the
marketability of a firm’s product (for example, product design, and
price) then the marketing department has to be active in the process.
Engineering will be influential in decision about new capital equipment,
materials and, and components; setting specification; defining product
performance requirements; and qualifying potential vendors.
Manufacturing executives will be included for procurement decisions that
affect the production mechanism (for example, materials or parts used
in production). When procurement decision involve a substantial
economic commitment or impinge on strategic or policy matters, top
management will have considerable influence.
Roles in the Buying Centre
Members of the buying centre assume different roles throughout the
procurement process. Frederick Webster Jr. and Yoram Wind have given
the following levels to each of these roles: users, gatekeepers,
influencers, deciders, and buyers.
Users – are the personnel who use the product in question. Users may
have anywhere from inconsequential to extremely important influence
on the purchase decision. In some cases, the users initiate the purchase
action by requesting the product. They may even develop the product
specifications.
Gatekeepers – control information to be reviewed by other members of
the buying centre. They may do so by disseminating printed information,
such as advertisements, or by controlling which salesperson speaks to
which individuals in the buying centre. To illustrate, the purchasing
agent might perform this screening role by opening the gate to the
buying centre for some sales personnel and closing it to others.
Influencers – affect the purchasing decision by supplying information for
the evaluation of alternatives or by setting buying specifications.
Typically, those in technical departments, such as engineering, quality
control, and R&D, have significant influence on the purchase decision.
Sometimes, outside individuals can assume this role. For high-tech
purchases, technical consultants often assume an influential role in the
decision process and broaden the set of alternatives being considered.
Deciders – actually make the buying decision, whether or not they have
the formal authority to do so. The identity of the decider is the most
difficult role to determine: Buyers may have formal authority to buy, but
the president of the firm may actually make the decision. A decider
could be a design engineer who develops a set of specifications that
only one vendor can meet.
Buyer – has formal authority to select a supplier and implement all
procedures connected with securing the product. More powerful
members of the organization often usurp the power of the buyer. The
buyer’s role is often assumed by the purchasing agent, who executes
the administrative functions associated with a purchase order.
Module-III
Types of Business Channel Intermediaries Distribution channel:

 The link between the manufacturer and the customer is called the
Channel of Distribution.
 The channel accomplishes all the tasks necessary to get the
product/service to market.
 Tasks can be performed by the manufacturer or be delegated
throughout the channel.
Distribution channel is a set of interdependent organizations that ease
the transfer of ownership as products move from producer to business
user or consumer.
The distribution of products involves two main elements:
 1. The management of the tangible or physical aspects of moving a
product from the producer to the end user (part of supply chain
management).
 2. The management of the intangible aspects or issues of ownership,
control and flows of communication between the parties responsible for
making the offering accessible to the customer (channel management).
The Business Market Channel
The link between manufacturers and customers is the channel of
distribution. The channel accomplishes the entire task necessary to
affect a sale and deliver products to the customer. These tasks include
making contact with potential buyers, negotiating, contracting,
transferring title, communicating, arranging financing, servicing the
product, and providing local inventory, transportation, and storage.
These tasks may be performed entirely by the manufacturer or entirely
by intermediaries, or they may be shared between them. The customer
may even undertake some of these functions; for example, customers
granted certain discounts might agree to accept larger inventories and
the associated storage costs.

Some channels are direct – the manufacturer must perform all the
marketing functions needed to make and deliver products. The
manufacturer’s direct sales force and online marketing channels are
examples. Others are indirect; that is, some type of intermediary (such
as a distributor or dealer) sells or handles the product.
Direct Channels
Direct distribution, common in business marketing, is a channel strategy
that does not use intermediaries. The manufacturer’s own sales force
deals directly with the customer, and the manufacturer has full
responsibility for performing all the necessary channel tasks. Direct
distribution is often required in business marketing because of the
nature of the selling situation or the concentrated nature of industry
demand. The direct sales approach is feasible when:
 1. The customers are large and well defined.
 2. The customers insist on direct sales
 3. Sales involve extensive negotiations with upper management
 4. Selling has to be controlled to ensure that the total product
package is properly implemented and to guarantee a quick response to
market conditions.
Indirect Channels
Indirect distribution uses at least one type of intermediary, if not more.
Business marketing channels typically include fewer types of
intermediaries than do consumer goods channels. Manufacturer’s
representatives and industrial distributors account for most of the
transactions handled in this way. Indirect distribution is generally found
where:
 1. Marketers are fragmented and widely dispersed
 2. Low transaction amounts prevail
 3. Buyers typically purchase a number of items, often different
brands, in one transaction.
Integrated Multichannel Models
Leading business marketing firms use multiple sales channels to serve
customers in a particular market. The goal of multichannel model is to
coordinate the activities of many channels, such as field sales
representatives, channel partners, call centres, and the Web, in order to
enhance the total customer experience and profitability. Consider a
typical sales cycle that includes the following tasks: lead generation,
lead qualification, negotiation and sales closure, fulfilment, and
customer care and support.

Triggered by a sales call, a customer’s response to direct

Lead
mail, or by a request for information through a website,
Generation
an initial contact with a prospect is made.

Lead Potential customer is screened: the prospect’s need for

Qualificatio the product or service, buying interest, funding, and time
n frame for making the purchase.

Bid and Preparation of bid and proposal to meet customer’s

Proposal requirements (a complex task for large technical
 projects).

Negotiation
The negotiation of prices, terms, and conditions, followed
and Sales
by agreement on a binding contract.
Closure

For standardized product or service, delivery of offering to

Fulfilment customer. Configuration, customization, and installation
for more complex sales

Customer Post-sale problem resolution, customer guidance, and

Care and ongoing contact to insure customer retention, loyalty, and
Support growth.

In a multichannel system, different channels can perform different tasks

within a single sales transaction with a customer. For example, business
marketing firms might use a call centre and direct mail to generate
leads, field sales representatives to close sales, business partners (for
example, industrial distributors) to provide fulfilment (that is, deliver or
install product), and a website to provide post-sale support.
Channel Functions:

Functions Purpose

  Extending relationship, trust,

Exchanges of products, services, commitment between all parties –
information, technical, financial, Reducing the uncertainty
social matters.   Better positioned to
concentrate on other tasks

  Producers focus on their core

Reducing complexity from activities
numbers of transactions,
frequency of contact by using   End user customers can
intermediaries obtained improved individual
support and service

  Producers can reduce the risk

Increasing value and competitive of purchase uncertainty
advantage
  Intermediaries through their
services create the competitive
 advantage

 Sorting -Middlemen obtain the supplies of goods from various

suppliers and sort them out into similar groups on the basis of size,
quality etc.
 Accumulation -In order to ensure a continuous supply of goods,
middlemen maintain a large volume of stock.
 Allocation -It involves packing of the sorted goods into small
marketable lots like 1Kg, 500 grams, 250 grams etc.
 Assorting -Middlemen obtain a variety of goods from different
manufacturers and provide them to the customers in the combination
desired by them.
 Product Promotion -Sales promotional activities are mostly
performed by the producer but sometimes middlemen also participate in
these activities like special displays, discounts etc.
 Negotiation -Middlemen negotiate the price, quality, guarantee and
other related matters about a product with the producer as well as
customer.
 Risk Taking -Middlemen have to bear the risk of distribution like risk
from damage or spoilage of goods etc. when the goods are transported
from one place to another or when they are stored in the god-owns.
 Hold Stock -Distribution channel members hold stock of a company’s
products in their own facilities. A wholesaler, for example, can support a
network of local retailers by holding stock, delivering goods to stores or
offering retailers a local collection service. This helps reduce a
company’s own stockholding costs and ensures products are readily
available close to the point of sale. By taking responsibility for delivery to
local customers, channel members also reduce a company’s logistics
costs.
 Provide Customer Support -Distributors of industrial or business-to-
business products may provide technical support and maintenance
services to a company’s customers. By handling installation, training,
scheduled servicing and maintenance to agreed-upon quality standards
through distributors, companies can ensure customers obtain essential
support without stretching their own service resources.
 Increase Market Coverage -Setting up a network of wholesalers and
retailers enables companies to reach territories they could not cover with
their own sales resources. This provides companies with a low-cost
method of expanding geographically without increasing its internal sales
resources. Members of the distribution channel with their own customer
base offer companies the opportunity to gain new business without
incurring sales and prospecting costs.
 Support Smaller Customers -Companies can use their distribution
channels to deal with their smaller customers, leaving their own sales
teams free to focus on dealing with large accounts. Distributors and
retailers may deal with small customers in a particular geographic region
or sell to a specific sector of the market. Companies must decide which
customers their channel partners can service as the retailer or distributor
then controls the relationship with the customer.
 Improve Customer Convenience -By developing an online channel,
companies can improve convenience for customers. A website is open
for business around the clock, so customers can order at any time
without having to search for a local stockist. An online channel also
enables companies to sell their goods in territories where they do not
have direct or indirect channel coverage.
Channel Functions Aligned With Customer Needs

Channel
Customer Needs
Function


1. Product
Information  1. Customers seek more information for new and/or
 technically complex products and those that are
2. Product characterized by a rapidly changing market environment.
Customizati  2. Some products must be technically modified or
on need to be adapted to meet the customer’s unique
 requirements.
3. Product  3. Because of its importance to the customer’s
Quality operations, product integrity and reliability might be given
Assurance special emphasis by customers.
 4. Lot
Size

  4. For products that have a high unit value or those

 that are used extensively, the purchase represents a
sizable dollar outlay and a significant financial decision for
5. Assortme the customers.
nt
 5. A customer may require a broad range of products,
 including complementary items, and assign special value
6. Availabili to one-stop shopping.
ty
 6. Some customer environments require the channel
 to manage demand uncertainty and support a high level
7. After- of product availability.
Sales
Service  7. Customers require a range of services from
installation and repair to maintenance and warranty.

8. Logistics  8. A customer organization may require special
transportation and storage services to support its
operations and strategy

Business Market Channel Design:

Channel design is a dynamic process of developing new channels where
none existed and modifying existing channels. The business marketer
usually deals with modification of existing channels, although new
products and customer segments may require entirely new channels.
Regardless of whether the manager is dealing with a new channel or
modifying an existing one, channel design is an active rather than a
passive task. Effective distribution channel do not simply evolve; rather,
they are developed by management, which takes action on the basis of
a well-conceived plan that reflects overall marketing goals.
Channel design is best conceptualized as a series of stages that the
business marketing manager must complete to be sure that all
important channel dimensions have been evaluated. The result of the
process is to specify the structure that provides the highest probability
of achieving the firm’s objective.

Step
End-User Focus: Define Customer Segments
1

Step Identify and Prioritize Customer’s Channel Requirements by

2 Segments
Step
Assess the Firm’s Capabilities to Meet Customer’s Requirements
3

Step
Benchmark Channel Offerings of Key Competitors
4

Step
Create Channel Solutions to Customer’s Latent Needs
5

Step
Evaluate and Select Channel Options
6

Step 1: Define Customer Segments

The primary goal of the distribution channel is to satisfy end-user needs,
so the channel design process should begin there. Step 1 is about
defining target market segments and isolating the customer buying and
usage behaviour in each segment (what they buy, how they buy, and
how they put their purchases to use).
Some business marketers err by considering their channel partners as
“customers and rarely looking beyond them”. To inform the channel
design process, however, the marketing strategist should centre on the
importance of the product from the customer’s perspective.
Step 2: Identify Customers’ Channel Needs by Segment
Identifying and prioritizing the channel function requirements for
customers in each market segment is next. This information should be
elicited directly from a sample of present or potential customers from
each segment. For example, large customers for information-technology
products might rank product customization, product quality assurance,
and after sales service as there top three needs, whereas
small customers may prioritize product information, assortment, and
availability as their most important needs. The business marketing
manager should also probe customers on their issues that might provide
strategy insights. For instance, how sensitive are customers to a two-
hour versus six-hour service response time, or how much value do they
perceive in a three-year versus one-year warranty.
Step 3: Assess the Firm’s Channel Capabilities
Once customer requirements have been isolated and prioritized, an
assessment is made of the strengths and weaknesses of the firm’s
channel. The central focus is on identifying the gaps between what
customers in a segment desire and what the channel is now providing.
Customers base their choice of a channel not on a single element, but
on a complete bundle of benefits (that is, channel functions). To that
end, the business-to-business firm should identify particular channel
functions, like aftersales support or availability where action could be
taken to enhance the customer value proposition.
Step 4: Benchmark to Competitors
What go-to-market strategies are key competitors using? In designing a
channel, cost considerations prevent the business marketer from closing
all the gaps on channel capabilities that may appear. However, a clear
direction for strategy is revealed by understanding the channel offerings
of competitors. For example, an aggressive competitor that goes to
market with its own team of account managers and dedicated service
specialists might demonstrate special strength in serving large corporate
customers. However, countless opportunities exist for smaller rivals to
counter this strategy by developing special channel offerings tailored to
small and medium-sized customers (for example, local markets succeed
in retailing their market leadership position in small towns despite the
aggressive challenge from malls and shopping marts.)
Step 5: Create Channel Solutions for Customers’ Latent Needs
Sometimes, a review of competitor offerings can alert the marketer to
opportunities for new offerings that may have special appeal to
customers. “At other times, customers’ needs may be latent and
unarticulated, and it is the channel steward’s responsibility to tap into
and surface those requirements.” Based on such an assessment, a
provider for information-technology equipment created an entirely new
channel option for the small and medium-sized customer segment.
Rather than selling equipment, this new channel takes responsibility for
installing, upgrading, and maintaining the equipment at the customers’
locations for an ongoing service fee.
Step 6: Evaluate and Select Channel Options
Channel decisions must ultimately consider the cost-benefit trade-offs
and the estimated profitability that each of the viable channel options
presents. Some of the channel gaps that are uncovered in this
assessment can be closed by the independent actions and investments
of the business-to-business firm (for example, adding to the service
support staff or the sales force). For the most part, however, the
greatest progress will come from the channel partners (for example,
distributors or representatives) working together and discussing how
channel capabilities can be aligned to customer needs. “The idea is to
enhance the value delivered to customers through collaborative action
among channel partners. If the partners can agree on how to pull it off
and, indeed, accomplish their redefined tasks,” they will squarely
respond to customer needs and advance the performance of the
channel. One important implication of the framework is that the design
of the channel must change as customer and competitor behaviour
changes. Rather than a static structure, channel management is an
ongoing process involving continuous adjustments and evolution.
When to Make a Channel Design Decision
 Developing a new product or product line
 Aiming an existing product at a new market
 Making a major change in some other component of the marketing
mix
 Establishing a new firm
 Adapting to changing intermediary policies that may inhibit
attainment of distribution objectives
 Dealing with changes in availability of particular kinds of
intermediaries
 Opening up new geographic marketing areas
 Facing the occurrence of major environmental changes
 Meeting the challenge of conflict or other behavioural problems
 Reviewing and evaluating
Design Criteria
Criteria for selecting and evaluating intermediaries
Both the firm and its distributors should recognize their obligations
before entering into an agreement. To improve the chances of success,
the supplier should ask several questions of potential distributors.
 1. What is distributor’s credit and financial condition?
 2. What is the distributor’s selling capability?
 3. Will the distributor forgo competitive products? Does it welcomes
the supplier’s products?
 4. What is the distributor’s general reputation among suppliers and
customers?
 5. Does the distributor have adequate market coverage?
 6. How competent is the distributor’s management?
 7. How does the distributor rate on aggressiveness, enthusiasm, and
taking initiative?
 8. Is the distributor the appropriate size to do business with us?
We have to consider the following factors for the selection of channel of
distribution:
Product -Perishable goods need speedy movement and shorter route of
distribution. For durable and standardized goods, longer and diversified
channel may be necessary. Whereas, for custom made product, direct
distribution to consumer or industrial user may be desirable. Also, for
technical product requiring specialized selling and serving talent, we
have the shortest channel. Products of high unit value are sold directly
by travelling sales force and not through middlemen.
Market
 1. For consumer market, retailer is essential whereas in business
market we can eliminate retailing.
 2. For large market size, we have many channels, whereas, for small
market size direct selling may be profitable.
 3. For highly concentrated market, direct selling is preferred whereas
for widely scattered and diffused markets, we have many channels of
distribution.
 4. Size and average frequency of customer’s orders also influence
the channel decision.
Customer and dealer analysis will provide information on the number,
type, location, buying habits of consumers and dealers in this case can
also influence the choice of channels. For example, desire for credit,
demand for personal service, amount and time and efforts a customer is
willing to spend-are all important factors in channels choice.
Middlemen
 1. Middlemen who can provide wanted marketing services will be
given first preference.
 2. The middlemen who can offer maximum co-operation in
promotional services are also preferred.
 3. The channel generating the largest sales volume at lower unit cost
is given top priority.
Company
 1. The company’s size determines the size of the market, the size of
its larger accounts and its ability to set middlemen’s co-operation. A
large company may have shorter channel.
 2. The company’s product-mix influences the pattern of channels.
The broader the product-line, the shorter will be the channel. If the
product-mix has greater specialization, the company can favour selective
or exclusive dealership.
 3. A company with substantial financial resources may not rely on
middlemen and can afford to reduce the levels of distribution. A
financially weak company has to depend on middlemen.
 4. New companies rely heavily on middlemen due to lack of
experience.
 5. A company desiring to exercise greater control over channel will
prefer a shorter channel as it will facilitate better co-ordination,
communication and control.
 6. Heavy advertising and sale promotion can motivate middlemen in
the promotional campaign. In such cases, a longer chain of distribution
is profitable.
Thus, quantity and quality of marketing services provided by the
company can influence the channel choice directly.
Marketing Environment -During recession or depression, shorter and
cheaper channel is preferred. During prosperity, we have a wider choice
of channel alternatives. The distribution of perishable goods even in
distant markets becomes a reality due to cold storage facilities in
transport and warehousing. Hence, this leads to expanded role of
intermediaries in the distribution of perishable goods.
Competitors -Marketers closely watch the channels used by rivals. Many
a time, similar channels may be desirables to bring about distribution of
a company’s products. Sometimes, marketers deliberately avoid
channels used by competitors. For example, company may by-pass retail
store channel (used by rivals) and adopt door-to-door sales (where
there is no competition).
Customer Characteristics -This refers to geographical distribution,
frequency of purchase, average quantity of purchase and numbers of
prospective customers.
Channel Compensation -This involves cost-benefit analysis. Major
elements of distribution cost apart from channel compensation are
transportation, warehousing, storage insurance, material handling
distribution personnel’s compensation and interest on inventory carried
at different selling points. Distribution Cost Analysis is a fast growing
and perhaps the most rewarding area in marketing cost analysis and
control.
Channel member performance evaluation

Criterio
Frequently Used Operational Performance Measures
n

Gross sales. Sales by

Sales Actual sales/sales quota.
product and market
Performa Market share Price level
segment. Sales growth over
nce realized
time

Inventor
Average inventory
y Inventory turnover. On-time
maintained. Inventory/sales
mainten delivery
ratio
ance

Total number of Salespeople assigned by

Selling
salespeople. Salespeople geography. Account managers
capabiliti
assigned to the supplier’s assigned to strategic
es
products. customers.

Informati Sales data by customer.

Information on inventories and
on Information on end-user
returns.
provision needs.

Channel Strategy
As B2B organizations rush new products to market, failing to carefully
plan a channel strategy is a common mistake. Often the biggest
challenge with a new offering is forging a cross-functional alliance across
the enterprise that includes channel interests earlier in the process.
Unfortunately, many companies base their channel launch strategies on
what works for the direct sales force — only to discover after the fact
that they need to retool their plans post-launch to reflect partner-
specific needs. Today, we’re seeing more channel teams seeking an
invitation to the exclusive “product marketing table” where product-
specific strategy and launch decisions are made.
It’s crucial to establish formal alignment during launch planning to
ensure a channel strategy is developed and agreed upon. Specific
channel conversations must take place at this critical stage. Channel
marketing must provide insight on what makes partners tick rather than
leaving product teams to base channel strategy on incorrect
assumptions. This channel/product marketing alignment should pinpoint
a new offering’s best routes to market (e.g. ISVs, resellers, system
integrators, retailers, consultants) and ensure that the strategy delivers
a well-formed readiness and go-to-market plan. Serious decisions has
identified three areas of alignment that must be addressed to develop
channel business propositions and ensure channel readiness:
  Channel product alignment. Clearly define what market segments
will be targeted by partners; then, within those segments, determine the
distribution strategy – who should be selling what and where.
Additionally, strong and verifiable evidence should be provided showing
how this new product stacks up against its competition and
demonstrating why it’s the best option for the partner to sell and the
end-user to buy.
  Channel sales alignment. Working together, product marketing and
channel marketing should determine what the net margin will be for
partners on the new offering and whether additional supplier products
can be attached or complementary services added by the partner to
increase the deal size. This teamwork should extend to identifying what
channel competencies will be required to effectively address the needs
of target markets – and determining whether current training courses
provide sufficient coverage or new training paths/competency levels are
necessary.
  Channel marketing alignment. Partners sell and support what they
know, so building awareness for new offerings is critical. Our data
indicates that successful channel organizations spend up to one-third of
their budgets on marketing to partners. Channel marketing should
educate partners through business value propositions, while at the same
time extending a joint (supplier/partner) value proposition through the
partner to customers. Driving demand for partners is key to creating a
successful launch for a new product. Most suppliers create programs for
new products for partners to execute themselves, then layer incentives
and funding to entice and support partners as part of a lead generation
strategy.
Aligning channel and product marketing in the development of a product
channel strategy bridges a significant gap that exists for some
organizations. Addressing partner-specific needs is vital to create a clear
and compelling business proposition for channel partners and answer
the inevitable (often first) question from partners: “What’s in it for me?”
Having a strong answer to this question will accelerate adoption and get
more partners on board faster with a supplier’s launch of a new product.
For B2B organizations whose sales model includes a portion of their
business going through partners, getting the channel a seat at the table
is the ideal scenario for developing a new product channel strategy.
Leading channel organizations have found that specifically addressing
channel interests early in the product launch process, and establishing
interlock between product marketing and channel marketing, can make
the difference between success and failure when delivering products
through the channel.
Marketing Channel Structure B2B:

Selecting Right Business-to-Business Channel

A business to business or B2B market is characterized by close technical
and commercial dialogue between buyers and sellers. The manufacturer
or the service provider often needs to manufacture or serve according to
the customers’ requirements. For example, an industrial plastic
components’ manufacturer has to work directly with customers during
the design and development process while manufacturing the ordered
components.
The importance of the product to the buyers or the type, frequency and
quantity of purchasing largely influence the B2B distribution channel
structures. For instance, companies might buy routine purchases like
office stationeries through specialist retailers or distributors, because
these are not important for the production lines. On the contrary, a key
component to run the production line might need to be supplied directly
to the buyer within a specific deadline. What type of distribution channel
structure is suitable for your product or service depends on the sector of
the business, on the type of product or service and cost effectiveness.
We will shed light upon four basic structures of distribution channels
that are widely practiced in B2B markets:
Manufacturer – Business Customer
Direct channel from manufacturer to the user is suitable for products
with high technical content and high unit cost. Other rationales of opting
for this channel are:
 Direct channel might become necessary if there is no wholesale
service in the market where the manufacturer is operating and if the
manufacturer is catering to a small group of local customers. The
manufacturer has its own sales and distribution department, which can
negotiate sales, provide services, meet customers’ needs and capable to
operate like the wholesalers.
 The sales representative can both sell and install the product, e.g.
computer software. Sales branches can sell the products directly to the
small retailers and wholesalers. In a direct distribution channel, sales
branches or sales offices should be set up in the areas where demand is
high, especially in busy areas for better visibility and customers’
conveniences. It is also convenient for the sales force in providing
products and support services; as a result, they can meet customers’
needs faster. Sales offices do not keep stock so they act like agents and
pass on customers’ orders to the head office.
 Direct channel gives the manufacturer more control over its
distribution channel, which in turn, increases the efficiency and
effectiveness of the links between the manufacturers and customers.
They are likely to develop strong and longer business relationships.
Manufacturer – Business Distributor – Business Customer
Manufacturers or service providers who choose this less direct channel
appoint agents on commission basis. They take the help of agents
because of the agent’s relevant market knowledge, well established
contacts in the market and their superior buying/selling skills. Moreover,
the manufacturer or the service provider can train the agents.
Manufacturer – Manufacturer’s Representative -Business Customer
This less direct channel works well when the number of customers either
goes up or down. This channel is also helpful when the intermediary
functions increase. Building material industries usually follow this
distribution channel structure.
Manufacturer – Manufacturer’s Representative -Business Distributor -
Business Customer
This channel structure is particularly helpful for export markets. Agents
start by coordinating sales; distributors followed by filling the needs of
inventory and restocking facilities close to the point of customer
demands. A manufacturer and a retailer might also provide online
service along with their bricks and mortar operation. In this way, they
get the benefit of both direct and indirect selling. As a matter of fact,
multiple distribution channel users can reach more market segments.
However, it increases intra-channel competition and the trade members
might become less supportive because of that. A flexible and far-sighted
attitude in choosing the proper distribution channel is a necessity for
your business growth. Say someone starts being a distributor or an
agent of an international paint for a local market. The starting point
might also be as a paints retailer. After accumulating good learning
experiences about the trade, the business starts manufacturing its own
brand of paint for that local market. Over the passage of time, the
company evolves into an international manufacturer, retailer and
distributor. Today’s many corporate conglomerates once started as
intermediaries, in this way. SMEs in Oman can also reach other countries
through intermediaries in those countries or via international
intermediaries. Exactly the same way foreign brands have been reaching
Oman.
Variables Affecting Channel Structure
 1. Market Variable
 2. Product Variables
 3. Company Variables
 4. Intermediary Variables
 5. Environmental Variables
 6. Behavioural Variables
Market Variables
 Market Geography – location, geographical size and distance from
producer
 Market Size – number of customers in a market
 Market Density – number of buying units
 Market Behaviour – who buys and how, when and where customers
buy
Product Variables
 Bulk and Weight
 Perishability
 Unit Value
 Degree of Standardization
 Technical versus Non-technical
 Newness
Company Variables
 Size – the range of options is relative to a firm’s size
 Financial Capacity – the greater the capital, lower is the dependence
on intermediaries
 Managerial Expertise – intermediaries are necessary when
managerial experience is lacking
 Objectives & Strategies – marketing and objectives may limit use of
intermediaries
Intermediary Variables
 Availability – availability of intermediaries influences channel
structure
 Cost – cost is always a consideration in channel structure
 Services – services that intermediaries offer are closely related to the
selection of channel members
Environmental Variables
 Economic
 Socio Cultural
 Competitive
 Technological
 Legal
Behavioural Variables
 Develop congruent roles for channel members
 Be aware of available power bases
 Attend to the influence of behavioural problems that can distort
communication
Channel Intensity
It refers to the number of intermediaries through which a manufacturer
distributes its goods. Marketing channel intensity takes into account both
the variance and number of channels an organization may use to deliver
goods and services to consumers. As organizations develop their
marketing channel strategies, an important question arises regarding
distribution intensity. There is some freedom in most industries for a
firm to determine which channels they will use, and how much volume
each channel will receive. Weighing the pros and cons of various
channels, both in terms of the number of channels and the volume
within each channel, can have a significant strategic impact on a firm’s
position in a market.
There are three ways to frame the distribution intensity decision:
Intensive
An intensive distribution strategy seeks to distribute a product through
all available channels in an area. Usually, an intensive distribution
strategy suits items with wide appeal across broad groups of consumers,
such as convenience goods. This is the highest in both number of
channels and volume within each channel. Firms that choose an
intensive distribution strategy try to sell their products in as many
outlets as possible. Intensive distribution strategies are often used for
convenience offerings—products customers purchase on the spot
without much shopping around. Soft drinks and newspapers are an
example. You see them sold in all kinds of different places.
Selective
Selective distribution is distribution of a product through only a limited
number of channels. This arrangement helps to control price cutting.
Selective distribution focuses on narrowing down the number of
channels within the distribution strategy, but not the overall volume of
goods sold through those channels. This strategy focuses on fewer
channels yet retains a desire for higher volumes to capture scale
economies in production. Common channels in these circumstances are
channels where the firm can maintain strategic control of how the
products are sold, at what price, and in which regions. Selective
distribution strategies are suitable for shopping products such as
clothing, furniture, household appliances, computers, and electronic
equipment for which consumers are willing to spend time visiting
different retail outlets to compare product alternatives. Producers can
choose only those wholesalers and retailers that have a good credit
rating, provide good market coverage, serve customers well, and
cooperate effectively. Wholesalers and retailers like selective distribution
because it results in higher sales and profits than are possible with
intensive distribution where sellers have to compete on price.
Exclusive
Exclusive distribution is distribution of a product through one wholesaler
or retailer in a specific geographical area. Though marketers may
sacrifice some market coverage with exclusive distribution, they often
develop and maintain an image of quality and prestige for the product.
In addition, exclusive distribution limits marketing costs since the firm
deals with a smaller number of accounts. In exclusive distribution,
producers and retailers cooperate closely in decisions concerning
advertising and promotion, inventory carried by the retailers, and prices.
Exclusive distribution is typically used with products that are high priced,
that have considerable service requirements, and when there are a
limited number of buyers in any single geographic area. Exclusive
distribution allows wholesalers and retailers to recoup the costs
associated with long selling processes for each customer and, in some
cases, extensive after-sale service. Specialty goods are usually good
candidates for this kind of distribution intensity.
Technology and Channels
Technology has disrupted some of the logic behind these channel
decisions, as digital storefronts have grown to be highly influential,
easily accessible to global markets, and substantially cheaper than retail
space. As the rise of digital purchasing continues, and the cost of
shipping decreases, globalization will drive organizations more and more
towards channel strategies that optimize online exposure.
Channel Conflict and Resolution
 A channel conflict may be defined as an “A situation in which one
channel member perceives another channel member(s) to be engaged in
behaviour that prevents it from achieving its goals”.
 Conflict is opposition, disagreement or discards among the
organizations.
 It is needed to have positive effect as loopholes in the existing
system can be plugged timely and performance can be maximized.
 It can keep other channel members on their toes knowing that a
decline in performance might lead to a change in the channel
arrangements.
 Channel conflict arises when the behaviour of a channel member is
in opposition to its channel counterpart. It is opponent centred and
direct in which the goal or object sought is controlled by the
counterpart.
Conflict can be classified as:
 Vertical Conflict
 Horizontal Conflict
 Multi-channel Conflict
Vertical Conflict
 Vertical conflict occurs due to the differences in goals and objectives,
misunderstanding, and mainly due to the poor communication.
 Lack of role clarity and over dependence on the manufacturers. For
example, today the large distributors dominate the market and dictate
the terms. Hence there are often conflicts between these giant
distributors and manufacturers.
 Distributors expect manufacturers to maintain the product quality
and production schedules and in turn manufacturers expect distributors
to provide coordination functional services. If they fail to conform each
other’s expectations, channel conflict results.
Reasons for Vertical Conflict
Dual Distribution – manufacturers may bypass intermediaries and sell
directly to consumers and thus they compete with the intermediaries.
Over Saturation – manufacturers permit too many intermediaries in a
designated area that can restrict, reduce sales opportunities for
individual distributor and ultimately shrink their profit.
Partial Treatment – manufacturers often offer different services and
margins to different distributors even at same level or favour some
members
New Channels – manufacturers develop and use innovative that create
threat to establish channel participants
 No or inadequate sales support and training to intermediaries from
the manufacturers
 Irregular communication, non-cooperation and rude behaviour with
the channel member
Horizontal Conflict
These are the conflicts between the channel members at the same level,
i.e. two or more distributors. These conflicts can offer some positive
benefits to the consumers. Competition or price war between two
distributors can be in favour of consumers.
Reason Behind Horizontal Conflict
 Aggressive advertising and pricing by one distributor can affect
business of other distributors.
 Extra service offered by one distributor can attract customers of
others.
 Crossing the assigned territory and selling in other distributors area
 Unethical practices of one distributor can affect other and spoil the
brand image.
Multi-Channel Conflict
 It occurs when the manufacturer uses dual distribution strategy i.e.
the manufacturer uses two or more channel arrangements.
 Manufacturers can sell directly through their representatives. This
can affect the business of other distributor selling the manufacturer’s
brand.
 Stages of Conflict
Latent Conflict
 Some amount of discord exists but does not affect the service
objective.
 Disagreement could be on roles, expectations, perception,
communication
Perceived Conflict
 Discords become noticeable – channel partners are aware of the
opposition
 Channel members take the situation in their stride and go about
their normal business
 No cause for worry but the opposition has to be recognized
Felt Conflict
 Reaching the stage of worry, concern and alarm. Also known as
“Affective Conflict”
 Parties try to outsmart each other
 Cause could be economical or personal
 Needs to be managed effectively and not allowed to escalate
Manifest Conflict
 Reflects open antagonistic behaviour of channel partners.
Confrontation results.
 Initiative taken are openly opposed affecting the performance of the
channel system.
 May require outside intervention to resolve.
Resolving Conflicts

Conflict Resolution Styles Avoidance

 Used by weak channel members

 Problem is postponed or discussion avoided
 Relationships are not of much importance
 As there is no serious effort on getting anything done, conflict is
avoided
Aggression
 Also known as competitive or selfish style
 It means being concerned about one’s own goals without any
thought of others
 The dominating channel partner (may be the Principal) dictates
terms and condition to the others. Long term could be detrimental to the
system.
Accommodation
 A situation of complete surrender
 One party helps the other achieve its goals without being worried
about its own goals
 Emphasis is on full cooperation and flexibility in approach which may
generate matching feeling in the receiver.
 If not handled properly, can result in exploitation
Compromise
 Obviously both sides have to give up something to meet mid-way.
 Can only work with small and less serious conflicts.
 Used often in the earlier two stages
Collaboration
 Also known as a problem solving approach
 Tries to maximize the benefit to both parties while solving the
dispute
 Most ideal style of conflict resolution – a win-win approach
 Requires a lot of time and effort to succeed
 Sensitive information may have to be shared
Controlling Conflict and Motivating Channel Members
Cooperation between members in the channel can be achieved in two
main ways. One way is to exercise authority through the use of the
power that one organization may have over others. Another way is to
establish trust and a spirit of collaboration between organizations.
Through trust it is possible to develop a sense of commitment so that all
organizations attempt to support one another.
Organizations seek to influence inter organisational relationships through
a variety of communication strategies.
Influence Strategies

Power
Strategy Message
source

 1. Promise
strategy 1.Reward 2.Coercion 3
1.If you do what we wish we will reward you. 2.If you do
 2. strategy not do what we wish we will punish you. 3.You agreed,
.Legitimacy 4.Referent

3.Legalistic strategy so you should do what we wish. 4.Please do what we

,

4.Request strategy wish. 5.We will not mention what we wish. 6.If you do

reward, coercion 5.Exp

Information what we wish you will be rewarded (e.g. more

ertise,

5.Exchange strategy profitable).

reward 6.Expertise,

6.Recommendation reward

strategy

These days, the use of relative power positions based on access to and
control of resources is no longer regarded as the preferred and
pervasive marketing management tool. With the focus turning to the
development and maintenance of buyer–seller relationships, trust and
commitment have emerged as significant contemporary managerial
concepts.
Motivating Channel Members
Distributors and representatives are independent and profit oriented.
They are oriented toward their customers and toward whatever means
are necessary to satisfy customer needs for industrial products and
services. Their perceptions and outlook may differ substantially from
those of the manufacturers they represent. As a consequence,
marketing strategies can fail when managers do not tailor their
programs to the capabilities and orientation of their intermediaries. To
manage the business marketing channel effectively, the marketer must
understand the intermediaries’ perspective and device ways to motivate
to perform in a way that enhances the manufacturer’s long-term
success. The manufacturer must continually seek support from
intermediaries, and the quality of that support depends on the
motivational techniques used.
Partnership
Channel member motivation begins with the understanding that the
channel relationship is a partnership. Manufacturers and intermediaries
are in business together; whatever expertise and assistance the
manufacturer can provide to the intermediaries improves total channel
effectiveness. One study of channel relationship suggested that
manufacturers may be able to increase the level of resources directed to
their products by developing a trusting relationship with their
representatives; by improving communication through recognition
programs, product training, and consultation with the representatives;
and by informing the representatives of plans, explicitly detailing
objectives, and providing positive feedback.
Another study of distributor-manufacturer working partnerships
recommended similar approaches. It also suggested that manufacturers
and their distributors engaged in joint annual planning that focuses on
specifying the cooperative efforts each firm requires of its partner to
reach its objectives and that periodically reviews progress toward
objectives. The net result is trust and satisfaction with the partnership as
the relationship leads to meeting performance goals.
Dealer Advisory Councils
One way to enhance the performance of all channel members is to
facilitate the sharing of information among them. Distributors or
representatives may be brought together periodically with the
manufacturer’s management to review distribution policies, provide
advice on marketing strategy, and supply industry intelligence.
Intermediaries can voice their opinions on policy matters and are
brought directly into the decision-making process.
Margins and Commission
In the final analysis, the primary motivating device is compensation. The
surest way to lose intermediary support is compensation policies that do
not meet industry and competitive standards. Representatives or
distributors who feel cheated on commissions or margins shift their
attention to products generating a higher profit. The manufacturer must
pay the prevailing compensation rates in the industry and must adjust
the rates as conditions change.
Intermediaries’ compensation should reflect the marketing task they
perform. If the manufacturer seeks special attention for a new industrial
product, most representatives require higher commissions. Many
industrial distributors charge separate fees for the value-added services
they provide. For this approach to work effectively, it is critical that the
client understands the value it is receiving for the extra charges.
Building Trust
The very nature of a distribution channel – with each member
dependent on another for success – can invite conflict. Conflict can be
controlled in various ways, including channel-wide committees, joint goal
setting, and cooperative programs involving a number of marketing
strategy elements. To compete, business marketers need to be effective
at cooperating within a network of organization – the channel.
Successful cooperation results from relationships in which the partners
have a strong sense of communication and trust. Robert M. Morgan and
Shelby D. Hunt suggest that relationship commitment and trust develop
when:
 Firms offer benefits and resources that are superior to what other
partner could offer
 Firms align themselves with other firms that have similar corporate
values
 Firms share valuable information on expectations, markets, and
performance
 Firms avoid taking advantage of their partner.
By following these prescriptions, business marketers and their channel
network can enjoy sustainable competitive advantages over their rivals
and their networks.
Channel Integration
Integrated Marketing is an approach to creating a unified and seamless
experience for consumers to interact with the brand/enterprise; it
attempts to meld all aspects of marketing communication such as
advertising, sales promotion, public relations, direct marketing, and
social media, through their respective mix of tactics, methods, channels,
media, and activities, so that all work together as a unified force. It is a
process designed to ensure that all messaging and communications
strategies are consistent across all channels and are centred on the
customer.
AAA -A planning process designed to assure that all brand contacts
received by a customer or prospect for a product, service, or
organization are relevant to that person and consistent over time.
AAAA -IMC is an approach to achieving the objectives of a marketing
campaign, through a well-coordinated use of different promotional
methods that are intended to reinforce each other. As defined by the
American Association of Advertising Agencies, integrated marketing
communications … recognizes the value of a comprehensive plan that
evaluates the strategic roles of a variety of communication disciplines
advertising, public relations, personal selling, and sales promotion and
combines them to provide clarity, consistency, and maximum
communication impact.
Importance of Channel Integration
 Bridge the gap
 Streamline the physical and information
 Reduces the uncertainty, cost and risk
 Degree of integration
 Better management
 Better coordination
 Barrier of other competitors
Types of Channel Integration:

 1. Horizontal Marketing System (HMS)

 2. Vertical Marketing System (VMS)
 3. Multi-Channel Marketing System (MMS)
Horizontal Marketing System (HMS)
A horizontal marketing system is a distribution channel arrangement
whereby two or more organizations at the same level join together for
marketing purposes to capitalize on a new opportunity. For example: a
bank and a supermarket agree to have the bank’s ATMs located at the
supermarket’s locations; two manufacturers combining to achieve
economies of scale otherwise not possible with each acting alone to
meet the needs and demands of a very large retailer; or two wholesalers
joining together to serve a particular region at a certain time of year.
According to businessdictionary.com, a horizontal marketing system is a
merger of firms on the same level in order to pursue marketing
opportunities. The firms combine their resources, such as production
capabilities and distribution, in order to maximize their earnings
potential.
Advantages of Horizontal Marketing System
 Horizontal integration of related businesses allows them to achieve
economies of scale by selling more of the same product through
geographic expansion.
 HMS includes the economies of the scope through synergies
achieved by sharing of resources common to different products and
reduction in the cost of international trade by operating factories in
foreign countries.
Disadvantages of Horizontal Marketing System
 The integration of business may result in problems related to size
such as lack of coordination.
 Conflicts between members
 Decrease in flexibility
Horizontal integration occurs when a company decides to merge, acquire
or take over another company in the same industry and at the same
stage of production. When a company can achieve the advantages of a
horizontal integration, the company can diversify its products or
services, sell those products or services to a larger market, reduce the
costs to produce its newly diversified products or services, and reduce
the amount of external competition.
When horizontal integration hampers a company, the worst
disadvantage the company can face is a reduction in overall value to the
firm because the expected synergies never materialize, despite the costs
of the horizontal integration. Other disadvantages can include legal
repercussions if the horizontal merger results in a company that may be
considered a monopoly and a reduction in flexibility due to the fact that
it is now a larger organization.
Vertical Marketing System (VMS):
A vertical marketing system (VMS) is one in which the main members of
a distribution channel work together as a unified group in order to meet
consumer needs. In conventional marketing systems, producers and
business distributors are separate businesses that are all trying to
maximize their profits. When the effort of one channel member to
maximize profits comes at the expense of other members, conflicts can
arise that reduce profits for the entire channel. To address this problem,
more and more companies are forming vertical marketing systems.
Vertical marketing systems can take several forms. In a corporate VMS,
one member of the distribution channel owns the other members.
Although they are owned jointly, each company in the chain continues
to perform a separate task. In an administered VMS, one member of the
channel is large and powerful enough to coordinate the activities of the
other members without an ownership stake. Finally, a contractual VMS
consists of independent firms joined together by contract for their
mutual benefit. One type of contractual VMS is a retailer cooperative, in
which a group of retailers buy from a jointly owned wholesaler. Another
type of contractual VMS is a franchise organization, in which a producer
licenses a wholesaler to distribute its products.
Advantages of Vertical Marketing System
 It allows you to invest in assets that are highly specialized.
 It gives you more control over your business.
 It allows for positive differentiation.
 It requires lower costs of transaction.
 It offers more cost control.
 It ensures a high level of certainty when it comes to quality.
 It provides more competitive advantages.
Disadvantages of Vertical Marketing System
 It can have capacity-balancing problems.
 It can bring about more difficulties.
 It can result in decreased flexibility.
 It can create some barriers to market entry.
 It can cause confusion within the business.
 It requires a huge amount of money.
 It makes things more difficult.
Multi-Channel Marketing System (MMS)
Multichannel marketing refers to the practice of engaging prospects,
leads and customers across a combination of indirect and direct
communication channels. A channel could be a device, medium, or
network. Multichannel marketing is important for the simple reason that
you must be where your customers are.
Module-4
Logistic Management:
LOGISTIC MANAGEMENT
supply chain management order fulfilmentLogistics management is the
governance of functions that helps organizations plan, manage and
implement processes to move and store goods. Logistics management
activities typically include inbound and outbound transportation
management, fleet management, warehousing, materials handling, ,
logistics network design, inventory control, supply/demand planning and
management of third-party logistics services providers.
distribution channel. In a manufacturing enterprise, the business process
starts with the flow of material from the suppliers to the manufacturing
plant and then to the customer through the Traditionally in the
functional organisation, the business process consists of discrete
activities such as procurement, manufacturing, and distribution under
the control of the respective departments. The departments may excel
in their respective functions, but as an organisation, their performance
may be dismal. This might happen because of three reasons:
 A lack of coordination in their activities
 Different goals to cherish
 No single agency could control them to cherish a common goal
The concept of logistics is based on the system approach. The flow of
material from a supplier to a manufacturing plant and finally to the end
customer is viewed as a single chain, ensuring efficiency and
effectiveness in sequential activities to achieve the objective of customer
satisfaction at a reduced cost.
Martin ChristopherLogistics recognises that all the activities of material
movement across the business process are interdependent and need
close coordination. These activities are to be managed as a system and
not as functional silos. The functional areas of logistics, termed
“Logistics Mix” by , consist of:
Importance of Logistics: Reduced Delivery Time

Reduced delivery time refers to a shortening of the period between a

customer ordering a product and that customer receiving the product.
When companies need to ship inventory (as e-commerce businesses
do), delivery time is a vital concern of both logistics and marketing. By
shortening delivery time, businesses can impress customers and create
loyalty while adding more value to their processes than competitors
have.
Pinpointing Customer Issues
With a highly efficient logistics strategy, companies can easily track
product orders and product shipment data. This allows a business to
spot exactly where a product has gone, what product was originally
ordered and shipped and what needs to happen to fix problems with the
order. With such expert tracking and communication procedures, a
business can easily placate an irate customer and turn a bad situation
into a good marketing opportunity.
Quality Control
Logistics is also important to manufacturers, because it allows for a high
level of control over production processes and immediate adaptations. A
company does not want to produce flawed products that have inherent
problems --few things are as damaging to a business's reputation. With
efficient logistics, a manufacturer can spot problems immediately and
quickly narrow down the issue to find the source and correct it.
Extra Services
Many businesses offer extra services as part of their marketing strategy;
these allow them to impress customers through advanced customer
service techniques. With modern logistics, companies can
offer advanced tracking options for product shipments that customers
can track at any time. Good logistics also allows for greater product
customization and tools for customers to use themselves.
Logistics has gained importance due to the following trends
 Raise in transportation cost.
 Production efficiency is reaching a peak
 Fundamental change in inventory philosophy
 Product line proliferated
 Computer technology
 Increased use or computers
 Increased public concern of products Growth of several new, large
retail chains or mass merchandise with large demands & very
sophisticated logistics services, by pass traditional channel &
distribution.
 Reduction in economic regulation
 Growing power of retailers
 Globalization
As a result of these developments, the decision maker has a number of
choices to work out the most ideal marketing logistics system.
Essentially, this system implies that people at all levels of management
think and act in terms of integrated capabilities and adoption of a total
approach to achieve pre-determined logistics objectives.
Furthermore Logistics has gained importance in the international
marketing with the following reasons:
 Transform in the customers attitude towards the total cost approach
rather than direct cost approach
 Technological advancement in the fields of information processing
and communication.
 Technological development in transportation and material handling.
 Companies are centralizing production to gain economies of scale.
 Most of the MNC organizations are restructuring their production
facilities on a global basis.
 In many industries, the value added by manufacturing is declining as
the cost of materials and distribution climbs.
 High volume data processing and transmission is revolutionizing
logistics control systems.
 With the advancement of new technologies, managers can now
update sales and inventory planning faster and more frequently, and
factories can respond with more flexibility to volatile market conditions.
 Product life cycles are contracting. Companies that have gone all out
to slash costs by turning to large scale batch production regularly find
themselves saddled with obsolete stocks and are unable to keep pace
with competitors‟ new-product introductions.
 Product lines are proliferating. More and more product line variety is
needed to satisfy the growing range of customer tastes and
requirements, and stock levels in both field and factory inevitably rise.
 The balance of power in distribution chain is shifting from the
manufacturers to the trader.
Importance of Logistics in Business
Inflows
You need supplies, raw materials and information flowing into your
business so you can use them to create or deliver your products or
services. If a delivery comes late or a computer goes down when you
are expecting vital information, your logistics are not working. You either
need to become a logistics expert or hire one to make sure you get what
you need on time. If you provide an office cleaning service, for example,
and your cleaning supplies don’t arrive on time, you can’t clean offices
that depend on you.
Internal Flow
Supplies, materials and information flow through your company once
they arrive. They must arrive on time at various workstations, desks and
offices so your employees can use them. For example, the financial
background check you perform on a company cannot be delayed if the
officer approving credit for the company has to meet a deadline.
Storage and Retrieval
Some items come into your company and must be stored until needed.
Physical products and supplies must be stored, and information must be
filed electronically or physically. When you need these items, you must
have a system for identifying and retrieving them. If a customer places a
special order for a product and the warehouse supervisor stores it until
you receive payment, you must be able to count on the supervisor to
find the item when you are ready for it.
Outflow
You make a living delivering your product or service to your customers.
That’s what they pay for. Whether you ship, deliver, transmit or
physically go to a customer’s home or business to perform a service, you
cannot afford any glitches in this function. If a vital machine part for the
repair of a customer’s air conditioning arrives, you must see that it gets
delivered to the customer’s site and that an installer is there at the same
time to install it.
Costs Are Significant
The economic forces of change are further acting to alter logistics cost
relationships and force careful re-planning of logistics systems around
the world. Trade barriers are falling as free trade is encouraged in
countries that previously had strictly managed economies. Tariffs are
being eliminated to allow the free flow of goods across political
boundaries, giving firms the opportunity to reposition their logistics
networks for lower costs and higher customer service. Finally, the world
economies seem to be on a wave of economic deregulation that will
heighten competition. Since transportation is frequently a target for
deregulation, logistics system costs will be affected.
Globalization of Industries
Globalization/internationalization of industries everywhere will depend
heavily on logistics performance and costs, as companies take more of a
world view of their operations. As this happens, logistics takes on
increased importance within the firm since logistics costs, especially the
transportation component, become a significant part of the total cost
structure. For example, if a firm seeks foreign suppliers for the materials
entering its product or foreign locations to build its products, the
motivation is to increase profit. Material and labour costs may be
reduced, but logistics costs are likely to increase due to increased
transportation and inventory costs. The trade-off, may lead to higher
profit by reducing materials, labour, and overhead costs at the expense
of logistics costs and tariffs. Outsourcing adds value, but it requires
more careful management of logistics costs and product flow times in
the supply channel. Functions of Logistics:

Order processing
It is an important task in functions of logistics operations. The purchase
order placed by a buyer to a supplier is an important legal document of
the transactions between the two parties. This document incorporates
the description or technical details of the product to supply, price,
delivery period, payment terms, taxes, and other commercial terms as
agree.
The processing of this document is important as it has a direct
relationship with the order or the performance cycle time, which
indicates the time when the order is received and when the materials
are received by the customer. The order processing activity consists of
the following steps:
 Order checking for any deviations in agrees upon or negotiated
terms
 Prices, payment and delivery terms.
 Checking the availability of materials in stock.
 Production and material scheduling for shortages.
 Acknowledging the order indicating deviations if any.
Inventory control
Inventory management is to keep enough inventories to meet customer
requirements, and simultaneously its carrying cost should be lowest. It is
basically an exercise of striking a balance between the customer service
for not losing market opportunity and the cost to meet the same.
The inventory is the greatest culprit in the overall supply chain of a firm
because of its huge carrying cost, which indirectly eats away the profits.
It consists of the cost of financing the inventory, insurance, storage,
losses, damages, and pilferage. The average cost of carrying inventory
varies from 10 to 25 percent of the total inventory per year depending
on the products.
Warehousing
Warehousing is the storing of finished goods until they are sold. It plays
a vital role in logistics operations of a firm. The effectiveness of an
organization’s marketing depends on the appropriate decision on
warehousing. In today’s context, warehousing is treated as switching
facility rather than a storage of improper warehousing management.
Warehousing is the key decision area in logistics. The major decisions in
warehousing are:
 Location of warehousing facilities
 Number of warehouses
 Size of the warehouse
 Warehouse layout
 Design of the building
 Ownership of the warehouse
Transportation
For movement of goods from the supplier to the buyer, transportation is
the most fundamental and important component of logistics. When an
order is placed, the transaction is not completed till the goods are
physically moved to the customer’s place. The physical movement of
goods is through various transportation modes. In logistics costs, its
share varies from 65 to 70 percent in the case of mass-consumed, very
low unit-priced products.
Firms choose the mode of transportation depending on the
infrastructure of transportation in the country or region. Cost is the most
important consideration in the selection of a particular mode of
transport. However, sometimes urgency of the good at the customer
end overrides the cost consideration, and goods are sent through the
fastest mode, which is an expensive alternative.
Material handling and storage system
The speed of the inventory movement across the supply chain depends
on the material handling methods. An improper method of material
handling will add to the product damages and delays in deliveries and
incidental overheads. Mechanization and automation in material handling
enhance the logistics system productivity. Other considerations for
selection of a material handling system are the volumes to be handled,
the speed required for material movement and the level of service to be
offered to the customer.
The storage system is important for maximum space utilization (floor
and cubic) in the given size of a warehouse. The material handling
system should support the storage system for speedy movement
(storage and retrieval) of goods in and out of the warehouse.
Logistical Packaging
Logistical or industrial packaging is a critical element in the physical
distribution of a product, which influences the efficiency of the logistical
system. It differs from product packaging, which is based on marketing
objectives. However, logistical packaging plays an important role in
damage protection, case in material handling and storage space
economy. The utilisation of load has a major bearing on logistical
packaging with regard to the packaging cost.
Information
Logistics is basically an information-based activity of inventory
movement across a supply chain. Hence, an information system plays a
vital role in delivering a superior service to the customers. Use of IT
tools for information identification, access, storage, analysis, retrieval
and decision support which is vital among the functions of logistics is
helping business firms to enhance their competitiveness.
Logistics strategy:
Firms spend a great deal of time finding ways to differentiate their
product offerings from those of their competitors. When management
recognizes that logistics impacts on a significant portion of a firm's costs
and that the result of decisions made about the supply chain yields
different levels of customer service, it is in a position to use this
information effectively to penetrate new markets, increase market share,
and increase profits.

The three strategies are in trade-off with each other. That is, a good
location strategy is dependent on the manner in which inventories are
managed and on the resulting inventory levels, and on the
transportation service selected. Inventory levels are dependent on the
number and location of facilities as well as the transportation service
selected. And so the interdependence goes. Hence, a triangle of logistics
strategy. Logistics network design is based on three objectives–cost
minimization, capital minimization, and logistics customer service
maximization. Not all of these objectives can be achieved simultaneously
since they may be in conflict. For example, minimizing costs and
simultaneously maximizing service are incompatible.
Objectives of marketing logistics
The General objectives of the logistics can be summarized as:
 1. Cost reduction
 2. Capital reduction
 3. Service improvement
The specific objective of an ideal logistics system is to ensure the flow of
supply to the buyer, the:
 1. Right product
 2. Right quantities and assortments
 3. Right places
 4. Right time
 5. Right cost / price and,
 6. Right condition
Market Logistic Decisions:
Market logistic includes planning the infrastructure to meet demand,
then implementing and controlling the physical flows of materials and
final goods from points of origin to points of use, to meet customer
requirements at a profit.
Interrelated aspects associated with market logistic:
 Physical Distribution
 Supply Chain Management (SCM)
 Value Network
 Demand Chain Planning
 Market Logistics
 Integrated Logistics Systems (ILS)
Market logistics planning has four steps:
 Deciding on the company’s value proposition to its customers.
 Deciding on the best channel design and network strategy for
reaching the customers.
 Developing operational excellence in sales forecasting, warehouse
management, transportation management, and material management.
 Implementing the solution with the best information system,
equipment, policies and procedures.
Market logistics objectives:

MARKETING AND LOGISTIC INTERFACE

Marketing Logistic
Marketing Activities Logistic Activities
Interface

  Marketing Research   Forecasting   Customer Service

 
  Product Mix   Transport
 Transportation
  Pricing   Inventory
  Storage
Processing
  Promotion
  Packing
  Material Handling
  Sales Force
  Order
Management   Information
Fulfilment

 It means getting the right goods to the right place at the right time
for the least cost.
 Market-logistic cost interact and are often negatively related.
Many companies state their market logistics objectives as “getting the
right goods to the right places at the right time for the least cost.” This
means a market logistics system has to simultaneously provide
maximum customer service at the minimum distribution cost.
Maximum customer service implies large inventories, premium
transportation and multiple warehouses, all of these raise market-
logistics costs. A company cannot achieve market-logistics efficiency by
asking its logistics manager to minimize the logistics costs.
Some of the major market logistics objectives of a company are as
follows:
Logistics Decisions: Market logistics activities involve strong trade-offs,
decisions must be made on a total system basis. Customers are
interested in on-time delivery, suppliers desire to meet emergency needs
and also have willingness to take back defective goods and re-supply
them quickly at their costs. A company must then research the relative
importance of these service outputs.
Market Logistics and Cost:
Let us consider, a machine manufacturer has established the following
service standards:
 1. To deliver at least 95 percent of the dealer’s orders within 7 days
of order receipt.
 2. To fill the dealer’s orders with 99 percent accuracy.
 3. To answer dealer inquiries on orders with 99 percent accuracy.
 4. To answer that damage to merchandise in transit does not exceed
one percent.
Given above market—logistics objectives, the company must design a
system that will minimise the cost of achieving these objectives.
Each possible market logistics system may give rise to the following
empirical equation:

Where, M = Total market-logistics cost of proposed system. T = Total freight cost of proposed system. FW = Total fixed

warehouse cost of proposed system.

VW = Total variable warehouse costs (including inventory) or proposed system. S = Total cost of lost sales due to average

delivery delay under proposed system.

Choosing a market logistics system calls for examining the total cost (M)
associated with different proposed system and selecting the system that
minimises it. If it is difficult to measure S, the company should aim to
minimise T + FW + VW for a target level of customer service.
Market Logistics Decisions:
Four major decisions must be made with regard to market logistics:
 1. How should orders be handled? (Order Processing).
 2. Where should stocks be located? (Warehousing).
 3. How much stock should be held? (Inventory).
 4. How should goods be shipped? (Transportation).
Connection between Marketing and Logistics

Logistic Activities in Supply Chain Management:

Logistic as the Critical Element in Supply Chain Management
Nowhere in business marketing strategy is SCM more important than in
logistics. Logistics management is that part of supply chain management
that plans, implements, and controls the efficient, effective forward and
reverse flow and storage of goods, services, and related information
between the point of origin and the point of consumption in order to
meet customer’s requirement. Logistics management is an integration
function that coordinates and optimizes all logistic activities, as well as
integrates logistic activities with other functions including marketing,
sales, manufacturing, finance, and information technology.
Effective business marketing demands efficient, systematic delivery of
finished products to channel members and customers. The importance
of this ability has elevated the logistics function to a place of prominence
in the marketing strategy of many business marketers.
Distinguish between logistics and supply chain management
Logistics is a critical element in SCM. In fact, there is considerable
confusion about the difference between the discipline of SCM and
logistics. SCM is focused on the integration of all business processes that
add value for customers. The 1990’s witnessed the rising importance of
time-based competition; rapidly improving Information technology,
expanding globalisation, increasing attention to quality, and the
changing face of inter firm relationship. These Trends combined to
cause companies to expand their perspective on logistics to include all
the forms involved in creating a finished product and delivering it to the
buyer or user on time and in perfect condition. The SCM concept is an
integrating philosophy for coordinating the total flow of supply channel
from supplier to ultimate user. Logistics is critical, however, to business
marketers, because regardless of the orientation of the entire supply
chain, the firm relies on its logistics system to deliver product in a
timely, low cost manner.
Managing flow
The significance of the supply chain perspective and logistical
management is that the business marketing manager focuses attention
on the performance of all participants in the supply chain. The manager
also coordinates their efforts to enhance the timely delivery of the
finished product to the ultimate user at the lowest possible cost.
Inherent in the supply chain approach is the need to form close
relationship with the supply chain participants, including vendors,
transportation suppliers, warehousing companies, and distributors. The
focus of logistics in the SCM for business marketer is the flow of product
through the supply chain, with timely information driving the entire
process.
The Strategic Role of Logistics
In the past, logistics was viewed simply as a cost of doing business but
today, many companies view logistics as a critical strategic weapon that
can value to customer relationship. For many business marketers,
logistics is the primary marketing tool for gaining and maintaining
competitive superiority. These firms typically recognise that logistics
performance is an important part of marketing strategy, and they exploit
their logistics competencies. Companies that incorporate logistics
planning and management into long-term business strategies can
achieve significant benefits, which create real value for the company.
Sales-Marketing-Logistics Integration
The rising value of logistics as a strategic marketing weapon has
fostered the integration of the sales, marketing, and logistics functions
of many business marketers. In progressive firms, unified teams of
sales, production, logistics, information systems, and marketing
personnel develop integrated logistics programs to offer to potential
customers. Teams of specialists from each area make sales calls and
tailor logistics solutions to customer problems.
Just-in-Time systems
To serve a customer, business market is must be prepared to deliver
their products frequently and with precise timing. The reason is the
widespread adoption by manufacturing firms, like Honda of America, of
the just-in-time (JIT) inventory principle. Under this principle, suppliers
carefully coordinate deliveries with the manufacturer's production
schedule -often delivering products just hours before they are used. The
objective of a JIT system is to eliminate waste of all kinds from the
production process by requiring the delivery of the specified product at
the precise time and in the exact quantity needed. The quality must be
perfect -there is no opportunity to inspect products in the JIT process.
Because JIT attempts to relate purchases to production requirements,
the typical order size shrinks, and more frequently deliveries are
required. Increased delivery frequency presents a challenge to the
business marketing production and logistics system. However, business
marketers will have to meet this challenge, as many competitors now
complete on the basis of inventory turns and speed to market.

Elemen
Key Aspects
ts

The “product” of Logistic activities, customer service relates

Custome to the effectiveness in creating time and place utility. The
r service level of customer service provided by the supplier has a
direct impact on total cost market share, and profitability.

Order Order processing triggers the logistic process and directs

 activities necessary to deliver product to customers. Speed
processi
and accuracy of order processing effect costs and customers
ng
service level.

Logistics Information exchanged in the distribution process guides the

Commun activities of the system. it is the vital link between the firm's
ications logistic system and its customers.

The physical movement of products from source of supply

Transpor through production to customers is the most significant cost
tation area in logistics, and it involves selecting modes and specific
carriers as well as routing.

Providing storage space serves as a buffer between

Warehou
production and use. Warehousing may be used to enhance
sing
service and to lower transportation costs.

Inventory is used to make products available to customers

Inventor
and to ensure the correct mix of products is at the proper
y control
location at the right time.

The role of packaging is to provide protection to the product,

Packagin
to maintain product identity throughout the logistic process,
g
and to create effective product density.

Materials handling increase the speed of, and reduces the

Materials cost of, picking orders in the warehouse and moving
handling products between storage and the transportation carriers. It
is a cost-generating activities that must be controlled.

Producti Utilised in conjunction with logistics planning, production

on planning ensures that products are available for inventory in
planning the correct assortment and quantity.

Plant
and
Strategic placement of plants and warehouses increases
warehou
customer service and reduces the cost of transportation.
se
location

Order Processing: Involve following activities:

 Order checking for any deviation in agreed on negotiation term
 Technical details – price, delivery period, payment terms, taxes etc.
 Checking the availability of material in stock (material requisition)
 Production and material scheduling for shortage
 Acknowledging the order, indicating deviation if any
It is routine operation but require great deal of planning, training of
people involved and investment to bring about efficiency and accuracy.
In a large organization a system capable of handling thousands of
voluminous orders with minimum human involvement or without human
involvement is a must involving shortened order fulfilment cycle to have
edge over rivals.
The order fulfilment process refers to all the steps companies must take
from the moment they receive an order until the items land in
customers’ hands. For many wholesale distribution companies, an order
fulfilment process might look like this:
 Order is received, either in person, on the phone, via email, etc.
 Order must be entered into back office systems (like an ERP or
accounting platform)
 Customer is notified that the order has been received.
 Order is sent to the warehouse. A paper order might be taken to the
warehouse as part of a batch, or it is sent directly from an invoicing or
sales order management application.
 Order is picked: a worker goes into the warehouse, finds the items in
the order, and picks them off the shelf.
 Order is packed to prepare for shipping.
 Order is shipped.
 Customer is notified that the order is on its way.
 Order arrives.
perfect order fill rateOne of the ways companies judge the efficiency of
their order fulfilment processes is by looking at the Perfect Order Metric.
A is one that is on time, complete, and undamaged, along with the
correct paperwork to accompany it. This metric is similar to , which
we’ve discussed on the blog before. Although companies all say they
strive for perfect orders every time, it’s a difficult thing to achieve. Here
are some insights and tips to help your business fulfil orders more
quickly, accurately and efficiently.
Order Fulfilment Process Challenges
Businesses face several challenges throughout the order fulfilment
process. These include challenges related to demand planning, inventory
management, supply chain optimization, logistics planning, and several
other complex concerns. However, at the risk of over-simplifying
matters, what it really boils down to is knowing and being able to make
effective decisions about what you have to sell, whether a customer is
likely to buy it, and how are you going to get it to them if they do.
Let’s break the problem down into its different parts:
 1. Demand Planning: Demand planning involves knowing in advance
what demand for a product will be, as well as demand shaping, or a
company’s efforts to try to generate demand, like marketing and
promotions.
 2. Inventory Management: Order fulfilment is all about meeting
customer expectations, and it’s hard to do that if you are out of stock on
the items customers want. Knowing what’s in stock and being able to
provide visibility on stock levels as the order is placed prevents
customers from being disappointed with backorders and delays.
 3. Supply Chain Execution: When items are low or out of stock, how
quickly can you get them back in stock? How quickly can your
manufacturers produce more product? From there, how long will it take
to get to your warehouses? These are supply chain execution questions
that can also impact order fulfilment.
 4. Logistics Planning: Once the items are ready to ship, how are you
going to get them to the customer? How long will it take? Will the items
be handled carefully so they arrive in one piece?
Strategies to Speed up Order Fulfilment Process
When it comes to speeding up order fulfilment, there are many steps
you can take to make a big impact. Start by looking at some of the
“quick wins” that don’t require a massive investment of dollars, but will
make a quick difference, such as classifying your inventory and ensuring
that it is stored as logically as possible.
The next step is to make sure that you are making the most of the
systems you already have in place. Many companies have the pieces in
place that are needed to improve their order fulfilment processes, but
are unable to get the most from these systems. Finally, you can also
look at making new investments in automation to speed up your order
handling times.
 1. Classify your inventory to ensure rapid handling: Grouping your
inventory from fastest moving to slowest moving helps to ensure that
you always have the right stock levels on your most important items. Put
the most popular items in a centrally located area of your warehouse to
ensure that they can be picked, packed and delivered to the shipping
dock in a minimal amount of time. Slower moving items can be stored in
a separate area. This more logical arrangement can really cut down on
the time it takes to process and fulfil orders.
 2. Integrate systems for more visibility into all aspects of order
fulfilment: In order to quickly fulfil an order, you need visibility into
several areas––demand forecasting, sales, inventory, and logistics just
to name a few. At a minimum, this requires some level of integration
between the sales order management system where the order is placed,
and the ERP system that maintains financial data, as well as the
inventory and logistics systems that that handle the processes for
picking, packing and shipping.
 3. Automate processes: After your systems are able to provide more
visibility into all aspects of the process, you should also look at how the
processes themselves can be sped up. Automation doesn’t necessarily
mean investing in robotics or conveyors; it can be as simple as investing
in scanners to more easily enter inventory into the system as it arrives in
your warehouse, or scanning it out as it leaves. And for smaller
businesses, the investment doesn’t have to be huge. There are even
applications that can be downloaded to a smart phone or tablet to
automate this process inexpensively.
Each of these methods has a dual benefit. Reclassifying inventory from
fastest moving to slowest will not only help save time in the order
fulfilment process, it will also save money in terms of labour costs in the
warehouse. Systems integration will help to improve the order fulfilment
process but also provide better reporting and analytics that can aid
decision-making and profitability. And automating processes speeds
order fulfilment but also provides more accurate data for future orders.
Transportation
 Process of moving an item from point A to point B.
 Safe, efficient, reliable and sustainable movement of persons and
goods over time and space.
Transportation in Logistic
 The operation of transportation determines the efficiency of moving
products.
 The progress in techniques and management principles improves the
moving load, delivery speed, service quality, operation costs, the usage
of facilities and energy saving
 Transportation takes a crucial part in the logistic operation
Transportation is usually the largest single logistical expense, and with
continually rising fuel cost, its importance will probably increase.
Typically, the transportation decision involves evaluating and selecting
both a mode of transportation and the individual carrier that will ensure
the best performance at the lowest cost. Mode refers to the type of
carrier – rail, truck, water, air, or some combination of the four.
Individual carriers have evaluated on rates and delivery performance.
The supply chain view is important in selecting individual carriers.
Carriers become an integral part of the supply chain, and close
relationship are important. One study found evidence that carriers’
operating performance improved when they were more involved in the
relationship between buyer and seller. By further integrating carriers into
the supply chain, the entire supply chain can improve its competitive
position. In this section we consider:
 The role of transportation in industrial supply chain
 The criteria for evaluating transportation options
Transportation and Logistical Service
A business marketer must be able to effectively move finished inventory
between facilities to channel intermediaries and to customers. The
transportation system is the link that binds the logistical network
together and ultimately results in timely delivery of products. Efficient
warehousing does not enhance customer service levels if transportation
is inconsistent or inadequate.
Transportation Performance Criteria
Cost of service is the variable cost of moving products from origin to
destination, including any terminal or accessory charges. The cost of
service may range from a little ₹0.5 per ton-km via water to as high as
₹25 per ton-km via airfreight. The important aspect of selecting the
transportation mode is not cost per se but cost relative to the objective
to be achieved. Bulk raw materials generally do not require prepaid
delivery service, so the cost of anything other than rail or water
transportation could not be justified. On the other hand, although
airfreight may be almost 10 times more expensive than motor airfreight,
the cost is inconsequential to a customer who needs an emergency
shipment of spare parts. The cost of premium (faster) transportation
modes may be justified by the resulting inventory reductions.
Speed of service refers to the elapsed time to move products from one
facility (plant or warehouse) to another facility (warehouse or customer
plant). Again, speed of service often over ides costs. Rail, a relatively
slow mode used for bulk shipments, requires inventory builds up at the
supplier’s factory and at the destination warehouse. The longer the
delivery time, the more inventory customers must maintain to service
their needs while the shipment is in transit. The slower modes involve
lower variable costs for product movement, yet they result in lower
service levels and higher investments in inventory. The faster modes
produce just the opposite effect. Not only must a comparison be made
between modes in terms of service but various carriers within a mode
must be evaluated on their “door-to-door” delivery time.
Service consistency is usually more important than average delivery
time, and all modes of transportation are not equally consistent.
Although air provides the lowest average delivery time, generally it has
the highest variability in delivery time relative to the average. The wide
variations in modal service consistency are particularly critical in
business marketing planning. The choice of transportation mode must
be made on the basis of cost, average transit time, and consistency if
effective customer service is to be achieved.
In summary, because business buyers often place a premium on
effective and consistent delivery service, the choice of transportation
mode is an important one -one where cost of service is often secondary.
However, the best decision on transportation carriers results from a
balancing of service, variable costs and investment requirements of
ordinary, verses expedited (rush order), shipments.
Importance of Transportation
 Without well-developed transportation system, logistic could not
bring its advantages into full play.
 A well operated logistic system could increase both the
competitiveness of the government and enterprises.
 Transportation system is the most important economic activity
among the components of business logistic system.
Transportation Functionality
Product Movement
 Temporal – product is locked during transit, hence inaccessible
 Financial – administration costs, salaries, maintenance costs
expended
 Environmental – fuel costs are high (creates air pollution,
congestion, noise pollution)
Product Storage
 When loading and unloading is more expensive than storage
 When storage space is limited (situation when inventory levels are
high)
Types of Transportation
Rail Transport
Advantages
 It is convenient mode of transport for travelling long distances
 Its operation is less affected by adverse weather like rains, fog etc.
Disadvantages
 It is not available in remote part of the country
 It involves heavy losses of life as well as goods in case of accident
 Road Transport
Advantages
 It is relatively cheaper mode of transportation as compared to other
modes
 It is flexible mode of transportation as loading and unloading is
possible at any destination
Disadvantages
 Due to limited carrying capacity, road transport is not economical for
long distance transportation of goods
Water Transport
Advantages
 It promotes international trades
 The cost of maintaining and constructing routes is very low most of
them are naturally made
Disadvantages
 It is slow moving mode of transport so it is not suitable for
perishable goods
 It is adversely affected by weather conditions
Air Transport
Advantages
 It is fastest mode of transport
 It is the most convenient of transport during natural calamities
Disadvantages
 It is relatively more expensive mode of transport
 It is not suitable for shirt distance travel
Warehousing
Warehouses or distribution centres are places where raw materials,
semi-finished or finished goods are stored. They represent an
interruption in the flow of material and thus add cost to the system.
Items should be warehoused only if there is an offsetting benefit gained
from storing them.
Warehouses include plant warehouses, regional warehouses, and local
warehouses. They may be owned and operated by the supplier or
intermediaries such as wholesalers, or they may be public warehouses.
The latter offer a general service to their public that includes providing
storage space and warehouse services. Some warehouses specialize in
the kinds of services they offer and the goods they store.
Warehousing and warehouse management are part of a logistics
management system, which is itself a component in supply chain
management. Although viewed by some as simply a place to store
finished goods, inbound functions that prepare items for storage and
outbound functions that consolidate, pack and ship orders provide
important economic and service benefits to both the business and its
customers.
Central Location
A warehouse provides a central location for receiving, storing and
distributing products. As each inbound shipment arrives, responsibility
for the goods transfers to warehouse personnel; products are identified,
sorted and dispatched to their temporary storage location. Storage isn’t
a static “thing” but rather a process that includes security measures and
maintaining an environment that preserves the integrity and usefulness
of the items. Once it’s time to move items, each order is retrieved,
grouped, packaged and checked for completeness before being
dispatched to their new destination.
Value-Adding Operation
The objective of a logistics system is to reduce cycle times and overall
inventories, lower costs and most importantly, improve customer
service. Warehousing increases the utility value of goods by providing a
means to have the right products available at the right place in the right
time. Operations such as order consolidation, order assembly, product
mixing and cross-docking that take place within the warehouse structure
also add value to the overall logistics system.
Economic Benefits
Warehouses provide economies of scale through efficient operations,
storage capacity and a central location. Economic benefits are realized,
for example, through consolidation and accumulation operations.
Consolidation operations cut outbound delivery costs for both the
business and its customers. Instead of shipping items individually from
multiple sources, items are delivered to a central warehouse, packaged
together and shipped back out as a complete order. Accumulation
operations allow a warehouse to act as a buffer, balancing supply and
demand for seasonal and long-term storage. This can be vital to
business profitability when demand for a product is year-round but the
product may only be available at certain times of the year.
Service Benefits
Warehouses can serve as part of a contingency plan to ensure outbound
orders are filled in full and on time. A practice called safety stocking
allows businesses to maintain a predetermined number of inventory
items at its warehouse. On the inbound side, safety stocking means that
an emergency such as a transportation delay or a shipment containing
defective or damaged goods won’t delay filling and shipping customers
order. On the outbound side, safety stocking is insurance against out-of-
stock items. The service function that warehouses perform can be
classified into two kinds:
 The general warehouse where goods are stored for long periods and
where the prime purpose is to protect goods until they are needed.
There is minimal handling, movement, and relationship to
transportation. Furniture storage or a depository for documents is
examples of this type of storage. It is also the type used for inventories
accumulated in anticipation of seasonal sales.
 The distribution warehouse has a dynamic purpose of movement and
mixing. Goods are received in large-volume uniform lots, stored briefly,
and then broken down into small individual orders of different items
required by the customer in the marketplace. The emphasis is on
movement and handling rather than on storage. This type of warehouse
is widely used in distribution systems. The size of the warehouse is not
so much its physical size as it is the throughput or volume of traffic
handled.
Role of warehouses
Warehouses serve three important roles: Transportation consolidation

As discussed before, transportation costs can be reduced by using that

concept of warehouse. This is accomplished by consolidating small (LTL)
shipments into large (TL) shipments.
Consolidation can occur in both the supply and distribution systems. In
physical supply, LTL shipments from several suppliers can be
consolidated at a warehouse before being shipped as TL to the factory.
In physical distribution, TL shipments can be made to a distant
warehouse and LTL shipments made to local users.
Product mixing
Although transportation consolidation is concerned with the reduction of
transportation costs, product mixing deals with the grouping of different
items into an order and the economics that warehouse can provide in
doing this. When customers place orders, they often want a mix of
products that are produced in different locations.
Without a distribution centre, customers would have to order from each
source and pay for LTL transport from each source. Using a distribution
centre, orders can be placed and delivered from a central location.
Service
Distribution centres improve customer service by providing place utility.
Goods are positioned close to markets so the markets can be served
more quickly.
Inventory Management
Inventory – raw materials, component parts, work-in-process, or
finished products that are held at a location in the supply chain.
Inventory is an idle stock of physical goods that contain economic value,
and are held in various forms by an organization in its custody awaiting
packing, processing, transformation, use or sale in a future point of
time.
Any organization which is into production, trading, sale and service of a
product will necessarily hold stock of various physical resources to aid in
future consumption and sale. While inventory is a necessary evil of any
such business, it may be noted that the organizations hold inventories
for various reasons, which include speculative purposes, functional
purposes, physical necessities etc.
From the above definition the following points stand out with reference
to inventory:
 All organizations engaged in production or sale of products hold
inventory in one form or other.
 Inventory can be in complete state or incomplete state.
 Inventory is held to facilitate future consumption, sale or further
processing/value addition.
 All inventoried resources have economic value and can be
considered as assets of the organization.
supply chain management VMI Inventory Management -Inventory
management and are the backbone of any business operations. With the
development of technology and availability of process driven software
applications, inventory management has undergone revolutionary
changes. In the last decade or so we have seen adaptation of enhanced
customer service concept on the part of the manufacturers agreeing to
manage and hold inventories at their customers end and thereby affect
Just in Time deliveries. Though this concept is the same in essence
different industries have named the models differently. Manufacturing
companies like computer manufacturing or mobile phone manufacturers
call the model by name -Vendor Managed Industry while Automobile
industry uses the term JIT -Just in Time whereas apparel industry calls
such a model by name -ECR -Efficient consumer response. The basic
underlying model of inventory management remains the same.
Different Types of Inventory
Inventory of materials occurs at various stages and departments of an
organization. A manufacturing organization holds inventory of raw
materials and consumables required for production. It also holds
inventory of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at plant, FG
Stores, distribution centres etc. Further both raw materials and finished
goods those that are in transit at various locations also form a part of
inventory depending upon who owns the inventory at the particular
juncture. Finished goods inventory is held by the organization at various
stocking points or with dealers and stockiest until it reaches the market
and end customers.
Besides Raw materials and finished goods, organizations also hold
inventories of spare parts to service the products. Defective products,
defective parts and scrap also forms a part of inventory as long as these
items are inventoried in the books of the company and have economic
value.
Independent Demand
An inventory of an item is said to be falling into the category of
independent demand when the demand for such an item is not
dependent upon the demand for another item. Finished goods Items,
which are ordered by External Customers or manufactured for stock and
sale, are called independent demand items.
Independent demands for inventories are based on confirmed Customer
orders, forecasts, estimates and past historical data.
Dependant Demand
If the demand for inventory of an item is dependent upon another item,
such demands are categorized as dependant demand. Raw materials
and component inventories are dependent upon the demand for
Finished Goods and hence can be called as Dependant demand
inventories.
Types of Inventory by Function

INPUT PROCESS OUTPUT

Finished
Raw Materials Work In Process
Goods

Consumables Semi-Finished Production in Finished

required for various stages, lying with various Goods at
processing. Eg : Fuel, departments like Production, WIP Distribution
Stationary, Bolts & Stores, QC, Final Assembly, Paint Centres
Nuts etc. required in Shop, Packing, Outbound Store throughout
manufacturing etc. Supply Chain

Finished
Maintenance Items/Consumables Production Waste and Scrap Goods in
transit

Finished
Packing Materials Rejections and Defectives Goods with
Stockiest

and Dealers

Local purchased Items required for

Spare Parts Stocks & Bought Out items
production

Defectives, Rejects and Sales Returns

Repaired Stock and

Parts

Sales Promotion & Sample Stocks

How Inventory is used

 Anticipation or seasonal inventory
 Safety stock – buffer demand fluctuation
 Lot-size or cycle stock – take advantage of quantity discounts or
purchasing efficiencies
 Pipeline or transportation inventory
 Speculative or hedge inventory protects against some future events
like labour strike
 Maintenance, repair and operational inventory (MRO)
Objective of Inventory Management
 The objective of inventory management is to strike a balance
between inventory investment and customer service.
 Provide acceptable level of customer service (on-time delivery)
 Allow cost-efficient operations
 Minimise inventory investment
Functions of Inventory management
 To meet anticipated demand
 To smooth production requirements
 To decouple operations
 To protect against stock-out
 To take advantage of order cycles
 To help hedge against price increase
 To permit operations
 To take advantage of quantity discounts
Need for Inventory Management
Inventory is a necessary evil that every organization would have to
maintain for various purposes. Optimum inventory management is the
goal of every inventory planner. Over inventory or under inventory both
cause financial impact and health of the business as well as effect
business opportunities.
Inventory holding is resorted to by organizations as hedge against
various external and internal factors, as precaution, as opportunity, as a
need and for speculative purposes.
Most of the organizations have raw material inventory warehouses
attached to the production facilities where raw materials, consumables
and packing materials are stored and issue for production on JIT basis.
The reasons for holding inventories can vary from case to case basis.
Meet variation in Production Demand
Production plan changes in response to the sales, estimates, orders and
stocking patterns. Accordingly the demand for raw material supply for
production varies with the product plan in terms of specific SKU as well
as batch quantities. Holding inventories at a nearby warehouse helps
issue the required quantity and item to production just in time.
Cater to Cyclical and Seasonal Demand
Market demand and supplies are seasonal depending upon various
factors like seasons; festivals etc and past sales data help companies to
anticipate a huge surge of demand in the market well in advance.
Accordingly they stock up raw materials and hold inventories to be able
to increase production and rush supplies to the market to meet the
increased demand.
Economies of Scale in Procurement
Buying raw materials in larger lot and holding inventory is found to be
cheaper for the company than buying frequent small lots. In such cases
one buys in bulk and holds inventories at the plant warehouse.
Take advantage of Price Increase and Quantity Discounts
If there is a price increase expected few months down the line due to
changes in demand and supply in the national or international market,
impact of taxes and budgets etc., the company’s tend to buy raw
materials in advance and hold stocks as a hedge against increased costs.
Companies resort to buying in bulk and holding raw material inventories
to take advantage of the quantity discounts offered by the supplier. In
such cases the savings on account of the discount enjoyed would be
substantially higher that of inventory carrying cost.
Reduce Transit Cost and Transit Times
In case of raw materials being imported from a foreign country or from
a faraway vendor within the country, one can save a lot in terms of
transportation cost buy buying in bulk and transporting as a container
load or a full truck load. Part shipments can be costlier.
In terms of transit time too, transit time for full container shipment or a
full truck load is direct and faster unlike part shipment load where the
freight forwarder waits for other loads to fill the container which can
take several weeks.
There could be a lot of factors resulting in shipping delays and
transportation too, which can hamper the supply chain forcing
companies to hold safety stock of raw material inventories.
Long Lead and High demand items need to be held in Inventory
Often raw material supplies from vendors have long lead running into
several months. Coupled with this if the particular item is in high
demand and short supply one can expect disruption of supplies. In such
cases it is safer to hold inventories and have control.
Effective Inventory Management
 To be effective, management must have the following:
 A system to keep track of inventory on hand and on order
 A reliable forecast of demand
 Knowledge of lead times and its variability
 Reasonable estimates of
 Inventory holding (carrying cost)
 Ordering cost
 Shortage cost
 A classification system for inventory items
Components of Inventory Cost
Ordering Cost
Cost of procurement and inbound logistics costs form a part of Ordering
Cost. Ordering Cost is dependant and varies based on two factors -The
cost of ordering excess and the Cost of ordering too less. Both these
factors move in opposite directions to each other. Ordering excess
quantity will result in carrying cost of inventory. Whereas ordering less
will result in increase of replenishment cost and ordering costs.
These two above costs together are called Total Stocking Cost. If you
plot the order quantity vs the TSC, you will see the graph declining
gradually until a certain point after which with every increase in quantity
the TSC will proportionately show an increase. This functional analysis
and cost implications form the basis of determining the Inventory
Procurement decision by answering the two basic fundamental questions
-How Much to Order and When to Order? How much to order is
determined by arriving at the Economic Order Quantity or EOQ?
Carrying Cost Inventory storage and maintenance involves various types of costs namely:

 Inventory Storage Cost

 Cost of Capital
Inventory carrying involves Inventory storage and management either
using in house facilities or external warehouses owned and managed by
third party vendors. In both cases, inventory management and process
involves extensive use of Building, Material Handling Equipment, IT
Software applications and Hardware Equipment coupled managed by
Operations and Management Staff resources.
Inventory Storage Cost
Inventory storage costs typically include Cost of Building Rental and
facility maintenance and related costs. Cost of Material Handling
Equipment, IT Hardware and applications, including cost of purchase,
depreciation or rental or lease as the case may be. Further costs include
operational costs, consumables, communication costs and utilities,
besides the cost of human resources employed in operations as well as
management.
Cost of Capital
Includes the costs of investments, interest on working capital, taxes on
inventory paid, insurance costs and other costs associate with legal
liabilities. The inventory storage costs as well as cost of capital is
dependent upon and varies with the decision of the management to
manage inventory in house or through outsourced vendors and third
party service providers.
Current times, the trend is increasingly in favour of outsourcing the
inventory management to third party service provides. For one thing the
organizations find that managing inventory operations requires certain
core competencies, which may not be in line with their business
competencies. They would rather outsource to a supplier who has the
required competency than build them in house.
Secondly in case of large-scale warehouse operations, the scale of
investments may be too huge in terms of cost of building and material
handling equipment etc. Besides the project may span over a longer
period of several years, thus blocking capital of the company, which can
be utilized into more important areas such as R & D, Expansion etc. than
by staying invested into the project.
Inventory Classification
Every unit of inventory has an economic value and is considered an
asset of the organization irrespective of where the inventory is located
or in which form it is available. Even scrap has residual economic value
attached to it. Depending upon the nature of business, the inventory
holding patterns may vary. While in some cases the inventory may be
very high in value, in some other cases inventory may be very high in
volumes and number of SKU. Inventory may be help physically at the
manufacturing locations or in a third party warehouse location.
Inventory Controllers are engaged in managing Inventory. Inventory
management involves several critical areas. Primary focus of inventory
controllers is to maintain optimum inventory levels and determine
order/replenishment schedules and quantities. They try to balance
inventory all the time and maintain optimum levels to avoid excess
inventory or lower inventory, which can cause damage to the business.
ABC Classification
Inventory in any organization can run in thousands of part numbers or
classifications and millions of part numbers in quantity. Therefore
inventory is required to be classified with some logic to be able to
manage the same. In most of the organizations inventory is categorized
according to ABC Classification Method, which is based on pareto
principle. Here the inventory is classified based on the value of the units.
The principle applied here is based on 80/20 principles. Accordingly the
classification can be as under:
 A Category Items Comprise 20% of SKU & Contribute to 80% of $
spend.
 B Category Items Comprise 30% of SKU & Contribute to 15% of $
spend.
 C Category Items Comprise 50% of SKU & Contribute to 5% of $
spend.
Advantages of ABC Classification
 This kind of categorization of inventory helps one manage the entire
volume and assign relative priority to the right category. For Example A
Class items are the high value items. Hence one is able to monitor the
inventory of this category closely to ensure the inventory level is
maintained at optimum levels for any excess inventory can have huge
adverse impact in terms of overall value.
 A Category Items: Helps one identify these stocks as high value
items and ensure tight control in terms of process control, physical
security as well as audit frequency.
 It helps the managers and inventory planners to maintain accurate
records and draw management’s attention to the issue on hand to
facilitate instant decision-making.
 B Category Items: These can be given second priority with lesser
frequency of review and less tightly controls with adequate
documentation, audit controls in place.
 C Category Items: Can be managed with basic and simple records.
Inventory quantities can be larger with very few periodic reviews.
Disadvantages
 Inventory Classification does not reflect the frequency of movement
of SKU and hence can mislead controllers.
 B & C Categories can often get neglected and pile in huge stocks or
susceptible to loss, pilferage, slackness in record control etc.
Models of Inventory
Economic Order Quantity Models
The question of how much to order is frequently determined by using an
Economic Order Quantity (EOQ) model. EOQ model identify the optimal
order quantity by minimising the sum of certain annual costs that vary
with order size. Three order size models are:
 The basic economic order quantity model
 The economic production quantity model
 The quantity discount model
The Economic Order Quantity Model Assumptions:

 Only one product is involved

 Annual demand requirements are known
 Demand is even throughout the year
 Lead time does not vary
 Each order is received in a single delivery
 There are no quantity discounts
EOQ model inventory cycle:
The inventory cycle begins with receipt of an order of Q units, which are
withdrawn at a constant rate over time. When the quantity on hand is
just sufficient to satisfy demand during lead time, an order for Q units is
submitted to the supplier. Because it is assumed that both the usage
rate and lead time don’t vary, the order will be received at the precise
instant that the inventory on hand falls to zero. Thus, orders are timed
to avoid both excess and stock outs.
The Economic Production Quantity Model
 Production done in batches or lots
 Capacity to produce a part exceeds the part’s usage or damage rate
 Assumptions of EPQ are similar to EOQ except orders are received
incrementally during production
Assumption:
 Only one item is involved
 Annual demand is know
 Usage rate is constant
 Usage occurs continually but production occurs periodically
 Production rate is constant
 Lead time does not vary
 No quantity discounts
Quantity Discount Model
 Quantity discounts are price reductions for large order offered to
customers to induce them to buy in large quantities. In this case the
price per unit decreases as order quantity increases.
 If the quantity discounts are offered, the buyer must weigh the
potential benefits of reduced purchase price and fewer orders that will
result from buying in large quantities against the increase in carrying
cost caused by higher average inventories.
 The buyer’s goal with quantity discounts is to select the order
quantity that will minimise the total cost, where the total cost is the sum
of carrying cost, ordering cost and purchasing cost
Factors Leading to Inventory Inefficiencies
In any company inventory management is one area that the
managements always focus on when it comes to improving business
efficiencies and cutting costs. An inventory reduction drive always yields
results, which are visible and releases cash back into business. Does this
mean that inventory management is inefficient? The answer can be a
yes and a no.
Inventory management function is dependent upon physical operations
involving multiple locations and agencies and processes. The inter
dependence upon transactions which are sequential and parallel,
renders inventory susceptible to inefficiencies occurring in operations,
transactions, and documentation over a period of time.
Another possible factor that can hamper the inventory efficiencies is the
system setup that is used to manage the inventory. Quite often one can
find that the system setup and process defined in the system is not user
friendly and cumbersome. An efficient system should define and guide
the physical process as well as documentation process. The system
process should in turn be developed based on the business process
requirement. In many cases the operations are made to suit the system
setup, which already exists in some basic form and not suited to the
particular business process on hand.
Poor system setup that does not match with the shop floor warehouse
set up renders operations in efficient. It is very common to come across
complaints from users with regard to non-availability of features to work
around the processes; at times processes are lengthy and cumbersome
leading to operational delays. Non availability of different reports and
loops and bugs in the system can often push the operations teams to
find shortcut methods to bypass the system processes and carry on with
the work, resulting in inventory inefficiencies as well as inefficient
operations.
In cases where a company has outsourced the inventory management
to a third party service provider, the inventory management
complications increase manifold. You have the company’s ERP or
inventory system on one hand and the third part service provider’s
inventory management system or warehouse system on the other hand.
At any given point of time both have to be reflecting the same inventory
accuracy and also match with physical stock available on shop floor, but
this is not the case always. In cases where the systems are interfaced
too inventory in one system cannot mirror the other and reconciling
transactions between the two systems can be cumbersome and time
consuming.
Health of the inventory accuracy as well as inventory management can
also depend upon the inventory strategy of the company and its outlook.
A few companies treat inventory to be a necessary evil and just about
ensure processes are compliant and inventory audits are regularly held.
They do not deal with and treat inventory as an important asset that
needs to be managed and reviewed to keep it lean and accurate.
Those companies, which are aware of the implications and benefits that
a lean inventory management practice can have on their business, strive
to build good management practices and keep finding ways to optimize
the processes. Any efficiency brought about with change in processes
adds to the company’s profits. Hence they give attention to and invest in
driving inventory management strategy and practices, which are
benchmarked against the best in the industry.
Decisions with regard to level of inventory to be carried, who owns and
carries the inventory in the supply chain are some of the key decisions
that drive efficiencies in inventory management. Besides this technology
can also bring about process improvements speeding up the sales and
delivery processes and to a certain extent reduces manpower resources
and associated costs too.
Inventory management is an ongoing and dynamic process. To keep out
the inefficiencies in systems, processes and physical operations, calls for
active management participation and continuous improvement in all
processes and systems that are involved in inventory management.
Factors affecting Inventory Operations
Inventory management operations are increasingly being outsourced to
third party service providers, thereby ensuring that the investments and
costs in managing the inventories are reduced. This is a welcome trend
provided the company’s focus on overseeing and reviewing both
inventory management as well as inventory operations periodically to
ensure proper controls are maintained and processes followed.
Inventory management entails study of data on movement of inventory,
its demand pattern, supply cycles, sales cycles etc. Active management
calls for continuous analysis and management of inventory items to
target at lean m inventory Management.
Inventory Management function is carried out by the inventory planners
in the company in close coordination with procurement, supply chain
logistics and finance, besides marketing departments.
The efficiencies of inventory management are largely dependent upon
the skills and knowledge of the inventory planners, the focus and
involvement of management and the management policies coupled with
the inventory management system.
However inventory operations management is not under the control of
the inventory management team but rests with the third party service
providers. In this section of the article we aim to uncover few of the
critical areas and action points on the part of operations that can impact
the inventory of the company. Unskilled Labour and Staff: Inventory
operations management is a process-oriented operation. Every task and
action required to be carried out by the operatives will impact the
inventory as well as the delivery lead times and other parameters.
Therefore knowledge of what one is required to do and the effect of the
action should be known to the operatives who are on the shop floor. For
Example: If an operative is given a put away task, he should know how
and where he should put away the pallet, how to scan the pallet ID and
confirm it back to the system. Besides he should also know the impact
of not completing any of these actions or doing something wrong. The
impact his action will have on the system as well as physical inventory
should be clear to the operative.
Secondly different inventory items would have to be handled differently.
Operatives who are carrying out the task should know why and what is
required to be done. They should also know the consequences of not
following the process. A pallet might have to be scanned for the pallet id
and put away on a floor location, while a carton might have to be
opened and scanned for individual boxes inside and put away into a bin.
The operatives should be trained on the entire process and understand
why and what he is doing.
The WMS systems are quite operational and task intensive. Where the
warehouses are being managed on RF based systems, the operatives
should be able to manage the RF readers, understand how to access
and complete transactions through the RF Guns.
Often it is noticed that when the warehouse operations are being
managed by a third party service provider and the principle customer is
not present at the location, the quality of staff and operatives is
compromised and people are not given adequate training before being
allocated their responsibility. Such situations can lead to inventory
discrepancies.
In adequate SOP, Training and emphasis on processes compliance:
When an inventory management project kicks off at a third party
warehouse location, both the principle customer as well as the third
party service provider work on the project and setup basic processes,
document them in Standard Operating Procedures and conduct training
as a part of the project management methodology.
However over a period of time the nature of business requirements
changes, resulting in change in the operating processes. These do not
get documented in terms of amendments and the SOPs become
outdated. Thereafter one finds that the new comers who are introduced
on the shop floor are required to learn the processes by working along
with others whereas no training or SOP document is provided to him for
reference. With the result they often have half-baked knowledge of the
processes and carry on tasks not knowing why they are doing and what
they are required to do.
This situation is very dangerous for the health of the inventory and it
shows slackness in the attitude of the third party service provider.
Continuation of such a situation will lead to bad housekeeping, inventory
mismatches, and discrepancies and also affect the service delivery and if
left unchecked can lead to theft, pilferage and misuse of inventory.
In any third party owned inventory operations warehouse, the principle
client should ensure that periodic review and training is conducted for all
staff. Inventory operations should be periodically reviewed and inventory
counts and audits carried out regularly.
Operational Challenges in Inventory Management
The latest trend in all industries has been to outsource inventory
management functions to Third Party Service providers. Companies
outsource both Raw Material Inventory as well as Finished Goods to the
Service Provider. In case of finished goods inventory, depending upon
the supply chain design, there may be multiple stocking points at
national, regional and state levels. In such an event each of the
warehouses a different service provider may manage operations, as one
may not be able to find a supplier having operations all over the
country. Therefore the inventory in such a situation will be managed in
the Company’s system as well as in the Service provider’s system.
Inventory management and control becomes a critical function especially
in such situations where multi locations and multiple service providers
are involved.
To ensure Inventory control is maintained across all locations, following
critical points if focused upon will help:
 Establish and outline Operations Process for Service Providers: Draw
up SOP -Standard Operating procedure detailing warehouse operations
process, warehouse inventory system process as well as documentation
process.
Especially in a 3rd Party Service Provider’s facility, it is important to have
process adherence as well as defined management, authorization and
escalation structure for operations failing which inventory operations will
not be under control.
 Establish inventory visibility at each of the location through MIS
Reports: Draw up list of reports and MIS data for all locations and
ensure they are mailed to a central desk in the inventory team for daily
review. The inventory team leader should analyse daily reports of all
locations and highlight any non-conformity and resolve them as well as
update the management.
 Initiate Daily Stock count procedure to be carried out at all of the
locations and reported back to the inventory desk. Daily stock count
should be able to reflect location accuracy, stock accuracy as well as
transaction summary for the day.
 Monthly audits and inventory count should be implemented at all
locations without fail and insist on one hundred percent adherence.
 Quarterly inventory -wall-to-wall count or half yearly and annual
wall-to-wall count should be implemented depending upon the volume
of transactions as well as value of transactions at each location.
 Central Inventory team to be responsible for ensuring review of all
reports and controlling inventories at all locations.
 Inventory reconciliation -involves reconciling physical inventory at
site with the system inventory at 3PL Site and then reconciling 3PL
System stocks with company’s system stock.
 Visiting major sites and being present during physical stock audits on
quarterly or half yearly basis is very important.
 Lastly keep reviewing processes and ensure training and re training
is carried out regularly and at all times at site so that a process oriented
culture is imbibed and all operating staff understand the importance of
maintaining processes as well as inventory health.
 Inventory is nothing but money to the company. If 3PL vendor is
managing the inventory, needless to say you should have your
processes in place to be able to control and maintain inventory health.
Reverse Logistics and cost control in SCM
Increasingly, companies must deal with the flow of goods coming back
from the final customer or other companies in the distribution channel.
This reverse flow of goods is due to the increased quality demands of
customers in the goods they purchase and to financial pressure on
distributors to reduce slow-moving or unwanted inventories.
The eleventh edition of the APICS Dictionary defines reverse logistic a
complete supply chain dedicated to the reverse flow of products and
materials for the purpose of return, repair, remanufacture and/or
recycling.
In some distribution channels, reverse logistics can represent major
costs, which are growing partly due to the increased use of the Internet.
In addition to this, companies are being forced to take responsibility for
the return packaging. There are two main categories of reverse logistics:
 Asset recovery, which is the return of actual products.
 Green reverse logistics, which represents the responsibility of the
supplier to dispose of packaging materials or environmentally sensitive
materials such as heavy metals and other restricted materials.
The costs of green reverse logistics are reduced through the use of
reusable packaging, such as bins or racks rather than corrugated
containers, or an overall reduction in the amount of packaging.
Environmentally sensitive materials can be sorted and either reused in
manufacturing or disposed of in the most cost-effective method
possible, hopefully avoiding landfalls. Refillable beverage container
reduces the need for landfill space but imposes a cost on the producer
for sorting and handling.
Reducing costs associated with asset recovery involves coordinating the
handling of the materials perhaps with the outbound flow of new goods.
Information on the returned materials is necessary to ensure proper
reuse or disposal of the materials. If the return will generate a credit to
the sender, then this will also require information.
An example of this working quite well occurs with the replacement of a
starter motor, which should be the same size and model as the
replacement, is placed in the original carton and sent back to the
supplier for a credit. The carton will have all the information describing
the motor and can be sued for identification as it travels back to the
builder. To reduce costs, distributors will coordinate the outbound
shipments of new motors with the return of old motors for rebuilding.
Hidden Opportunities for Supply Chain Cost Reductions
Of course hidden costs, if you can find them, mean hidden
opportunities. In the management of returns, costs you can look for and
aim to eliminate or reduce include the following:
 Labour costs associated with customer relations (where there is a
return, there may be an unhappy customer who must be appeased)
 Customer service labour costs (identifying warranty eligibility,
determining what return and credit rules apply in each individual case)
 Transaction costs
 Transport and shipping costs
 Warehouse and storage costs
Much depends upon the nature of your supply chain operation of course.
Some industries experience more returns than others. The impact of
returns too, can differ from one industry or organisation to another.
That’s why the most important first step in improving reverse logistics
management is to dig down and understand the true costs of product
returns in your operation.
The Causes of Excessive Costs in Reverse Logistics
Unlike the forward flow of products through your supply chain,
management and streamlining of the reverse process is seldom seen as
a priority. That’s typically for the following reasons:
 Unlike customer orders, there is usually no deadline for returns to
arrive at their destination
 Products are moving against the normal flow, making for challenging
process integration
 For many organisations, it’s very difficult to forecast and plan for
return volume
 Returns are typically seen as an inevitable cost and a low priority for
management action
 These characteristics conspire to hide the costs of returns, making it
difficult to see exactly where and when they impact budgets, which are
geared towards a one-way flow of goods and materials.
Improving Reverse Logistics Management
Some companies that successfully manage reverse logistics have
implemented automated process management. Others have formed
dedicated reverse logistics functions, employing a team of people who
do nothing else but manage the return of unwanted, damaged or
recalled products. Another possibility, if your organisation handles a high
volume of returns, is to outsource reverse logistics to a 3PL partner.
Whatever approach you take though, the important thing is to create a
clear dividing line between the processes for outbound orders and those
for returns. That’s the bit which many companies miss and as a result,
struggle to get visibility of costs attributable to product return.
Minimising Returns for Supply Chain Cost Reductions
Of course, the best solution of all is to eliminate or dramatically reduce
the number of returns your company has to handle. In order to do that,
you’ll still need to improve traceability as a first step.
Once you have visibility of return volumes and reasons for return, you
can put the necessary effort into understanding root causes and finding
ways to diminish their impact. This may require the development of
initiatives to improve manufacturing, storage, transportation, and/or
customer service in relation to outbound product supply.
Putting It All Together
For most supply chain organizations, improving reverse logistics and
reducing its cost will require steps to prevent or minimise returns, taken
in conjunction with measures to streamline the reverse supply chain.
As with most cost reduction efforts, you’ll probably have to spend
initially, in order to save. If reverse logistics was easy, every company
would excel in its management and execution and I wouldn’t be writing
about the issues. Few things worth doing are easy though, so why not
at least take a look for the hidden costs in your product-return
processes? You might find there are some decent savings to be had
enough perhaps, to do more than just look.
***************The End**************
All The Best
B2B Marketing:
B2B (business-to-business) marketing is marketing of products to
businesses or other organizations for use in production of goods, for use
in general business operations (such as office supplies), or for resale to
other consumers, such as a wholesaler selling to a retailer.
Importance of Business Marketing:
Business market serve the largest market of all: The rupee volume of
transactions in the industrial or business market significantly exceeds
that of the ultimate consumer market. In the business market, a single
customer can account for an enormous level of purchasing activity.
Getting Word Out
For a business to succeed, the product or service it provides must be
known to potential buyers. Without marketing, the potential customers
may never be aware of the business offerings and the business may not
be given the opportunity to progress and succeed.
Higher Sales
Once the product, service or company gets the response from prospects,
it increases your chances that consumers will make a purchase. As
awareness becomes a reality, it is also the point where new customers
start to spread the word, telling friends and family about this amazing
new product they discovered. Sales will steadily increase as the word
spreads. Without employing marketing strategies, these sales may not
have ever happened; without sales, a company cannot succeed.
Company Reputation
The success of a company often rests on a solid reputation. Marketing
builds brand name recognition or product recall with a company. As your
reputation grows, the business expands and sales increase. The
reputation of your company is built through active participation in
community programs.
Healthy Competition
Marketing also fosters an environment in the marketplace for healthy
completion. Marketing helps keep pricing competitive for a business to
try to win over consumers before its competition does. Without
competition, well-known companies would continue to sell while lesser
known companies or new companies would stand little chance of ever
becoming successful. Marketing facilitates the healthy competition that
allows small businesses and new businesses to be successful enter and
grow in the marketplace.
Business Marketing vs Consumer Marketing: Business Marketing
Business Marketing refers to the sale of either products or services or
both by one organization to other organizations that further resell the
same or utilize to support their own system. Examples -(Industrial
marketing)
 1. Office furniture (Cabinets, desks, workstations, drawers) -End
user will not purchase workstations for his own use at home.
 2. Bulk SMS service (utilized by organizations)
Consumer Marketing
On the other hand refers to the transaction of goods and services
between organizations and potential customers. In consumer markets,
products are sold to consumers either for their own use or use by their
family members.
Examples –
 1. Fast Moving Consumer Goods (FMCG) -Fast moving consumer
goods are items that are sold quickly to the end-users generally at
nominal costs. Example -Aerated drinks, grocery items and so on.
 2. Consumer Durables -Goods that a consumer uses for a
considerable amount of time rather than consuming in one use are
categorized under Consumer Durables.
Consumer Durables are further categorized into -White Goods and
Brown Goods
 a) White Goods -(Refrigerators, Microwaves, air conditioners and so
on (Majorly all household appliances)
 b) Brown Goods -(Television, CD Players, Radio, Game Consoles
(Majorly used for entertainment and fun)
 3. Soft Goods -Soft goods are products which have a shorter lifecycle
and their value decreases after every use. E.g. shirts, clothes, shoes.
Difference between Business Marketing and Consumer Marketing:

Areas of
differen B2B market Consumer Market
ce

Market   Geographically
characteri concentrated   Geographically disbursed
stics   Relatively fewer   Mass market
buyer
Product
characteri   Technical complex  Standardized
stics   Customized

 Emphasis on personal
Promotional char  Emphasis on mass media
acteristics
selling

  Competitive
building  List price or MRP
Price
characteri   Negotiated prices
stics  List prices for standard
products

Service   Service, timely

characteri availability  Somewhat important
stics   Extremely
important
Channel  More direct  Indirect
characteri
stics  Fewer intermediaries  Multiple layer of intermediaries

Buying  Involvement of various

behaviour functional area from  Involvement of family members
both the ends

 Purchase decisions are  Purchase decisions are mostly

performance based and based on psychological/social/
rational physiological need
  Relatively less technical
 Technical expertise
expertise is required

 Stable interpersonal
 Non personal relationship
relationship

Type of Business Customers:

Commercial Institutional Governmental

Customers Customers Customers

Schools, colleges,
Manufacturers Federal government
universities

Construction Health-care
· Non-defence
companies organization

Service firms Libraries · Defence

Transportation companies Foundations State government

Selected professional
Art galleries Local government
groups

Wholesalers Clinics · Counties

Retailers · Townships

1. Commercial Enterprises as Customers

Commercial enterprises include manufacturers, construction companies,
service firms (for example, hotels), transportation companies, selected
professional groups (for example, dentists), and resellers (wholesalers
and retailers purchasing equipment and supplies to use in their
operations).
Commercial enterprises can be divided into three categories: Users
Users purchase industrial products or services to produce other goods or
services that are, in turn, sold in the business or consumer markets.
Original Equipment Manufacturers (OEMs)
The OEM purchases industrial goods to incorporate into other products it
sells in the business or ultimate consumer market.
Dealers and Distributors
Dealers and Distributors include commercial enterprises that purchase
industrial goods for resale (in basically the same form) to users and
OEMs. The distributors accumulate, stores, and sell a large assortment
of goods to industrial users, assuming title to the goods it purchases.
A Concentration of Customers
Because manufacturing operations are so concentrated in India, the
business marketer normally serves far fewer but far larger customers
than does a consumer products marketer. In addition to concentration
to size, business marketers are also concentrated geographically.
2. Government Units as Customers
Total money spent on public services by the Centre, state and local
governments constitute government spending or expenditure. In other
words, money spent by the government on providing goods and services
such as defence, judicial and education system to its citizens is total
government spending.
3. Institutions as Customers
Institutional customers comprise the third sector of the business market.
They make up a sizable market – total expenditures on public
elementary and secondary schools. Schools and health-care
organizations make up a sizable component of the institutional market,
which also includes colleges and universities, libraries, foundations, art
galleries and clinics.
Business customers can also be classified as:

1. Producers:
Producers are companies that purchase goods and services that they
transform into other products. They include both manufacturers and
service providers. Example -Procter & Gamble, General Motors,
McDonald’s, Dell, Delta Airlines, restaurants, dentist, doctor etc. All
these businesses have to buy certain products to produce the goods and
services they create.
2. Resellers:
Resellers are companies that sell goods and services produced by other
firms without materially changing them. They include wholesalers,
brokers, and retailers. Walmart and Target are two big retailers you are
familiar with. Large wholesalers, brokers, and retailers have a great deal
of market power.
3. Government:
Business-to-government (B2G) markets, or when companies sell to local,
state, and governments, represent a major selling opportunity, even for
smaller sellers. In fact, many government entities specify that their
agencies must award a certain amount of business to small businesses,
minority-and women-owned businesses, and businesses owned by
disabled veterans.
4. Institutions
Institutional markets include non-profit organizations such as the Red
Cross, Churches, Hospitals, Charitable organizations, Private colleges,
Civic clubs, and so on. Like government and for-profit organizations,
they buy a huge quantity of products and services. Holding costs down
is especially important to them. The lower their costs are, the more
people they can provide their services to.
Type of Business Products: Business products are sold to other
businesses, as opposed to convenience, shopping, and specialty
products, which are sold to consumers.
Entering goods and services
Entering goods become part of the finished product. These categories of
goods consist of raw materials and manufactured materials and parts.
Their cost is an expensive item assigned to the manufacturing process.
Raw Materials
Raw materials include both farm products and natural products. Raw
materials are processed only to the level required for economical
handling and transport; they basically enter the buying organization’s
production process in their natural state.

Manufactured Materials and Parts

In contrast to raw materials, manufactured materials and parts undergo
more initial processing. Component materials such as textiles or sheet
steel have been processed before reaching a clothing manufacturer or
automaker but must be processed further before becoming part of the
finished consumer product.
B2B Products

Foundation Goods
The distinguishing characteristic of foundation goods is that they are
capital items. As capital goods are used up or worn out, a portion of
their original cost is assigned to the production process as a depreciation
expense. Foundation goods include installation and accessory
equipment.
Installations
Installations include the major long-term investment items that underlie
the manufacturing process, such as buildings, land rights, and fixed
equipment. Large computers and machine tools are examples of fixed
equipment. The demand for installations is shaped by the economic
climate (for example, favourable interest rates) but is driven by the
market outlook for a firm’s products.
Accessory Equipment
Accessory equipment is generally less expensive and is short-lived
compared with installations, and it is not considered part of the fixed
plant. This equipment can be found in plant as well as in the office.
Portable drills, personal computers, and photocopying machines
illustrate this category.
Facilitating Goods
Facilitating goods are the supplies and services that support
organizational operations. Because these goods do not enter the
production process or become part of the finished product, their costs
are handled as expense items.
Supplies
Virtually every organization requires operating supplies, such as printer
cartridges, paper, or business forms, and maintenance and repair items,
such as paint and cleaning materials. These items generally reach a
broad cross section of industrial users. In fact, they are similar to the
kinds of supplies that consumers might purchase at a hardware or
discount store.
Services
As the service sector in India is contributing to about a quarter of total
employment, the service firms have expanded sophistically in relation to
the scale and expertise that individual staff and service groups have
within integrated companies. To capture the skills of the specialist and
to direct attention to what they do best, many firms are shifting or
“outsourcing” selected service functions to outside suppliers.
Understanding Business Market & Environment:
When determining the best way to market a product, the marketing
team must analyse the marketing environment. Obviously, the
marketing team must understand the market they wish to sell to, and
what is the best way to market to those customers.
Business marketing
It is the practice of individuals, or organizations, including commercial
businesses, governments and institutions, facilitating the sale of their
products or services to other companies or organizations that in turn
resell them, use them as components in products or services they offer,
or use them to support their operations. It is also the task of selecting,
developing and managing customer relationships for the advantage of
both customer and supplier, with regard to their respective skills,
resources, technologies, strategies and objectives.
Business environment
Business Environment consists of all those factors that have a bearing
on the business, such as the strengths, weaknesses, internal power
relationships and orientations of the organization; government policies
and regulations; nature of the economy and economic conditions;
sociocultural factors; demographic trends; natural factors; and, global
trends and cross-border developments.
Concept of Business Environment
A business firm is an open system. It gets resources from the
environment and supplies its goods and services to the environment.
There are different levels of environmental forces. Some are close and
internal forces whereas others are external forces. External forces may
be related to national level, regional level or international level. These
environmental forces provide opportunities or threats to the business
community. Every business organization tries to grasp the available
opportunities and face the threats that emerge from the business
environment. Business organizations cannot change the external
environment but they just react. They change their internal business
components (internal environment) to grasp the external opportunities
and face the external environmental threats.
Types of Environment:
On the basis of the extent of intimacy with the firm, the environmental
factors may be classified in to different types or levels. As indicated
below, there are, broadly, two types of environment, the internal
environment, i.e., factors internal to the firm and external environment,
i.e., factors external to the firm which have relevance to it.

The internal factors are generally regarded as controllable factors

because the company has control over these factors; it can alter or
modify such factors as its personnel, physical facilities, organization and
functional means, such as marketing mix, to suit the environment.
The external factors, on the other hand, are, by and large, beyond the
control of a company. The external or environmental factors such as the
economic "factors, sociocultural factors, government and legal factors,
demographic factors, geo-physical factors etc.; are, therefore, generally
regarded as uncontrollable factors.
Internal Environment
The important internal factors which have a bearing on the strategy and
other decisions are outlined below.
Value System
The value system of the founders and those at the helm of affairs has
important bearing on the choice of business, the mission and objectives
of the organization, business policies and practices. It is a widely
acknowledged fact that the extent to which the value system is shared
by all in the organization is an important factor contributing to success.
The value system and ethical standards are also among the factors
evaluated by many companies in the selection of suppliers, distributors,
collaborators etc.
Vision, Mission and Objectives
The business domain of the company, priorities, direction of
development, business philosophy, business policy etc., is guided by the
vision mission and objectives of the company.
Management Structure and Nature
The organizational structure, the composition of the Board of Directors,
extent of professionalization of management etc., are important factors
influencing business decisions. Some management structures and styles
delay decision making while some others facilitate quick decision
making.
Internal Power Relationship
Factors like the amount of support the top management enjoys from
different levels of employees, shareholders and Board of Directors have
important influence on the decisions and their implementation. The
relationship between the members of Board of Directors and between
the chief executive and the Board are also critical factors.
Human Resources
The characteristics of the human resources like skill, quality, morale,
commitment, attitude etc., could contribute to the strength -and
weakness, of an organization. Some organizations find it difficult to carry
out restructuring or modernization because of resistance by employees
whereas they are smoothly done in some others.
Company Image and Brand Equity
The image of the company matters while raising finance, forming joint
ventures or other alliances, soliciting marketing intermediaries, entering
purchase or sale contracts, launching new, products etc. Brand equity is
also relevant in several of these cases.
Miscellaneous Factors
There are a number of other internal factors which contribute to the
business success/failures or influence the decision-making. They include
the following.
 1. Physical Assets and Facilities like the production capacity,
technology and efficiency of the productive apparatus, distribution
logistics etc., are among the factors which influence the competitiveness
of a firm.
 2. R & D and Technological Capabilities, among other things,
determine a company's ability to innovate and compete.
 3. Marketing Resources like the organization for marketing, quality of
the marketing men, brand equity and distribution network have direct
bearing on marketing efficiency. They are important also for brand
extension, new product introduction etc.
 4. Financial Factors like financial policies, financial position and
capital structure are also important internal environment affecting
business performances, strategies and decisions.
External Environment
As stated earlier, the external business environment consists of a micro
environment and a macro environment.
Micro Environment
The micro environment consists of the actors in the company's
immediate environment that affects the performance of the company.
These include the suppliers, marketing intermediaries, competitors,
customers and the publics." The macro environment consists larger
societal forces that affect all the actors in the company's micro
environment namely, the demographic, economic, natural, technical,
political and cultural forces."
Suppliers
An important force, in the micro environment of a company is the
suppliers, i.e., those who supply the inputs like raw materials and
components to the company. The importance of reliable source/sources
of supply to the smooth functioning of the business is obvious.
Uncertainty regarding the supply or other supply constraints often
compels companies to maintain high inventories causing cost increases.
Customers
As it is often exhorted, the major task of a business is to create and
sustain customers. A business exists only because, of its customers.
Monitoring the customer sensitivity is, therefore, a prerequisite for the
business success. A company may have different categories of
consumers like individuals, households, industries and other commercial
establishments, and government and other institutions.
Competitors
A firm's competitors include not only the other firms which market the
same or similar products but also all those who compete for thee
discretionary income of the consumers.
The competition among such alternatives which satisfy a particular
category of desire is called generic competition. If the consumer decides
to go in for a T.V., the next question is which form of the T.V black and
white .or Colour with remote control or without it etc. In other words,
there is a product form competition. Finally, the consumer encounters
the brand competition i.e. the competition between the different brands
of the same product form.
Module-II
Segmentation of Business Market Introduction
A market segment represents “a group of present or potential customers
with some common characteristics which is relevant in explaining (and
predicting) their response to a supplier’s marketing stimuli.” Effective
segmentation of markets is the first step in crafting a marketing strategy
because the characteristics and needs of each segment will define the
direction and focus of the marketing program. Segmentation that is
done well provides the necessary information for understanding what
elements of the marketing mix are going to be critical in satisfying the
target customers in those segments.

Segmentation Challenges in Business-to-Business Markets:

Business-to-business markets are characterised in a number of ways

that makes them very different to their consumer cousins. Below we
summarise the main differences between consumer and business-to-
business markets, and set out the implications for market segmentation:
 1) B2B markets have a more complex decision-making unit: In most
households, even the most complex and expensive of purchases are
confined to the small family unit, while the purchase of items such as
food, clothes and cigarettes usually involves just one person. Other than
low-value, low-risk items such as paperclips, the decision-making unit in
businesses is far more complicated. The purchase of a piece of plant
equipment may involve technical experts, purchasing experts, board
members, production managers and health and safety experts, each of
these participants having their own set of (not always evident) priorities.
 2) B2B buyers are more “rational”: In business-to-business markets
it is critical to identify the drivers of customer needs. These often boil
down to relatively simple identifiers such as company size, volume
purchased or job function. These identifiers often enable needs and
therefore segments to be quite accurately predicted.
 3) B2B products are often more complex: Just as the decision-
making unit is often complex in business-to-business markets, so too are
b2b products themselves. Even complex consumer purchases such as
cars and stereos tend to be chosen on the basis of fairly simple criteria.
Conversely, even the simplest of b2b products might have to be
integrated into a larger system, making the involvement of a qualified
expert necessary. Whereas consumer products are usually standardized,
b2b purchases are frequently tailored.
 4) B2B target audiences are smaller than consumer target
audiences: Almost all business-to-business markets exhibit a customer
distribution that confirms the Pareto Principle or 80:20 rule. A small
number of customers dominate the sales ledger.
 5) Personal relationships are more important in b2b markets: A small
customer base that buys regularly from the business-to-business
supplier is relatively easy to talk to. Sales and technical representatives
visit the customers. People are on first-name terms. Personal
relationships and trust develop. It is not unusual for a business-to-
business supplier to have customers that have been loyal and committed
for many years.
 6) B2B buyers are longer-term buyers: Whilst consumers do buy
items such as houses and cars which are long-term purchases, these
incidences are relatively rare. Long-term purchases – or at least
purchases which are expected to be repeated over a long period of time
– are more common in business-to-business markets, where capital
machinery, components and continually used consumables are
prevalent. In addition, the long-term products and services required by
businesses are more likely to require service back-up from the supplier
than is the case in consumer markets.
 7) B2B markets drive innovation less than consumer markets: B2B
companies that innovate usually do so as a response to an innovation
that has happened further upstream. In contrast with FMCG companies,
they have the comparative luxury of responding to trends rather than
having to predict or even drive them.
 8) B2B markets have fewer behavioural and needs-based segments:
The small number of segments typical to b2b markets is in itself a key
distinguishing factor of business-to-business markets.
Segmentation Process:
The benefits of B2B segmentation are not hard to grasp. The challenge
is arriving at the most effective groupings.
A common approach in business-to-business markets is to apply a
market segmentation based on company size. The consumption levels of
business-to-business customers are so widely different that this often
makes sense due to large companies usually thinking and acting
differently to small ones. A further sophistication may be to classify
customers into those who are identified as strategic to the future of
the business, those who are important and therefore key and those who
are smaller and can be considered more of a transactional typology.
These “demographic” segmentations, sometimes referred to as
“firmographic” in business-to-business markets, are perfectly reasonable
and may suffice. However, they do not offer that sustainable competitive
advantage that competitors cannot copy. A more challenging
segmentation is one based on behaviour or needs. Certainly large
companies may be of key or strategic value to a business but some want
a low cost offer stripped bare of all services while others are demanding
in every way. If both are treated the same, one or both will feel
unfulfilled in some way and be vulnerable to the charms of the
competition.
It is not easy to jump straight into a fully-fledged needs-based
segmentation. Most companies are starting with some history of
involvement in segmentation, even if it is only a north/south split of its
sales force. Companies move down the road of segmentation learning all
the way.
The Road To A Needs-based Segmentation

There may be problems in developing a needs-based segmentation but

this is at least an aspiration to drive towards. The question is “how?”
The starting point of any business-to-business segmentation is a good
database. A well-maintained database is high on the list in any audit of
marketing excellence in a business-to-business company. The database
should, as a minimum, contain the obvious details of correct address
and telephone number together with a purchase history. Ideally it
should also contain contact names of people involved in the decision-
making unit, though this does present problems of keeping it up to date.
Management is frequently blissfully unaware of the parlous state of its
databases as it is rarely involved in inputting and maintaining data.
Sometimes the best database in the company is the Christmas card list
held close to the chest of every sales person.
Using Statistics for Segmentation
The classification data on questionnaires provides demographic data
while questions in the body of the interview determine aspects of
behaviour. Cross tabulations of data on these criteria allow us to see the
different responses amongst groups of respondents. This is market
segmentation at its simplest level and every researcher uses the
computer tabulations of findings to establish groups of respondents with
marked differences.
Factor Analysis:
Using a technique known as factor analysis, statisticians can work out
which groups of attributes best fit together. Looking through the
different statements or attributes that make up these groupings it is
usually possible to see common themes such as people who want low
prices with few extras, people who want lots of services or add-ons and
are prepared to pay for them, people who are concerned
about environmental issues and so on. Factor analysis reduces the large
number of attributes to a smaller but representative sub-set. These sub-
sets are then given labels such as “price fighters”, “service seekers” and
any other such terms that help the marketing team know exactly who
they are addressing.
Cluster Analysis:
The groupings of needs that have been worked out by factor analysis
are now run through further computations using a technique known as
cluster analysis. These factors are presented to the cluster analysis
whose algorithms rearrange the data into the partitions that have been
specified and so determine how neatly the population fits into the
different groupings.
Organizational Buying and Buying Behaviour:
Organization buying behaviour is defined as the rational decision-making
process in which organization buys goods and services when they have
need of any goods or service for their organization. The purchased
products and services get identified, evaluated, and chosen among
alternative brands and suppliers. Organizational buying is similar to the
consumer buyer behaviour without any major differences. Organizations
buy the products and services for the betterment of organizational
objectives such as manufacture and deliver goods and services to
members, customers or the community.
Nature/ Characteristics of Organizational Buying Behaviour
  Every organization is unique – As different organization have
different organizational structure, culture, values, objectives and
resources. Therefore, they also have a unique set of needs, demands
and exhibit unique buying behaviour.
  There is long time lag between efforts and results – In the process
of individual buying, the time taken between a purchase decision and
sales transaction is shorter than industrial buying. This is due to the
extra formalities and procedures that are to be followed in organizational
buying process. For example, asking quotations, evaluating tenders,
preparing bulk orders etc.
  It is a rational as well as emotional activity – Due to presence of
human beings in the purchase process, it rise to emotional element
involved in buying. As industrial buyer may select the quantity and
quality of a product on the basis of specified organization norms but
may choose a dealer on the basis of his personal or political affiliation or
past experience with the dealer.
  It is a formal activity – Organization buying involves a formal
contract between the buyer and seller. It is an formal activity which
requires the buyer to follow rules and procedures laid down by the
organization regarding the type, quality, quantity, terms of payment,
delivery time etc. while making a purchase decision.
  It is a multi-person activity – Buying decisions in an organization
are generally taken by a team of qualified personnel also referred to as
buying centre where each individual plays different buying roles.
Organizational buying behaviour is a process, not an isolated act or
event. Tracing the history of a procurement decision uncovers critical
decision points and evolving information requirements. In fact,
organizational buying involves several stages, each of which yields a
decision.
Organisational Buying Stages

Stage Description

1. Problem Managers at P&G need new high-speed packaging

Recognition equipment to support a new product launch

2. General Production managers’ work with a purchasing manager

Description of to determine the characteristics needed in the new
Need packaging system.

3. Product An experienced production manager assists a

Specifications purchasing manager in developing a detailed and
 precise description of the needed equipment.

After conferring with production managers, a

4. Supplier
purchasing manager identifies a set of alternative
Search
suppliers that could satisfy P&G’s requirement.

5. Acquisition Alternative proposals are evaluated by a purchasing

and Analysis manager and a number of members of the production
of Proposals department.

6. Supplier Negotiations with the two finalists are conducted, and a

Selection supplier is chosen.

7. Selection of A delivery date is established for the production

Order Routine equipment.

8. After equipment is installed, purchasing and production

Performance managers evaluate the performance of the equipment
Review and the service support provided by the supplier.

Problem Solving
The first stage of the business buying process is to identify the need of
the organization which will be met by purchasing any goods or services.
Problem recognition can result from internal or external stimuli.
Internally, the company may take a decision to launch a new product
that requires new production equipment and materials. Or, a machine
may break down and need another new part. Externally, the buyer gets
some new ideas at a trade show, see an ad, or receive a call from a
seller who offers best products at low price.
General Need Description
After the need is recognized, the buyers prepare a general need
description which reports both characteristics and quantity needed and
item for the organization. For standard items, this process presents very
few problems but for complex problems the buyer needs to work with
the other engineers, users, consultants in order to define the item.
Product Specification
In this stage, the buying organization decides and specifies the technical
product features for the needed item. Product value analysis is the
approach that helps to reduce the cost in which the components are
studied. After studying it carefully they can be redesigned, standardized
or made by fewer cost methods of production. The team will decide best
product features and specifies them accordingly.
Supplier Search
In this stage, the buyer conducts supplier search to find the best sellers.
The buyer can assemble a list of qualified suppliers by analysing trade
directories, doing computer searches or contacting other companies for
recommendation letters.
Proposal Solicitation
The stage of the business buying in which the buyer ask qualified
suppliers to submit proposals is called proposal solicitation. In the next
stage suppliers send only a catalogues or a salespersons. However,
when the item is complex or expensive, the buyer asks for the detailed
written proposals or formal presentations for each potential supplier.
Supplier Selection
In this stage, the buyer reviews proposals and choose a supplier or
suppliers. During supplier selection, the buying centre often will prepare
up a list of the desired supplier trait and their relative importance.
Such trait includes product and service quality, reputation, on-time
delivery, ethical corporate behaviour, honest communication and
competitive prices.
Order-Routine Specification
This is the stage of buying process in which the buyer choose the final
supplier by listing various things like technical specifications, quantity
needed, expected time of delivery, return policies, and warranties.
Performance Review
The stage of buying process in which the buyer analyse the supplier's
performance on the basis of different criteria and decides to continue,
modify or drop the arrangement. The seller's job is to observe and
examine the same factors used by the buyer to make sure that the seller
is giving the expected satisfaction.
The purchasing process begins when someone in the organization
recognizes a problem that can be solved or an opportunity that can be
captured by acquiring specific product. Problem recognition can be
triggered by internal or external forces.
The Search Process
Once the organization has defined the product that meets its
requirements, attention turns to this question: Which of the many
possible suppliers are promising candidates? The organization invests
more time and energy in the supplier search when the proposed product
has a strong bearing on organizational performance. When the
information needs of the buying organization are low, stage 4 and 5
occur simultaneously, especially for standardized items. In this case, a
purchasing manager may merely check a catalogue or secure an update
price from the internet. Stage 5 emerges as a distinct category only
when the information needs of the organization are high. Here, the
process of acquiring and analysing proposals may involve purchasing
managers, engineers, users, and other organizational members.
Supplier Selection and Performance Review
After being selected as a chosen supplier (stage 6) and agreeing to
purchasing guidelines (stage 7), such as required quantities and
expected time of delivery, a marketer faces further tests. A performance
review is the final stage in the purchasing process. The performance
review may lead the purchasing manager to continue, modify, or cancel
the agreement. A review critical of the chosen supplier and supportive of
rejected alternatives can lead members of the decision-making unit to
re-examine their position. If the product fails to meet the needs of the
using department, decision makers may give further consideration to
vendors screened earlier in the procurement process. To keep a new
customer, the marketer must ensure that the buying organization’s need
have been completely satisfied. Failure to follow through at this critical
stage leaves the marketer vulnerable.
Buying Situation

New A situation requiring the purchase of a product for the first

Task time

Modifie
A situation where the purchaser wants some changes in the
d
original good or service
Rebuy

A situation in which the purchaser reorders the same goods or

Straigh
services without looking for new information or investigating
t Rebuy
other suppliers
Therefore, attention must centre on buying situations rather than on
products. Three types of buying situations have been delineated:
 1. New Task – In the new-task buying situation, organization
decision makers perceive the problem or need as totally different from
previous experience; therefore, they need a significant amount of
information to explore alternative ways of solving the problem and
searching for alternative suppliers.
When confronting a new-task buying situation, organizational buyers
operate in a stage of decision making referred to as extensive problem
solving. The buying influentials and decision makers lack well-defined
criteria for comparing alternative products and suppliers, but they also
lack strong predispositions toward a particular solution. In the consumer
market, this is the same type of problem solving an individual or
household might follow when buying a first home.
 2. Straight Rebuy – When there is a continuing or recurring
requirement, buyers have substantial experience in dealing with the
need and require little or no new information. Evaluation of new
alternative solutions is unnecessary and unlikely to yield appreciable
improvements. Thus, a straight rebuy approach is appropriate.
Routine problem solving is the decision process organizational buyers
employ in the straight rebuy. Organizational buyers apply well-
developed choice criteria to the purchase decision. The criteria have
been refined over time as the buyers have developed predisposition
toward the offerings of one or a few carefully screened suppliers.
 3. Modified Rebuy – In the modified rebuy situation, organizational
decision makers feel they can derive significant benefits by re-evaluating
alternatives. The buyers have experience in satisfying the continuing or
recurring requirement, but they believe it is worthwhile to seek
additional information and perhaps to consider alternative solutions.
Several factors may trigger such a reassessment. Internal forces include
the search for quality improvements or cost reductions. A marketer
offering cost, quality, or service improvements can be an external
precipitating force. The modified rebuy situation is most likely to occur
when the firm is displeased with the performance of present suppliers
(for example, poor delivery service).
Limited problem solving best describes the decision-making process for
the modified rebuy. Decision makers have well-defined criteria but are
uncertain about which suppliers can best fit their needs. In the
consumer market, college students buying their second computer might
follow a limited problem-solving approach.
The Buying Centre
The concept of the buying centre provides rich insights into the role of
group forces in organizational buying behaviour. The buying centre
consists of individuals who participate in the purchasing decision and
share the goals and risk arising from the decision. The size of the buying
centre varies, but an average buying centre includes more than four
person per purchase; the number of people involved in all stages of one
purchase may be as many as 20.
The composition of the buying centre may change from one purchasing
situation to another and is not prescribed by the organizational chart. A
buying group evolves during the purchasing process in response to the
information requirements of the specific situation. Because
organizational buying is a process rather than an isolated act, different
individuals are important to the process at different times. A design
engineer may exert significant influence early in the process when
product specifications are being established; others may assume a more
dominant role in later phases. A salesperson must define the buying
situation and the information requirements from the organization’s
perspective in order to anticipate the size and composition of the buying
centre. Again, the composition of the buying centre evolves during the
purchasing process, differs from firm to firm, and varies from one
purchasing situation to another.
Isolating the Buying Situation
First steps in defining the buying centre is the buying situation and
determining whether the firm is in the early or later stages of the
procurement decision-making process. The product, intensive-care
monitoring systems, is complex and costly. Buying centre members are
drawn from five functional areas, each participating to varying degrees
in the process. A marketer who concentrated exclusively on the
purchasing function would be overlooking key buying influentials.

The Involvement of Buying Centre Participants at Different Stages of

the Procurement Process

Stages of Procurement Process for a Medical Supplier

Buying Identific Establish Identification and Selectio

 Centre n of
ation of ment of Evaluation of
Participan Supplier
Need Objective Buying Alternatives
ts s

Physicians High High High High

Nursing Low High High Low

Administrati
Moderate Moderate Moderate High
on

Engineering Low Moderate Moderate Low

Purchasing Low Low Low Moderate

Predicting Composition
A marketer can also predict the composition of the buying centre by
projecting the effect of the industrial product on various functional areas
in the organization. If the procurement decision will affect the
marketability of a firm’s product (for example, product design, and
price) then the marketing department has to be active in the process.
Engineering will be influential in decision about new capital equipment,
materials and, and components; setting specification; defining product
performance requirements; and qualifying potential vendors.
Manufacturing executives will be included for procurement decisions that
affect the production mechanism (for example, materials or parts used
in production). When procurement decision involve a substantial
economic commitment or impinge on strategic or policy matters, top
management will have considerable influence.
Roles in the Buying Centre
Members of the buying centre assume different roles throughout the
procurement process. Frederick Webster Jr. and Yoram Wind have given
the following levels to each of these roles: users, gatekeepers,
influencers, deciders, and buyers.
Users – are the personnel who use the product in question. Users may
have anywhere from inconsequential to extremely important influence
on the purchase decision. In some cases, the users initiate the purchase
action by requesting the product. They may even develop the product
specifications.
Gatekeepers – control information to be reviewed by other members of
the buying centre. They may do so by disseminating printed information,
such as advertisements, or by controlling which salesperson speaks to
which individuals in the buying centre. To illustrate, the purchasing
agent might perform this screening role by opening the gate to the
buying centre for some sales personnel and closing it to others.
Influencers – affect the purchasing decision by supplying information for
the evaluation of alternatives or by setting buying specifications.
Typically, those in technical departments, such as engineering, quality
control, and R&D, have significant influence on the purchase decision.
Sometimes, outside individuals can assume this role. For high-tech
purchases, technical consultants often assume an influential role in the
decision process and broaden the set of alternatives being considered.
Deciders – actually make the buying decision, whether or not they have
the formal authority to do so. The identity of the decider is the most
difficult role to determine: Buyers may have formal authority to buy, but
the president of the firm may actually make the decision. A decider
could be a design engineer who develops a set of specifications that
only one vendor can meet.
Buyer – has formal authority to select a supplier and implement all
procedures connected with securing the product. More powerful
members of the organization often usurp the power of the buyer. The
buyer’s role is often assumed by the purchasing agent, who executes
the administrative functions associated with a purchase order.
Module-III
Types of Business Channel Intermediaries Distribution channel:
 The link between the manufacturer and the customer is called the
Channel of Distribution.
 The channel accomplishes all the tasks necessary to get the
product/service to market.
 Tasks can be performed by the manufacturer or be delegated
throughout the channel.
Distribution channel is a set of interdependent organizations that ease
the transfer of ownership as products move from producer to business
user or consumer.
The distribution of products involves two main elements:
 1. The management of the tangible or physical aspects of moving a
product from the producer to the end user (part of supply chain
management).
 2. The management of the intangible aspects or issues of ownership,
control and flows of communication between the parties responsible for
making the offering accessible to the customer (channel management).
The Business Market Channel
The link between manufacturers and customers is the channel of
distribution. The channel accomplishes the entire task necessary to
affect a sale and deliver products to the customer. These tasks include
making contact with potential buyers, negotiating, contracting,
transferring title, communicating, arranging financing, servicing the
product, and providing local inventory, transportation, and storage.
These tasks may be performed entirely by the manufacturer or entirely
by intermediaries, or they may be shared between them. The customer
may even undertake some of these functions; for example, customers
granted certain discounts might agree to accept larger inventories and
the associated storage costs.

Some channels are direct – the manufacturer must perform all the
marketing functions needed to make and deliver products. The
manufacturer’s direct sales force and online marketing channels are
examples. Others are indirect; that is, some type of intermediary (such
as a distributor or dealer) sells or handles the product.
Direct Channels
Direct distribution, common in business marketing, is a channel strategy
that does not use intermediaries. The manufacturer’s own sales force
deals directly with the customer, and the manufacturer has full
responsibility for performing all the necessary channel tasks. Direct
distribution is often required in business marketing because of the
nature of the selling situation or the concentrated nature of industry
demand. The direct sales approach is feasible when:
 1. The customers are large and well defined.
 2. The customers insist on direct sales
 3. Sales involve extensive negotiations with upper management
 4. Selling has to be controlled to ensure that the total product
package is properly implemented and to guarantee a quick response to
market conditions.
Indirect Channels
Indirect distribution uses at least one type of intermediary, if not more.
Business marketing channels typically include fewer types of
intermediaries than do consumer goods channels. Manufacturer’s
representatives and industrial distributors account for most of the
transactions handled in this way. Indirect distribution is generally found
where:
 1. Marketers are fragmented and widely dispersed
 2. Low transaction amounts prevail
 3. Buyers typically purchase a number of items, often different
brands, in one transaction.
Integrated Multichannel Models
Leading business marketing firms use multiple sales channels to serve
customers in a particular market. The goal of multichannel model is to
coordinate the activities of many channels, such as field sales
representatives, channel partners, call centres, and the Web, in order to
enhance the total customer experience and profitability. Consider a
typical sales cycle that includes the following tasks: lead generation,
lead qualification, negotiation and sales closure, fulfilment, and
customer care and support.

Triggered by a sales call, a customer’s response to direct

Lead
mail, or by a request for information through a website,
Generation
an initial contact with a prospect is made.

Lead Potential customer is screened: the prospect’s need for

Qualificatio the product or service, buying interest, funding, and time
n frame for making the purchase.

Preparation of bid and proposal to meet customer’s

Bid and
requirements (a complex task for large technical
Proposal
projects).

Negotiation
The negotiation of prices, terms, and conditions, followed
and Sales
by agreement on a binding contract.
Closure

For standardized product or service, delivery of offering to

Fulfilment customer. Configuration, customization, and installation
for more complex sales

Customer Post-sale problem resolution, customer guidance, and

Care and ongoing contact to insure customer retention, loyalty, and
Support growth.

In a multichannel system, different channels can perform different tasks

within a single sales transaction with a customer. For example, business
marketing firms might use a call centre and direct mail to generate
leads, field sales representatives to close sales, business partners (for
example, industrial distributors) to provide fulfilment (that is, deliver or
install product), and a website to provide post-sale support.
Channel Functions:

Functions Purpose

  Extending relationship, trust,

Exchanges of products, services, commitment between all parties –
information, technical, financial, Reducing the uncertainty
social matters.   Better positioned to
concentrate on other tasks

Reducing complexity from   Producers focus on their core

numbers of transactions, activities
frequency of contact by using   End user customers can
intermediaries obtained improved individual
support and service
  Producers can reduce the risk
Increasing value and competitive of purchase uncertainty
advantage   Intermediaries through their
services create the competitive
advantage
 Sorting -Middlemen obtain the supplies of goods from various
suppliers and sort them out into similar groups on the basis of size,
quality etc.
 Accumulation -In order to ensure a continuous supply of goods,
middlemen maintain a large volume of stock.
 Allocation -It involves packing of the sorted goods into small
marketable lots like 1Kg, 500 grams, 250 grams etc.
 Assorting -Middlemen obtain a variety of goods from different
manufacturers and provide them to the customers in the combination
desired by them.
 Product Promotion -Sales promotional activities are mostly
performed by the producer but sometimes middlemen also participate in
these activities like special displays, discounts etc.
 Negotiation -Middlemen negotiate the price, quality, guarantee and
other related matters about a product with the producer as well as
customer.
 Risk Taking -Middlemen have to bear the risk of distribution like risk
from damage or spoilage of goods etc. when the goods are transported
from one place to another or when they are stored in the god-owns.
 Hold Stock -Distribution channel members hold stock of a company’s
products in their own facilities. A wholesaler, for example, can support a
network of local retailers by holding stock, delivering goods to stores or
offering retailers a local collection service. This helps reduce a
company’s own stockholding costs and ensures products are readily
available close to the point of sale. By taking responsibility for delivery to
local customers, channel members also reduce a company’s logistics
costs.
 Provide Customer Support -Distributors of industrial or business-to-
business products may provide technical support and maintenance
services to a company’s customers. By handling installation, training,
scheduled servicing and maintenance to agreed-upon quality standards
through distributors, companies can ensure customers obtain essential
support without stretching their own service resources.
 Increase Market Coverage -Setting up a network of wholesalers and
retailers enables companies to reach territories they could not cover with
their own sales resources. This provides companies with a low-cost
method of expanding geographically without increasing its internal sales
resources. Members of the distribution channel with their own customer
base offer companies the opportunity to gain new business without
incurring sales and prospecting costs.
 Support Smaller Customers -Companies can use their distribution
channels to deal with their smaller customers, leaving their own sales
teams free to focus on dealing with large accounts. Distributors and
retailers may deal with small customers in a particular geographic region
or sell to a specific sector of the market. Companies must decide which
customers their channel partners can service as the retailer or distributor
then controls the relationship with the customer.
 Improve Customer Convenience -By developing an online channel,
companies can improve convenience for customers. A website is open
for business around the clock, so customers can order at any time
without having to search for a local stockist. An online channel also
enables companies to sell their goods in territories where they do not
have direct or indirect channel coverage.
Channel Functions Aligned With Customer Needs

Channel
Customer Needs
Function


1. Product
Information  1. Customers seek more information for new and/or
 technically complex products and those that are
2. Product characterized by a rapidly changing market environment.
Customizati  2. Some products must be technically modified or
on need to be adapted to meet the customer’s unique
 requirements.
3. Product  3. Because of its importance to the customer’s
Quality operations, product integrity and reliability might be given
Assurance special emphasis by customers.
 4. Lot
Size
 4. For products that have a high unit value or those
that are used extensively, the purchase represents a

sizable dollar outlay and a significant financial decision for
5. Assortme
the customers.
nt
 5. A customer may require a broad range of products,

including complementary items, and assign special value
6. Availabili
to one-stop shopping.
ty
 6. Some customer environments require the channel

to manage demand uncertainty and support a high level
7. After-
of product availability.
Sales
 7. Customers require a range of services from
Service
installation and repair to maintenance and warranty.

 8. A customer organization may require special
8. Logistics
transportation and storage services to support its
operations and strategy
Business Market Channel Design:
Channel design is a dynamic process of developing new channels where
none existed and modifying existing channels. The business marketer
usually deals with modification of existing channels, although new
products and customer segments may require entirely new channels.
Regardless of whether the manager is dealing with a new channel or
modifying an existing one, channel design is an active rather than a
passive task. Effective distribution channel do not simply evolve; rather,
they are developed by management, which takes action on the basis of
a well-conceived plan that reflects overall marketing goals.
Channel design is best conceptualized as a series of stages that the
business marketing manager must complete to be sure that all
important channel dimensions have been evaluated. The result of the
process is to specify the structure that provides the highest probability
of achieving the firm’s objective.

Step
End-User Focus: Define Customer Segments
1

Step Identify and Prioritize Customer’s Channel Requirements by

2 Segments

Step
Assess the Firm’s Capabilities to Meet Customer’s Requirements
3

Step
Benchmark Channel Offerings of Key Competitors
4

Step
Create Channel Solutions to Customer’s Latent Needs
5

Step
Evaluate and Select Channel Options
6

Step 1: Define Customer Segments

The primary goal of the distribution channel is to satisfy end-user needs,
so the channel design process should begin there. Step 1 is about
defining target market segments and isolating the customer buying and
usage behaviour in each segment (what they buy, how they buy, and
how they put their purchases to use).
Some business marketers err by considering their channel partners as
“customers and rarely looking beyond them”. To inform the channel
design process, however, the marketing strategist should centre on the
importance of the product from the customer’s perspective.
Step 2: Identify Customers’ Channel Needs by Segment
Identifying and prioritizing the channel function requirements for
customers in each market segment is next. This information should be
elicited directly from a sample of present or potential customers from
each segment. For example, large customers for information-technology
products might rank product customization, product quality assurance,
and after sales service as there top three needs, whereas
small customers may prioritize product information, assortment, and
availability as their most important needs. The business marketing
manager should also probe customers on their issues that might provide
strategy insights. For instance, how sensitive are customers to a two-
hour versus six-hour service response time, or how much value do they
perceive in a three-year versus one-year warranty.
Step 3: Assess the Firm’s Channel Capabilities
Once customer requirements have been isolated and prioritized, an
assessment is made of the strengths and weaknesses of the firm’s
channel. The central focus is on identifying the gaps between what
customers in a segment desire and what the channel is now providing.
Customers base their choice of a channel not on a single element, but
on a complete bundle of benefits (that is, channel functions). To that
end, the business-to-business firm should identify particular channel
functions, like aftersales support or availability where action could be
taken to enhance the customer value proposition.
Step 4: Benchmark to Competitors
What go-to-market strategies are key competitors using? In designing a
channel, cost considerations prevent the business marketer from closing
all the gaps on channel capabilities that may appear. However, a clear
direction for strategy is revealed by understanding the channel offerings
of competitors. For example, an aggressive competitor that goes to
market with its own team of account managers and dedicated service
specialists might demonstrate special strength in serving large corporate
customers. However, countless opportunities exist for smaller rivals to
counter this strategy by developing special channel offerings tailored to
small and medium-sized customers (for example, local markets succeed
in retailing their market leadership position in small towns despite the
aggressive challenge from malls and shopping marts.)
Step 5: Create Channel Solutions for Customers’ Latent Needs
Sometimes, a review of competitor offerings can alert the marketer to
opportunities for new offerings that may have special appeal to
customers. “At other times, customers’ needs may be latent and
unarticulated, and it is the channel steward’s responsibility to tap into
and surface those requirements.” Based on such an assessment, a
provider for information-technology equipment created an entirely new
channel option for the small and medium-sized customer segment.
Rather than selling equipment, this new channel takes responsibility for
installing, upgrading, and maintaining the equipment at the customers’
locations for an ongoing service fee.
Step 6: Evaluate and Select Channel Options
Channel decisions must ultimately consider the cost-benefit trade-offs
and the estimated profitability that each of the viable channel options
presents. Some of the channel gaps that are uncovered in this
assessment can be closed by the independent actions and investments
of the business-to-business firm (for example, adding to the service
support staff or the sales force). For the most part, however, the
greatest progress will come from the channel partners (for example,
distributors or representatives) working together and discussing how
channel capabilities can be aligned to customer needs. “The idea is to
enhance the value delivered to customers through collaborative action
among channel partners. If the partners can agree on how to pull it off
and, indeed, accomplish their redefined tasks,” they will squarely
respond to customer needs and advance the performance of the
channel. One important implication of the framework is that the design
of the channel must change as customer and competitor behaviour
changes. Rather than a static structure, channel management is an
ongoing process involving continuous adjustments and evolution.
When to Make a Channel Design Decision
 Developing a new product or product line
 Aiming an existing product at a new market
 Making a major change in some other component of the marketing
mix
 Establishing a new firm
 Adapting to changing intermediary policies that may inhibit
attainment of distribution objectives
 Dealing with changes in availability of particular kinds of
intermediaries
 Opening up new geographic marketing areas
 Facing the occurrence of major environmental changes
 Meeting the challenge of conflict or other behavioural problems
 Reviewing and evaluating
Design Criteria
Criteria for selecting and evaluating intermediaries
Both the firm and its distributors should recognize their obligations
before entering into an agreement. To improve the chances of success,
the supplier should ask several questions of potential distributors.
 1. What is distributor’s credit and financial condition?
 2. What is the distributor’s selling capability?
 3. Will the distributor forgo competitive products? Does it welcomes
the supplier’s products?
 4. What is the distributor’s general reputation among suppliers and
customers?
 5. Does the distributor have adequate market coverage?
 6. How competent is the distributor’s management?
 7. How does the distributor rate on aggressiveness, enthusiasm, and
taking initiative?
 8. Is the distributor the appropriate size to do business with us?
We have to consider the following factors for the selection of channel of
distribution:
Product -Perishable goods need speedy movement and shorter route of
distribution. For durable and standardized goods, longer and diversified
channel may be necessary. Whereas, for custom made product, direct
distribution to consumer or industrial user may be desirable. Also, for
technical product requiring specialized selling and serving talent, we
have the shortest channel. Products of high unit value are sold directly
by travelling sales force and not through middlemen.
Market
 1. For consumer market, retailer is essential whereas in business
market we can eliminate retailing.
 2. For large market size, we have many channels, whereas, for small
market size direct selling may be profitable.
 3. For highly concentrated market, direct selling is preferred whereas
for widely scattered and diffused markets, we have many channels of
distribution.
 4. Size and average frequency of customer’s orders also influence
the channel decision.
Customer and dealer analysis will provide information on the number,
type, location, buying habits of consumers and dealers in this case can
also influence the choice of channels. For example, desire for credit,
demand for personal service, amount and time and efforts a customer is
willing to spend-are all important factors in channels choice.
Middlemen
 1. Middlemen who can provide wanted marketing services will be
given first preference.
 2. The middlemen who can offer maximum co-operation in
promotional services are also preferred.
 3. The channel generating the largest sales volume at lower unit cost
is given top priority.
Company
 1. The company’s size determines the size of the market, the size of
its larger accounts and its ability to set middlemen’s co-operation. A
large company may have shorter channel.
 2. The company’s product-mix influences the pattern of channels.
The broader the product-line, the shorter will be the channel. If the
product-mix has greater specialization, the company can favour selective
or exclusive dealership.
 3. A company with substantial financial resources may not rely on
middlemen and can afford to reduce the levels of distribution. A
financially weak company has to depend on middlemen.
 4. New companies rely heavily on middlemen due to lack of
experience.
 5. A company desiring to exercise greater control over channel will
prefer a shorter channel as it will facilitate better co-ordination,
communication and control.
 6. Heavy advertising and sale promotion can motivate middlemen in
the promotional campaign. In such cases, a longer chain of distribution
is profitable.
Thus, quantity and quality of marketing services provided by the
company can influence the channel choice directly.
Marketing Environment -During recession or depression, shorter and
cheaper channel is preferred. During prosperity, we have a wider choice
of channel alternatives. The distribution of perishable goods even in
distant markets becomes a reality due to cold storage facilities in
transport and warehousing. Hence, this leads to expanded role of
intermediaries in the distribution of perishable goods.
Competitors -Marketers closely watch the channels used by rivals. Many
a time, similar channels may be desirables to bring about distribution of
a company’s products. Sometimes, marketers deliberately avoid
channels used by competitors. For example, company may by-pass retail
store channel (used by rivals) and adopt door-to-door sales (where
there is no competition).
Customer Characteristics -This refers to geographical distribution,
frequency of purchase, average quantity of purchase and numbers of
prospective customers.
Channel Compensation -This involves cost-benefit analysis. Major
elements of distribution cost apart from channel compensation are
transportation, warehousing, storage insurance, material handling
distribution personnel’s compensation and interest on inventory carried
at different selling points. Distribution Cost Analysis is a fast growing
and perhaps the most rewarding area in marketing cost analysis and
control.
Channel member performance evaluation

Criterio
Frequently Used Operational Performance Measures
n

Gross sales. Sales by

Sales Actual sales/sales quota.
product and market
Performa Market share Price level
segment. Sales growth over
nce realized
time

Inventor
Average inventory
y Inventory turnover. On-time
maintained. Inventory/sales
mainten delivery
ratio
ance

Total number of Salespeople assigned by

Selling
salespeople. Salespeople geography. Account managers
capabiliti
assigned to the supplier’s assigned to strategic
es
products. customers.

Informati Sales data by customer.

Information on inventories and
on Information on end-user
returns.
provision needs.

Channel Strategy
As B2B organizations rush new products to market, failing to carefully
plan a channel strategy is a common mistake. Often the biggest
challenge with a new offering is forging a cross-functional alliance across
the enterprise that includes channel interests earlier in the process.
Unfortunately, many companies base their channel launch strategies on
what works for the direct sales force — only to discover after the fact
that they need to retool their plans post-launch to reflect partner-
specific needs. Today, we’re seeing more channel teams seeking an
invitation to the exclusive “product marketing table” where product-
specific strategy and launch decisions are made.
It’s crucial to establish formal alignment during launch planning to
ensure a channel strategy is developed and agreed upon. Specific
channel conversations must take place at this critical stage. Channel
marketing must provide insight on what makes partners tick rather than
leaving product teams to base channel strategy on incorrect
assumptions. This channel/product marketing alignment should pinpoint
a new offering’s best routes to market (e.g. ISVs, resellers, system
integrators, retailers, consultants) and ensure that the strategy delivers
a well-formed readiness and go-to-market plan. Serious decisions has
identified three areas of alignment that must be addressed to develop
channel business propositions and ensure channel readiness:
  Channel product alignment. Clearly define what market segments
will be targeted by partners; then, within those segments, determine the
distribution strategy – who should be selling what and where.
Additionally, strong and verifiable evidence should be provided showing
how this new product stacks up against its competition and
demonstrating why it’s the best option for the partner to sell and the
end-user to buy.
  Channel sales alignment. Working together, product marketing and
channel marketing should determine what the net margin will be for
partners on the new offering and whether additional supplier products
can be attached or complementary services added by the partner to
increase the deal size. This teamwork should extend to identifying what
channel competencies will be required to effectively address the needs
of target markets – and determining whether current training courses
provide sufficient coverage or new training paths/competency levels are
necessary.
  Channel marketing alignment. Partners sell and support what they
know, so building awareness for new offerings is critical. Our data
indicates that successful channel organizations spend up to one-third of
their budgets on marketing to partners. Channel marketing should
educate partners through business value propositions, while at the same
time extending a joint (supplier/partner) value proposition through the
partner to customers. Driving demand for partners is key to creating a
successful launch for a new product. Most suppliers create programs for
new products for partners to execute themselves, then layer incentives
and funding to entice and support partners as part of a lead generation
strategy.
Aligning channel and product marketing in the development of a product
channel strategy bridges a significant gap that exists for some
organizations. Addressing partner-specific needs is vital to create a clear
and compelling business proposition for channel partners and answer
the inevitable (often first) question from partners: “What’s in it for me?”
Having a strong answer to this question will accelerate adoption and get
more partners on board faster with a supplier’s launch of a new product.
For B2B organizations whose sales model includes a portion of their
business going through partners, getting the channel a seat at the table
is the ideal scenario for developing a new product channel strategy.
Leading channel organizations have found that specifically addressing
channel interests early in the product launch process, and establishing
interlock between product marketing and channel marketing, can make
the difference between success and failure when delivering products
through the channel.
Marketing Channel Structure B2B:

Selecting Right Business-to-Business Channel

A business to business or B2B market is characterized by close technical
and commercial dialogue between buyers and sellers. The manufacturer
or the service provider often needs to manufacture or serve according to
the customers’ requirements. For example, an industrial plastic
components’ manufacturer has to work directly with customers during
the design and development process while manufacturing the ordered
components.
The importance of the product to the buyers or the type, frequency and
quantity of purchasing largely influence the B2B distribution channel
structures. For instance, companies might buy routine purchases like
office stationeries through specialist retailers or distributors, because
these are not important for the production lines. On the contrary, a key
component to run the production line might need to be supplied directly
to the buyer within a specific deadline. What type of distribution channel
structure is suitable for your product or service depends on the sector of
the business, on the type of product or service and cost effectiveness.
We will shed light upon four basic structures of distribution channels
that are widely practiced in B2B markets:
Manufacturer – Business Customer
Direct channel from manufacturer to the user is suitable for products
with high technical content and high unit cost. Other rationales of opting
for this channel are:
 Direct channel might become necessary if there is no wholesale
service in the market where the manufacturer is operating and if the
manufacturer is catering to a small group of local customers. The
manufacturer has its own sales and distribution department, which can
negotiate sales, provide services, meet customers’ needs and capable to
operate like the wholesalers.
 The sales representative can both sell and install the product, e.g.
computer software. Sales branches can sell the products directly to the
small retailers and wholesalers. In a direct distribution channel, sales
branches or sales offices should be set up in the areas where demand is
high, especially in busy areas for better visibility and customers’
conveniences. It is also convenient for the sales force in providing
products and support services; as a result, they can meet customers’
needs faster. Sales offices do not keep stock so they act like agents and
pass on customers’ orders to the head office.
 Direct channel gives the manufacturer more control over its
distribution channel, which in turn, increases the efficiency and
effectiveness of the links between the manufacturers and customers.
They are likely to develop strong and longer business relationships.
Manufacturer – Business Distributor – Business Customer
Manufacturers or service providers who choose this less direct channel
appoint agents on commission basis. They take the help of agents
because of the agent’s relevant market knowledge, well established
contacts in the market and their superior buying/selling skills. Moreover,
the manufacturer or the service provider can train the agents.
Manufacturer – Manufacturer’s Representative -Business Customer
This less direct channel works well when the number of customers either
goes up or down. This channel is also helpful when the intermediary
functions increase. Building material industries usually follow this
distribution channel structure.
Manufacturer – Manufacturer’s Representative -Business Distributor -
Business Customer
This channel structure is particularly helpful for export markets. Agents
start by coordinating sales; distributors followed by filling the needs of
inventory and restocking facilities close to the point of customer
demands. A manufacturer and a retailer might also provide online
service along with their bricks and mortar operation. In this way, they
get the benefit of both direct and indirect selling. As a matter of fact,
multiple distribution channel users can reach more market segments.
However, it increases intra-channel competition and the trade members
might become less supportive because of that. A flexible and far-sighted
attitude in choosing the proper distribution channel is a necessity for
your business growth. Say someone starts being a distributor or an
agent of an international paint for a local market. The starting point
might also be as a paints retailer. After accumulating good learning
experiences about the trade, the business starts manufacturing its own
brand of paint for that local market. Over the passage of time, the
company evolves into an international manufacturer, retailer and
distributor. Today’s many corporate conglomerates once started as
intermediaries, in this way. SMEs in Oman can also reach other countries
through intermediaries in those countries or via international
intermediaries. Exactly the same way foreign brands have been reaching
Oman.
Variables Affecting Channel Structure
 1. Market Variable
 2. Product Variables
 3. Company Variables
 4. Intermediary Variables
 5. Environmental Variables
 6. Behavioural Variables
Market Variables
 Market Geography – location, geographical size and distance from
producer
 Market Size – number of customers in a market
 Market Density – number of buying units
 Market Behaviour – who buys and how, when and where customers
buy
Product Variables
 Bulk and Weight
 Perishability
 Unit Value
 Degree of Standardization
 Technical versus Non-technical
 Newness
Company Variables
 Size – the range of options is relative to a firm’s size
 Financial Capacity – the greater the capital, lower is the dependence
on intermediaries
 Managerial Expertise – intermediaries are necessary when
managerial experience is lacking
 Objectives & Strategies – marketing and objectives may limit use of
intermediaries
Intermediary Variables
 Availability – availability of intermediaries influences channel
structure
 Cost – cost is always a consideration in channel structure
 Services – services that intermediaries offer are closely related to the
selection of channel members
Environmental Variables
 Economic
 Socio Cultural
 Competitive
 Technological
 Legal
Behavioural Variables
 Develop congruent roles for channel members
 Be aware of available power bases
 Attend to the influence of behavioural problems that can distort
communication
Channel Intensity
It refers to the number of intermediaries through which a manufacturer
distributes its goods. Marketing channel intensity takes into account both
the variance and number of channels an organization may use to deliver
goods and services to consumers. As organizations develop their
marketing channel strategies, an important question arises regarding
distribution intensity. There is some freedom in most industries for a
firm to determine which channels they will use, and how much volume
each channel will receive. Weighing the pros and cons of various
channels, both in terms of the number of channels and the volume
within each channel, can have a significant strategic impact on a firm’s
position in a market.
There are three ways to frame the distribution intensity decision:
Intensive
An intensive distribution strategy seeks to distribute a product through
all available channels in an area. Usually, an intensive distribution
strategy suits items with wide appeal across broad groups of consumers,
such as convenience goods. This is the highest in both number of
channels and volume within each channel. Firms that choose an
intensive distribution strategy try to sell their products in as many
outlets as possible. Intensive distribution strategies are often used for
convenience offerings—products customers purchase on the spot
without much shopping around. Soft drinks and newspapers are an
example. You see them sold in all kinds of different places.
Selective
Selective distribution is distribution of a product through only a limited
number of channels. This arrangement helps to control price cutting.
Selective distribution focuses on narrowing down the number of
channels within the distribution strategy, but not the overall volume of
goods sold through those channels. This strategy focuses on fewer
channels yet retains a desire for higher volumes to capture scale
economies in production. Common channels in these circumstances are
channels where the firm can maintain strategic control of how the
products are sold, at what price, and in which regions. Selective
distribution strategies are suitable for shopping products such as
clothing, furniture, household appliances, computers, and electronic
equipment for which consumers are willing to spend time visiting
different retail outlets to compare product alternatives. Producers can
choose only those wholesalers and retailers that have a good credit
rating, provide good market coverage, serve customers well, and
cooperate effectively. Wholesalers and retailers like selective distribution
because it results in higher sales and profits than are possible with
intensive distribution where sellers have to compete on price.
Exclusive
Exclusive distribution is distribution of a product through one wholesaler
or retailer in a specific geographical area. Though marketers may
sacrifice some market coverage with exclusive distribution, they often
develop and maintain an image of quality and prestige for the product.
In addition, exclusive distribution limits marketing costs since the firm
deals with a smaller number of accounts. In exclusive distribution,
producers and retailers cooperate closely in decisions concerning
advertising and promotion, inventory carried by the retailers, and prices.
Exclusive distribution is typically used with products that are high priced,
that have considerable service requirements, and when there are a
limited number of buyers in any single geographic area. Exclusive
distribution allows wholesalers and retailers to recoup the costs
associated with long selling processes for each customer and, in some
cases, extensive after-sale service. Specialty goods are usually good
candidates for this kind of distribution intensity.
Technology and Channels
Technology has disrupted some of the logic behind these channel
decisions, as digital storefronts have grown to be highly influential,
easily accessible to global markets, and substantially cheaper than retail
space. As the rise of digital purchasing continues, and the cost of
shipping decreases, globalization will drive organizations more and more
towards channel strategies that optimize online exposure.
Channel Conflict and Resolution
 A channel conflict may be defined as an “A situation in which one
channel member perceives another channel member(s) to be engaged in
behaviour that prevents it from achieving its goals”.
 Conflict is opposition, disagreement or discards among the
organizations.
 It is needed to have positive effect as loopholes in the existing
system can be plugged timely and performance can be maximized.
 It can keep other channel members on their toes knowing that a
decline in performance might lead to a change in the channel
arrangements.
 Channel conflict arises when the behaviour of a channel member is
in opposition to its channel counterpart. It is opponent centred and
direct in which the goal or object sought is controlled by the
counterpart.
Conflict can be classified as:
 Vertical Conflict
 Horizontal Conflict
 Multi-channel Conflict
Vertical Conflict
 Vertical conflict occurs due to the differences in goals and objectives,
misunderstanding, and mainly due to the poor communication.
 Lack of role clarity and over dependence on the manufacturers. For
example, today the large distributors dominate the market and dictate
the terms. Hence there are often conflicts between these giant
distributors and manufacturers.
 Distributors expect manufacturers to maintain the product quality
and production schedules and in turn manufacturers expect distributors
to provide coordination functional services. If they fail to conform each
other’s expectations, channel conflict results.
Reasons for Vertical Conflict
Dual Distribution – manufacturers may bypass intermediaries and sell
directly to consumers and thus they compete with the intermediaries.
Over Saturation – manufacturers permit too many intermediaries in a
designated area that can restrict, reduce sales opportunities for
individual distributor and ultimately shrink their profit.
Partial Treatment – manufacturers often offer different services and
margins to different distributors even at same level or favour some
members
New Channels – manufacturers develop and use innovative that create
threat to establish channel participants
 No or inadequate sales support and training to intermediaries from
the manufacturers
 Irregular communication, non-cooperation and rude behaviour with
the channel member
Horizontal Conflict
These are the conflicts between the channel members at the same level,
i.e. two or more distributors. These conflicts can offer some positive
benefits to the consumers. Competition or price war between two
distributors can be in favour of consumers.
Reason Behind Horizontal Conflict
 Aggressive advertising and pricing by one distributor can affect
business of other distributors.
 Extra service offered by one distributor can attract customers of
others.
 Crossing the assigned territory and selling in other distributors area
 Unethical practices of one distributor can affect other and spoil the
brand image.
Multi-Channel Conflict
 It occurs when the manufacturer uses dual distribution strategy i.e.
the manufacturer uses two or more channel arrangements.
 Manufacturers can sell directly through their representatives. This
can affect the business of other distributor selling the manufacturer’s
brand.
 Stages of Conflict
Latent Conflict
 Some amount of discord exists but does not affect the service
objective.
 Disagreement could be on roles, expectations, perception,
communication
Perceived Conflict
 Discords become noticeable – channel partners are aware of the
opposition
 Channel members take the situation in their stride and go about
their normal business
 No cause for worry but the opposition has to be recognized
Felt Conflict
 Reaching the stage of worry, concern and alarm. Also known as
“Affective Conflict”
 Parties try to outsmart each other
 Cause could be economical or personal
 Needs to be managed effectively and not allowed to escalate
Manifest Conflict
 Reflects open antagonistic behaviour of channel partners.
Confrontation results.
 Initiative taken are openly opposed affecting the performance of the
channel system.
 May require outside intervention to resolve.
Resolving Conflicts

Conflict Resolution Styles Avoidance

 Used by weak channel members
 Problem is postponed or discussion avoided
 Relationships are not of much importance
 As there is no serious effort on getting anything done, conflict is
avoided
Aggression
 Also known as competitive or selfish style
 It means being concerned about one’s own goals without any
thought of others
 The dominating channel partner (may be the Principal) dictates
terms and condition to the others. Long term could be detrimental to the
system.
Accommodation
 A situation of complete surrender
 One party helps the other achieve its goals without being worried
about its own goals
 Emphasis is on full cooperation and flexibility in approach which may
generate matching feeling in the receiver.
 If not handled properly, can result in exploitation
Compromise
 Obviously both sides have to give up something to meet mid-way.
 Can only work with small and less serious conflicts.
 Used often in the earlier two stages
Collaboration
 Also known as a problem solving approach
 Tries to maximize the benefit to both parties while solving the
dispute
 Most ideal style of conflict resolution – a win-win approach
 Requires a lot of time and effort to succeed
 Sensitive information may have to be shared
Controlling Conflict and Motivating Channel Members
Cooperation between members in the channel can be achieved in two
main ways. One way is to exercise authority through the use of the
power that one organization may have over others. Another way is to
establish trust and a spirit of collaboration between organizations.
Through trust it is possible to develop a sense of commitment so that all
organizations attempt to support one another.
Organizations seek to influence inter organisational relationships through
a variety of communication strategies.
Influence Strategies

Power
Strategy Message
source

 1. Promise
strategy 1.Reward 2.Coercion 3
1.If you do what we wish we will reward you. 2.If you do
 2. strategy .Legitimacy 4.Referent
not do what we wish we will punish you. 3.You agreed,
3.Legalistic strategy ,
so you should do what we wish. 4.Please do what we
4.Request strategy reward, coercion 5.Exp
wish. 5.We will not mention what we wish. 6.If you do
Information ertise,
what we wish you will be rewarded (e.g. more
5.Exchange strategy reward 6.Expertise,
profitable).
6.Recommendation reward
strategy
These days, the use of relative power positions based on access to and
control of resources is no longer regarded as the preferred and
pervasive marketing management tool. With the focus turning to the
development and maintenance of buyer–seller relationships, trust and
commitment have emerged as significant contemporary managerial
concepts.
Motivating Channel Members
Distributors and representatives are independent and profit oriented.
They are oriented toward their customers and toward whatever means
are necessary to satisfy customer needs for industrial products and
services. Their perceptions and outlook may differ substantially from
those of the manufacturers they represent. As a consequence,
marketing strategies can fail when managers do not tailor their
programs to the capabilities and orientation of their intermediaries. To
manage the business marketing channel effectively, the marketer must
understand the intermediaries’ perspective and device ways to motivate
to perform in a way that enhances the manufacturer’s long-term
success. The manufacturer must continually seek support from
intermediaries, and the quality of that support depends on the
motivational techniques used.
Partnership
Channel member motivation begins with the understanding that the
channel relationship is a partnership. Manufacturers and intermediaries
are in business together; whatever expertise and assistance the
manufacturer can provide to the intermediaries improves total channel
effectiveness. One study of channel relationship suggested that
manufacturers may be able to increase the level of resources directed to
their products by developing a trusting relationship with their
representatives; by improving communication through recognition
programs, product training, and consultation with the representatives;
and by informing the representatives of plans, explicitly detailing
objectives, and providing positive feedback.
Another study of distributor-manufacturer working partnerships
recommended similar approaches. It also suggested that manufacturers
and their distributors engaged in joint annual planning that focuses on
specifying the cooperative efforts each firm requires of its partner to
reach its objectives and that periodically reviews progress toward
objectives. The net result is trust and satisfaction with the partnership as
the relationship leads to meeting performance goals.
Dealer Advisory Councils
One way to enhance the performance of all channel members is to
facilitate the sharing of information among them. Distributors or
representatives may be brought together periodically with the
manufacturer’s management to review distribution policies, provide
advice on marketing strategy, and supply industry intelligence.
Intermediaries can voice their opinions on policy matters and are
brought directly into the decision-making process.
Margins and Commission
In the final analysis, the primary motivating device is compensation. The
surest way to lose intermediary support is compensation policies that do
not meet industry and competitive standards. Representatives or
distributors who feel cheated on commissions or margins shift their
attention to products generating a higher profit. The manufacturer must
pay the prevailing compensation rates in the industry and must adjust
the rates as conditions change.
Intermediaries’ compensation should reflect the marketing task they
perform. If the manufacturer seeks special attention for a new industrial
product, most representatives require higher commissions. Many
industrial distributors charge separate fees for the value-added services
they provide. For this approach to work effectively, it is critical that the
client understands the value it is receiving for the extra charges.
Building Trust
The very nature of a distribution channel – with each member
dependent on another for success – can invite conflict. Conflict can be
controlled in various ways, including channel-wide committees, joint goal
setting, and cooperative programs involving a number of marketing
strategy elements. To compete, business marketers need to be effective
at cooperating within a network of organization – the channel.
Successful cooperation results from relationships in which the partners
have a strong sense of communication and trust. Robert M. Morgan and
Shelby D. Hunt suggest that relationship commitment and trust develop
when:
 Firms offer benefits and resources that are superior to what other
partner could offer
 Firms align themselves with other firms that have similar corporate
values
 Firms share valuable information on expectations, markets, and
performance
 Firms avoid taking advantage of their partner.
By following these prescriptions, business marketers and their channel
network can enjoy sustainable competitive advantages over their rivals
and their networks.
Channel Integration
Integrated Marketing is an approach to creating a unified and seamless
experience for consumers to interact with the brand/enterprise; it
attempts to meld all aspects of marketing communication such as
advertising, sales promotion, public relations, direct marketing, and
social media, through their respective mix of tactics, methods, channels,
media, and activities, so that all work together as a unified force. It is a
process designed to ensure that all messaging and communications
strategies are consistent across all channels and are centred on the
customer.
AAA -A planning process designed to assure that all brand contacts
received by a customer or prospect for a product, service, or
organization are relevant to that person and consistent over time.
AAAA -IMC is an approach to achieving the objectives of a marketing
campaign, through a well-coordinated use of different promotional
methods that are intended to reinforce each other. As defined by the
American Association of Advertising Agencies, integrated marketing
communications … recognizes the value of a comprehensive plan that
evaluates the strategic roles of a variety of communication disciplines
advertising, public relations, personal selling, and sales promotion and
combines them to provide clarity, consistency, and maximum
communication impact.
Importance of Channel Integration
 Bridge the gap
 Streamline the physical and information
 Reduces the uncertainty, cost and risk
 Degree of integration
 Better management
 Better coordination
 Barrier of other competitors
Types of Channel Integration:

 1. Horizontal Marketing System (HMS)

 2. Vertical Marketing System (VMS)
 3. Multi-Channel Marketing System (MMS)
Horizontal Marketing System (HMS)
A horizontal marketing system is a distribution channel arrangement
whereby two or more organizations at the same level join together for
marketing purposes to capitalize on a new opportunity. For example: a
bank and a supermarket agree to have the bank’s ATMs located at the
supermarket’s locations; two manufacturers combining to achieve
economies of scale otherwise not possible with each acting alone to
meet the needs and demands of a very large retailer; or two wholesalers
joining together to serve a particular region at a certain time of year.
According to businessdictionary.com, a horizontal marketing system is a
merger of firms on the same level in order to pursue marketing
opportunities. The firms combine their resources, such as production
capabilities and distribution, in order to maximize their earnings
potential.
Advantages of Horizontal Marketing System
 Horizontal integration of related businesses allows them to achieve
economies of scale by selling more of the same product through
geographic expansion.
 HMS includes the economies of the scope through synergies
achieved by sharing of resources common to different products and
reduction in the cost of international trade by operating factories in
foreign countries.
Disadvantages of Horizontal Marketing System
 The integration of business may result in problems related to size
such as lack of coordination.
 Conflicts between members
 Decrease in flexibility
Horizontal integration occurs when a company decides to merge, acquire
or take over another company in the same industry and at the same
stage of production. When a company can achieve the advantages of a
horizontal integration, the company can diversify its products or
services, sell those products or services to a larger market, reduce the
costs to produce its newly diversified products or services, and reduce
the amount of external competition.
When horizontal integration hampers a company, the worst
disadvantage the company can face is a reduction in overall value to the
firm because the expected synergies never materialize, despite the costs
of the horizontal integration. Other disadvantages can include legal
repercussions if the horizontal merger results in a company that may be
considered a monopoly and a reduction in flexibility due to the fact that
it is now a larger organization.
Vertical Marketing System (VMS):
A vertical marketing system (VMS) is one in which the main members of
a distribution channel work together as a unified group in order to meet
consumer needs. In conventional marketing systems, producers and
business distributors are separate businesses that are all trying to
maximize their profits. When the effort of one channel member to
maximize profits comes at the expense of other members, conflicts can
arise that reduce profits for the entire channel. To address this problem,
more and more companies are forming vertical marketing systems.
Vertical marketing systems can take several forms. In a corporate VMS,
one member of the distribution channel owns the other members.
Although they are owned jointly, each company in the chain continues
to perform a separate task. In an administered VMS, one member of the
channel is large and powerful enough to coordinate the activities of the
other members without an ownership stake. Finally, a contractual VMS
consists of independent firms joined together by contract for their
mutual benefit. One type of contractual VMS is a retailer cooperative, in
which a group of retailers buy from a jointly owned wholesaler. Another
type of contractual VMS is a franchise organization, in which a producer
licenses a wholesaler to distribute its products.
Advantages of Vertical Marketing System
 It allows you to invest in assets that are highly specialized.
 It gives you more control over your business.
 It allows for positive differentiation.
 It requires lower costs of transaction.
 It offers more cost control.
 It ensures a high level of certainty when it comes to quality.
 It provides more competitive advantages.
Disadvantages of Vertical Marketing System
 It can have capacity-balancing problems.
 It can bring about more difficulties.
 It can result in decreased flexibility.
 It can create some barriers to market entry.
 It can cause confusion within the business.
 It requires a huge amount of money.
 It makes things more difficult.
Multi-Channel Marketing System (MMS)
Multichannel marketing refers to the practice of engaging prospects,
leads and customers across a combination of indirect and direct
communication channels. A channel could be a device, medium, or
network. Multichannel marketing is important for the simple reason that
you must be where your customers are.
Module-4
Logistic Management:
LOGISTIC MANAGEMENT
supply chain management order fulfilmentLogistics management is the
governance of functions that helps organizations plan, manage and
implement processes to move and store goods. Logistics management
activities typically include inbound and outbound transportation
management, fleet management, warehousing, materials handling, ,
logistics network design, inventory control, supply/demand planning and
management of third-party logistics services providers.
distribution channel. In a manufacturing enterprise, the business process
starts with the flow of material from the suppliers to the manufacturing
plant and then to the customer through the Traditionally in the
functional organisation, the business process consists of discrete
activities such as procurement, manufacturing, and distribution under
the control of the respective departments. The departments may excel
in their respective functions, but as an organisation, their performance
may be dismal. This might happen because of three reasons:
 A lack of coordination in their activities
 Different goals to cherish
 No single agency could control them to cherish a common goal
The concept of logistics is based on the system approach. The flow of
material from a supplier to a manufacturing plant and finally to the end
customer is viewed as a single chain, ensuring efficiency and
effectiveness in sequential activities to achieve the objective of customer
satisfaction at a reduced cost.
Martin ChristopherLogistics recognises that all the activities of material
movement across the business process are interdependent and need
close coordination. These activities are to be managed as a system and
not as functional silos. The functional areas of logistics, termed
“Logistics Mix” by , consist of:

Importance of Logistics: Reduced Delivery Time

Reduced delivery time refers to a shortening of the period between a
customer ordering a product and that customer receiving the product.
When companies need to ship inventory (as e-commerce businesses
do), delivery time is a vital concern of both logistics and marketing. By
shortening delivery time, businesses can impress customers and create
loyalty while adding more value to their processes than competitors
have.
Pinpointing Customer Issues
With a highly efficient logistics strategy, companies can easily track
product orders and product shipment data. This allows a business to
spot exactly where a product has gone, what product was originally
ordered and shipped and what needs to happen to fix problems with the
order. With such expert tracking and communication procedures, a
business can easily placate an irate customer and turn a bad situation
into a good marketing opportunity.
Quality Control
Logistics is also important to manufacturers, because it allows for a high
level of control over production processes and immediate adaptations. A
company does not want to produce flawed products that have inherent
problems --few things are as damaging to a business's reputation. With
efficient logistics, a manufacturer can spot problems immediately and
quickly narrow down the issue to find the source and correct it.
Extra Services
Many businesses offer extra services as part of their marketing strategy;
these allow them to impress customers through advanced customer
service techniques. With modern logistics, companies can
offer advanced tracking options for product shipments that customers
can track at any time. Good logistics also allows for greater product
customization and tools for customers to use themselves.
Logistics has gained importance due to the following trends
 Raise in transportation cost.
 Production efficiency is reaching a peak
 Fundamental change in inventory philosophy
 Product line proliferated
 Computer technology
 Increased use or computers
 Increased public concern of products Growth of several new, large
retail chains or mass merchandise with large demands & very
sophisticated logistics services, by pass traditional channel &
distribution.
 Reduction in economic regulation
 Growing power of retailers
 Globalization
As a result of these developments, the decision maker has a number of
choices to work out the most ideal marketing logistics system.
Essentially, this system implies that people at all levels of management
think and act in terms of integrated capabilities and adoption of a total
approach to achieve pre-determined logistics objectives.
Furthermore Logistics has gained importance in the international
marketing with the following reasons:
 Transform in the customers attitude towards the total cost approach
rather than direct cost approach
 Technological advancement in the fields of information processing
and communication.
 Technological development in transportation and material handling.
 Companies are centralizing production to gain economies of scale.
 Most of the MNC organizations are restructuring their production
facilities on a global basis.
 In many industries, the value added by manufacturing is declining as
the cost of materials and distribution climbs.
 High volume data processing and transmission is revolutionizing
logistics control systems.
 With the advancement of new technologies, managers can now
update sales and inventory planning faster and more frequently, and
factories can respond with more flexibility to volatile market conditions.
 Product life cycles are contracting. Companies that have gone all out
to slash costs by turning to large scale batch production regularly find
themselves saddled with obsolete stocks and are unable to keep pace
with competitors‟ new-product introductions.
 Product lines are proliferating. More and more product line variety is
needed to satisfy the growing range of customer tastes and
requirements, and stock levels in both field and factory inevitably rise.
 The balance of power in distribution chain is shifting from the
manufacturers to the trader.
Importance of Logistics in Business
Inflows
You need supplies, raw materials and information flowing into your
business so you can use them to create or deliver your products or
services. If a delivery comes late or a computer goes down when you
are expecting vital information, your logistics are not working. You either
need to become a logistics expert or hire one to make sure you get what
you need on time. If you provide an office cleaning service, for example,
and your cleaning supplies don’t arrive on time, you can’t clean offices
that depend on you.
Internal Flow
Supplies, materials and information flow through your company once
they arrive. They must arrive on time at various workstations, desks and
offices so your employees can use them. For example, the financial
background check you perform on a company cannot be delayed if the
officer approving credit for the company has to meet a deadline.
Storage and Retrieval
Some items come into your company and must be stored until needed.
Physical products and supplies must be stored, and information must be
filed electronically or physically. When you need these items, you must
have a system for identifying and retrieving them. If a customer places a
special order for a product and the warehouse supervisor stores it until
you receive payment, you must be able to count on the supervisor to
find the item when you are ready for it.
Outflow
You make a living delivering your product or service to your customers.
That’s what they pay for. Whether you ship, deliver, transmit or
physically go to a customer’s home or business to perform a service, you
cannot afford any glitches in this function. If a vital machine part for the
repair of a customer’s air conditioning arrives, you must see that it gets
delivered to the customer’s site and that an installer is there at the same
time to install it.
Costs Are Significant
The economic forces of change are further acting to alter logistics cost
relationships and force careful re-planning of logistics systems around
the world. Trade barriers are falling as free trade is encouraged in
countries that previously had strictly managed economies. Tariffs are
being eliminated to allow the free flow of goods across political
boundaries, giving firms the opportunity to reposition their logistics
networks for lower costs and higher customer service. Finally, the world
economies seem to be on a wave of economic deregulation that will
heighten competition. Since transportation is frequently a target for
deregulation, logistics system costs will be affected.
Globalization of Industries
Globalization/internationalization of industries everywhere will depend
heavily on logistics performance and costs, as companies take more of a
world view of their operations. As this happens, logistics takes on
increased importance within the firm since logistics costs, especially the
transportation component, become a significant part of the total cost
structure. For example, if a firm seeks foreign suppliers for the materials
entering its product or foreign locations to build its products, the
motivation is to increase profit. Material and labour costs may be
reduced, but logistics costs are likely to increase due to increased
transportation and inventory costs. The trade-off, may lead to higher
profit by reducing materials, labour, and overhead costs at the expense
of logistics costs and tariffs. Outsourcing adds value, but it requires
more careful management of logistics costs and product flow times in
the supply channel. Functions of Logistics:
Order processing
It is an important task in functions of logistics operations. The purchase
order placed by a buyer to a supplier is an important legal document of
the transactions between the two parties. This document incorporates
the description or technical details of the product to supply, price,
delivery period, payment terms, taxes, and other commercial terms as
agree.
The processing of this document is important as it has a direct
relationship with the order or the performance cycle time, which
indicates the time when the order is received and when the materials
are received by the customer. The order processing activity consists of
the following steps:
 Order checking for any deviations in agrees upon or negotiated
terms
 Prices, payment and delivery terms.
 Checking the availability of materials in stock.
 Production and material scheduling for shortages.
 Acknowledging the order indicating deviations if any.
Inventory control
Inventory management is to keep enough inventories to meet customer
requirements, and simultaneously its carrying cost should be lowest. It is
basically an exercise of striking a balance between the customer service
for not losing market opportunity and the cost to meet the same.
The inventory is the greatest culprit in the overall supply chain of a firm
because of its huge carrying cost, which indirectly eats away the profits.
It consists of the cost of financing the inventory, insurance, storage,
losses, damages, and pilferage. The average cost of carrying inventory
varies from 10 to 25 percent of the total inventory per year depending
on the products.
Warehousing
Warehousing is the storing of finished goods until they are sold. It plays
a vital role in logistics operations of a firm. The effectiveness of an
organization’s marketing depends on the appropriate decision on
warehousing. In today’s context, warehousing is treated as switching
facility rather than a storage of improper warehousing management.
Warehousing is the key decision area in logistics. The major decisions in
warehousing are:
 Location of warehousing facilities
 Number of warehouses
 Size of the warehouse
 Warehouse layout
 Design of the building
 Ownership of the warehouse
Transportation
For movement of goods from the supplier to the buyer, transportation is
the most fundamental and important component of logistics. When an
order is placed, the transaction is not completed till the goods are
physically moved to the customer’s place. The physical movement of
goods is through various transportation modes. In logistics costs, its
share varies from 65 to 70 percent in the case of mass-consumed, very
low unit-priced products.
Firms choose the mode of transportation depending on the
infrastructure of transportation in the country or region. Cost is the most
important consideration in the selection of a particular mode of
transport. However, sometimes urgency of the good at the customer
end overrides the cost consideration, and goods are sent through the
fastest mode, which is an expensive alternative.
Material handling and storage system
The speed of the inventory movement across the supply chain depends
on the material handling methods. An improper method of material
handling will add to the product damages and delays in deliveries and
incidental overheads. Mechanization and automation in material handling
enhance the logistics system productivity. Other considerations for
selection of a material handling system are the volumes to be handled,
the speed required for material movement and the level of service to be
offered to the customer.
The storage system is important for maximum space utilization (floor
and cubic) in the given size of a warehouse. The material handling
system should support the storage system for speedy movement
(storage and retrieval) of goods in and out of the warehouse.
Logistical Packaging
Logistical or industrial packaging is a critical element in the physical
distribution of a product, which influences the efficiency of the logistical
system. It differs from product packaging, which is based on marketing
objectives. However, logistical packaging plays an important role in
damage protection, case in material handling and storage space
economy. The utilisation of load has a major bearing on logistical
packaging with regard to the packaging cost.
Information
Logistics is basically an information-based activity of inventory
movement across a supply chain. Hence, an information system plays a
vital role in delivering a superior service to the customers. Use of IT
tools for information identification, access, storage, analysis, retrieval
and decision support which is vital among the functions of logistics is
helping business firms to enhance their competitiveness.
Logistics strategy:
Firms spend a great deal of time finding ways to differentiate their
product offerings from those of their competitors. When management
recognizes that logistics impacts on a significant portion of a firm's costs
and that the result of decisions made about the supply chain yields
different levels of customer service, it is in a position to use this
information effectively to penetrate new markets, increase market share,
and increase profits.

The three strategies are in trade-off with each other. That is, a good
location strategy is dependent on the manner in which inventories are
managed and on the resulting inventory levels, and on the
transportation service selected. Inventory levels are dependent on the
number and location of facilities as well as the transportation service
selected. And so the interdependence goes. Hence, a triangle of logistics
strategy. Logistics network design is based on three objectives–cost
minimization, capital minimization, and logistics customer service
maximization. Not all of these objectives can be achieved simultaneously
since they may be in conflict. For example, minimizing costs and
simultaneously maximizing service are incompatible.
Objectives of marketing logistics
The General objectives of the logistics can be summarized as:
 1. Cost reduction
 2. Capital reduction
 3. Service improvement
The specific objective of an ideal logistics system is to ensure the flow of
supply to the buyer, the:
 1. Right product
 2. Right quantities and assortments
 3. Right places
 4. Right time
 5. Right cost / price and,
 6. Right condition
Market Logistic Decisions:
Market logistic includes planning the infrastructure to meet demand,
then implementing and controlling the physical flows of materials and
final goods from points of origin to points of use, to meet customer
requirements at a profit.
Interrelated aspects associated with market logistic:
 Physical Distribution
 Supply Chain Management (SCM)
 Value Network
 Demand Chain Planning
 Market Logistics
 Integrated Logistics Systems (ILS)
Market logistics planning has four steps:
 Deciding on the company’s value proposition to its customers.
 Deciding on the best channel design and network strategy for
reaching the customers.
 Developing operational excellence in sales forecasting, warehouse
management, transportation management, and material management.
 Implementing the solution with the best information system,
equipment, policies and procedures.
Market logistics objectives:

MARKETING AND LOGISTIC INTERFACE

Marketing Logistic
Marketing Activities Logistic Activities
Interface

  Marketing Research   Forecasting   Customer Service

  Product Mix    Transport
  Pricing  Transportation   Inventory
  Promotion   Storage Processing
  Sales Force   Packing   Material Handling
Management   Order   Information
 Fulfilment
 It means getting the right goods to the right place at the right time
for the least cost.
 Market-logistic cost interact and are often negatively related.
Many companies state their market logistics objectives as “getting the
right goods to the right places at the right time for the least cost.” This
means a market logistics system has to simultaneously provide
maximum customer service at the minimum distribution cost.
Maximum customer service implies large inventories, premium
transportation and multiple warehouses, all of these raise market-
logistics costs. A company cannot achieve market-logistics efficiency by
asking its logistics manager to minimize the logistics costs.
Some of the major market logistics objectives of a company are as
follows:
Logistics Decisions: Market logistics activities involve strong trade-offs,
decisions must be made on a total system basis. Customers are
interested in on-time delivery, suppliers desire to meet emergency needs
and also have willingness to take back defective goods and re-supply
them quickly at their costs. A company must then research the relative
importance of these service outputs.
Market Logistics and Cost:
Let us consider, a machine manufacturer has established the following
service standards:
 1. To deliver at least 95 percent of the dealer’s orders within 7 days
of order receipt.
 2. To fill the dealer’s orders with 99 percent accuracy.
 3. To answer dealer inquiries on orders with 99 percent accuracy.
 4. To answer that damage to merchandise in transit does not exceed
one percent.
Given above market—logistics objectives, the company must design a
system that will minimise the cost of achieving these objectives.
Each possible market logistics system may give rise to the following
empirical equation:

Where, M = Total market-logistics cost of proposed system. T = Total freight cost of proposed system. FW = Total fixed

warehouse cost of proposed system.

VW = Total variable warehouse costs (including inventory) or proposed system. S = Total cost of lost sales due to average

delivery delay under proposed system.

Choosing a market logistics system calls for examining the total cost (M)
associated with different proposed system and selecting the system that
minimises it. If it is difficult to measure S, the company should aim to
minimise T + FW + VW for a target level of customer service.
Market Logistics Decisions:
Four major decisions must be made with regard to market logistics:
 1. How should orders be handled? (Order Processing).
 2. Where should stocks be located? (Warehousing).
 3. How much stock should be held? (Inventory).
 4. How should goods be shipped? (Transportation).
Connection between Marketing and Logistics

Logistic Activities in Supply Chain Management:

Logistic as the Critical Element in Supply Chain Management
Nowhere in business marketing strategy is SCM more important than in
logistics. Logistics management is that part of supply chain management
that plans, implements, and controls the efficient, effective forward and
reverse flow and storage of goods, services, and related information
between the point of origin and the point of consumption in order to
meet customer’s requirement. Logistics management is an integration
function that coordinates and optimizes all logistic activities, as well as
integrates logistic activities with other functions including marketing,
sales, manufacturing, finance, and information technology.
Effective business marketing demands efficient, systematic delivery of
finished products to channel members and customers. The importance
of this ability has elevated the logistics function to a place of prominence
in the marketing strategy of many business marketers.
Distinguish between logistics and supply chain management
Logistics is a critical element in SCM. In fact, there is considerable
confusion about the difference between the discipline of SCM and
logistics. SCM is focused on the integration of all business processes that
add value for customers. The 1990’s witnessed the rising importance of
time-based competition; rapidly improving Information technology,
expanding globalisation, increasing attention to quality, and the
changing face of inter firm relationship. These Trends combined to
cause companies to expand their perspective on logistics to include all
the forms involved in creating a finished product and delivering it to the
buyer or user on time and in perfect condition. The SCM concept is an
integrating philosophy for coordinating the total flow of supply channel
from supplier to ultimate user. Logistics is critical, however, to business
marketers, because regardless of the orientation of the entire supply
chain, the firm relies on its logistics system to deliver product in a
timely, low cost manner.
Managing flow
The significance of the supply chain perspective and logistical
management is that the business marketing manager focuses attention
on the performance of all participants in the supply chain. The manager
also coordinates their efforts to enhance the timely delivery of the
finished product to the ultimate user at the lowest possible cost.
Inherent in the supply chain approach is the need to form close
relationship with the supply chain participants, including vendors,
transportation suppliers, warehousing companies, and distributors. The
focus of logistics in the SCM for business marketer is the flow of product
through the supply chain, with timely information driving the entire
process.
The Strategic Role of Logistics
In the past, logistics was viewed simply as a cost of doing business but
today, many companies view logistics as a critical strategic weapon that
can value to customer relationship. For many business marketers,
logistics is the primary marketing tool for gaining and maintaining
competitive superiority. These firms typically recognise that logistics
performance is an important part of marketing strategy, and they exploit
their logistics competencies. Companies that incorporate logistics
planning and management into long-term business strategies can
achieve significant benefits, which create real value for the company.
Sales-Marketing-Logistics Integration
The rising value of logistics as a strategic marketing weapon has
fostered the integration of the sales, marketing, and logistics functions
of many business marketers. In progressive firms, unified teams of
sales, production, logistics, information systems, and marketing
personnel develop integrated logistics programs to offer to potential
customers. Teams of specialists from each area make sales calls and
tailor logistics solutions to customer problems.
Just-in-Time systems
To serve a customer, business market is must be prepared to deliver
their products frequently and with precise timing. The reason is the
widespread adoption by manufacturing firms, like Honda of America, of
the just-in-time (JIT) inventory principle. Under this principle, suppliers
carefully coordinate deliveries with the manufacturer's production
schedule -often delivering products just hours before they are used. The
objective of a JIT system is to eliminate waste of all kinds from the
production process by requiring the delivery of the specified product at
the precise time and in the exact quantity needed. The quality must be
perfect -there is no opportunity to inspect products in the JIT process.
Because JIT attempts to relate purchases to production requirements,
the typical order size shrinks, and more frequently deliveries are
required. Increased delivery frequency presents a challenge to the
business marketing production and logistics system. However, business
marketers will have to meet this challenge, as many competitors now
complete on the basis of inventory turns and speed to market.

Elemen
Key Aspects
ts

The “product” of Logistic activities, customer service relates

Custome to the effectiveness in creating time and place utility. The
r service level of customer service provided by the supplier has a
direct impact on total cost market share, and profitability.

Order processing triggers the logistic process and directs

Order
activities necessary to deliver product to customers. Speed
processi
and accuracy of order processing effect costs and customers
ng
service level.

Logistics Information exchanged in the distribution process guides the

Commun activities of the system. it is the vital link between the firm's
ications logistic system and its customers.

The physical movement of products from source of supply

Transpor through production to customers is the most significant cost
tation area in logistics, and it involves selecting modes and specific
carriers as well as routing.

Warehou Providing storage space serves as a buffer between

 production and use. Warehousing may be used to enhance
sing
service and to lower transportation costs.

Inventory is used to make products available to customers

Inventor
and to ensure the correct mix of products is at the proper
y control
location at the right time.

The role of packaging is to provide protection to the product,

Packagin
to maintain product identity throughout the logistic process,
g
and to create effective product density.

Materials handling increase the speed of, and reduces the

Materials cost of, picking orders in the warehouse and moving
handling products between storage and the transportation carriers. It
is a cost-generating activities that must be controlled.

Producti Utilised in conjunction with logistics planning, production

on planning ensures that products are available for inventory in
planning the correct assortment and quantity.

Plant
and
Strategic placement of plants and warehouses increases
warehou
customer service and reduces the cost of transportation.
se
location

Order Processing: Involve following activities:

 Order checking for any deviation in agreed on negotiation term
 Technical details – price, delivery period, payment terms, taxes etc.
 Checking the availability of material in stock (material requisition)
 Production and material scheduling for shortage
 Acknowledging the order, indicating deviation if any
It is routine operation but require great deal of planning, training of
people involved and investment to bring about efficiency and accuracy.
In a large organization a system capable of handling thousands of
voluminous orders with minimum human involvement or without human
involvement is a must involving shortened order fulfilment cycle to have
edge over rivals.
The order fulfilment process refers to all the steps companies must take
from the moment they receive an order until the items land in
customers’ hands. For many wholesale distribution companies, an order
fulfilment process might look like this:
 Order is received, either in person, on the phone, via email, etc.
 Order must be entered into back office systems (like an ERP or
accounting platform)
 Customer is notified that the order has been received.
 Order is sent to the warehouse. A paper order might be taken to the
warehouse as part of a batch, or it is sent directly from an invoicing or
sales order management application.
 Order is picked: a worker goes into the warehouse, finds the items in
the order, and picks them off the shelf.
 Order is packed to prepare for shipping.
 Order is shipped.
 Customer is notified that the order is on its way.
 Order arrives.
perfect order fill rateOne of the ways companies judge the efficiency of
their order fulfilment processes is by looking at the Perfect Order Metric.
A is one that is on time, complete, and undamaged, along with the
correct paperwork to accompany it. This metric is similar to , which
we’ve discussed on the blog before. Although companies all say they
strive for perfect orders every time, it’s a difficult thing to achieve. Here
are some insights and tips to help your business fulfil orders more
quickly, accurately and efficiently.
Order Fulfilment Process Challenges
Businesses face several challenges throughout the order fulfilment
process. These include challenges related to demand planning, inventory
management, supply chain optimization, logistics planning, and several
other complex concerns. However, at the risk of over-simplifying
matters, what it really boils down to is knowing and being able to make
effective decisions about what you have to sell, whether a customer is
likely to buy it, and how are you going to get it to them if they do.
Let’s break the problem down into its different parts:
 1. Demand Planning: Demand planning involves knowing in advance
what demand for a product will be, as well as demand shaping, or a
company’s efforts to try to generate demand, like marketing and
promotions.
 2. Inventory Management: Order fulfilment is all about meeting
customer expectations, and it’s hard to do that if you are out of stock on
the items customers want. Knowing what’s in stock and being able to
provide visibility on stock levels as the order is placed prevents
customers from being disappointed with backorders and delays.
 3. Supply Chain Execution: When items are low or out of stock, how
quickly can you get them back in stock? How quickly can your
manufacturers produce more product? From there, how long will it take
to get to your warehouses? These are supply chain execution questions
that can also impact order fulfilment.
 4. Logistics Planning: Once the items are ready to ship, how are you
going to get them to the customer? How long will it take? Will the items
be handled carefully so they arrive in one piece?
Strategies to Speed up Order Fulfilment Process
When it comes to speeding up order fulfilment, there are many steps
you can take to make a big impact. Start by looking at some of the
“quick wins” that don’t require a massive investment of dollars, but will
make a quick difference, such as classifying your inventory and ensuring
that it is stored as logically as possible.
The next step is to make sure that you are making the most of the
systems you already have in place. Many companies have the pieces in
place that are needed to improve their order fulfilment processes, but
are unable to get the most from these systems. Finally, you can also
look at making new investments in automation to speed up your order
handling times.
 1. Classify your inventory to ensure rapid handling: Grouping your
inventory from fastest moving to slowest moving helps to ensure that
you always have the right stock levels on your most important items. Put
the most popular items in a centrally located area of your warehouse to
ensure that they can be picked, packed and delivered to the shipping
dock in a minimal amount of time. Slower moving items can be stored in
a separate area. This more logical arrangement can really cut down on
the time it takes to process and fulfil orders.
 2. Integrate systems for more visibility into all aspects of order
fulfilment: In order to quickly fulfil an order, you need visibility into
several areas––demand forecasting, sales, inventory, and logistics just
to name a few. At a minimum, this requires some level of integration
between the sales order management system where the order is placed,
and the ERP system that maintains financial data, as well as the
inventory and logistics systems that that handle the processes for
picking, packing and shipping.
 3. Automate processes: After your systems are able to provide more
visibility into all aspects of the process, you should also look at how the
processes themselves can be sped up. Automation doesn’t necessarily
mean investing in robotics or conveyors; it can be as simple as investing
in scanners to more easily enter inventory into the system as it arrives in
your warehouse, or scanning it out as it leaves. And for smaller
businesses, the investment doesn’t have to be huge. There are even
applications that can be downloaded to a smart phone or tablet to
automate this process inexpensively.
Each of these methods has a dual benefit. Reclassifying inventory from
fastest moving to slowest will not only help save time in the order
fulfilment process, it will also save money in terms of labour costs in the
warehouse. Systems integration will help to improve the order fulfilment
process but also provide better reporting and analytics that can aid
decision-making and profitability. And automating processes speeds
order fulfilment but also provides more accurate data for future orders.
Transportation
 Process of moving an item from point A to point B.
 Safe, efficient, reliable and sustainable movement of persons and
goods over time and space.
Transportation in Logistic
 The operation of transportation determines the efficiency of moving
products.
 The progress in techniques and management principles improves the
moving load, delivery speed, service quality, operation costs, the usage
of facilities and energy saving
 Transportation takes a crucial part in the logistic operation
Transportation is usually the largest single logistical expense, and with
continually rising fuel cost, its importance will probably increase.
Typically, the transportation decision involves evaluating and selecting
both a mode of transportation and the individual carrier that will ensure
the best performance at the lowest cost. Mode refers to the type of
carrier – rail, truck, water, air, or some combination of the four.
Individual carriers have evaluated on rates and delivery performance.
The supply chain view is important in selecting individual carriers.
Carriers become an integral part of the supply chain, and close
relationship are important. One study found evidence that carriers’
operating performance improved when they were more involved in the
relationship between buyer and seller. By further integrating carriers into
the supply chain, the entire supply chain can improve its competitive
position. In this section we consider:
 The role of transportation in industrial supply chain
 The criteria for evaluating transportation options
Transportation and Logistical Service
A business marketer must be able to effectively move finished inventory
between facilities to channel intermediaries and to customers. The
transportation system is the link that binds the logistical network
together and ultimately results in timely delivery of products. Efficient
warehousing does not enhance customer service levels if transportation
is inconsistent or inadequate.
Transportation Performance Criteria
Cost of service is the variable cost of moving products from origin to
destination, including any terminal or accessory charges. The cost of
service may range from a little ₹0.5 per ton-km via water to as high as
₹25 per ton-km via airfreight. The important aspect of selecting the
transportation mode is not cost per se but cost relative to the objective
to be achieved. Bulk raw materials generally do not require prepaid
delivery service, so the cost of anything other than rail or water
transportation could not be justified. On the other hand, although
airfreight may be almost 10 times more expensive than motor airfreight,
the cost is inconsequential to a customer who needs an emergency
shipment of spare parts. The cost of premium (faster) transportation
modes may be justified by the resulting inventory reductions.
Speed of service refers to the elapsed time to move products from one
facility (plant or warehouse) to another facility (warehouse or customer
plant). Again, speed of service often over ides costs. Rail, a relatively
slow mode used for bulk shipments, requires inventory builds up at the
supplier’s factory and at the destination warehouse. The longer the
delivery time, the more inventory customers must maintain to service
their needs while the shipment is in transit. The slower modes involve
lower variable costs for product movement, yet they result in lower
service levels and higher investments in inventory. The faster modes
produce just the opposite effect. Not only must a comparison be made
between modes in terms of service but various carriers within a mode
must be evaluated on their “door-to-door” delivery time.
Service consistency is usually more important than average delivery
time, and all modes of transportation are not equally consistent.
Although air provides the lowest average delivery time, generally it has
the highest variability in delivery time relative to the average. The wide
variations in modal service consistency are particularly critical in
business marketing planning. The choice of transportation mode must
be made on the basis of cost, average transit time, and consistency if
effective customer service is to be achieved.
In summary, because business buyers often place a premium on
effective and consistent delivery service, the choice of transportation
mode is an important one -one where cost of service is often secondary.
However, the best decision on transportation carriers results from a
balancing of service, variable costs and investment requirements of
ordinary, verses expedited (rush order), shipments.
Importance of Transportation
 Without well-developed transportation system, logistic could not
bring its advantages into full play.
 A well operated logistic system could increase both the
competitiveness of the government and enterprises.
 Transportation system is the most important economic activity
among the components of business logistic system.
Transportation Functionality
Product Movement
 Temporal – product is locked during transit, hence inaccessible
 Financial – administration costs, salaries, maintenance costs
expended
 Environmental – fuel costs are high (creates air pollution,
congestion, noise pollution)
Product Storage
 When loading and unloading is more expensive than storage
 When storage space is limited (situation when inventory levels are
high)
Types of Transportation
Rail Transport
Advantages
 It is convenient mode of transport for travelling long distances
 Its operation is less affected by adverse weather like rains, fog etc.
Disadvantages
 It is not available in remote part of the country
 It involves heavy losses of life as well as goods in case of accident
 Road Transport
Advantages
 It is relatively cheaper mode of transportation as compared to other
modes
 It is flexible mode of transportation as loading and unloading is
possible at any destination
Disadvantages
 Due to limited carrying capacity, road transport is not economical for
long distance transportation of goods
Water Transport
Advantages
 It promotes international trades
 The cost of maintaining and constructing routes is very low most of
them are naturally made
Disadvantages
 It is slow moving mode of transport so it is not suitable for
perishable goods
 It is adversely affected by weather conditions
Air Transport
Advantages
 It is fastest mode of transport
 It is the most convenient of transport during natural calamities
Disadvantages
 It is relatively more expensive mode of transport
 It is not suitable for shirt distance travel
Warehousing
Warehouses or distribution centres are places where raw materials,
semi-finished or finished goods are stored. They represent an
interruption in the flow of material and thus add cost to the system.
Items should be warehoused only if there is an offsetting benefit gained
from storing them.
Warehouses include plant warehouses, regional warehouses, and local
warehouses. They may be owned and operated by the supplier or
intermediaries such as wholesalers, or they may be public warehouses.
The latter offer a general service to their public that includes providing
storage space and warehouse services. Some warehouses specialize in
the kinds of services they offer and the goods they store.
Warehousing and warehouse management are part of a logistics
management system, which is itself a component in supply chain
management. Although viewed by some as simply a place to store
finished goods, inbound functions that prepare items for storage and
outbound functions that consolidate, pack and ship orders provide
important economic and service benefits to both the business and its
customers.
Central Location
A warehouse provides a central location for receiving, storing and
distributing products. As each inbound shipment arrives, responsibility
for the goods transfers to warehouse personnel; products are identified,
sorted and dispatched to their temporary storage location. Storage isn’t
a static “thing” but rather a process that includes security measures and
maintaining an environment that preserves the integrity and usefulness
of the items. Once it’s time to move items, each order is retrieved,
grouped, packaged and checked for completeness before being
dispatched to their new destination.
Value-Adding Operation
The objective of a logistics system is to reduce cycle times and overall
inventories, lower costs and most importantly, improve customer
service. Warehousing increases the utility value of goods by providing a
means to have the right products available at the right place in the right
time. Operations such as order consolidation, order assembly, product
mixing and cross-docking that take place within the warehouse structure
also add value to the overall logistics system.
Economic Benefits
Warehouses provide economies of scale through efficient operations,
storage capacity and a central location. Economic benefits are realized,
for example, through consolidation and accumulation operations.
Consolidation operations cut outbound delivery costs for both the
business and its customers. Instead of shipping items individually from
multiple sources, items are delivered to a central warehouse, packaged
together and shipped back out as a complete order. Accumulation
operations allow a warehouse to act as a buffer, balancing supply and
demand for seasonal and long-term storage. This can be vital to
business profitability when demand for a product is year-round but the
product may only be available at certain times of the year.
Service Benefits
Warehouses can serve as part of a contingency plan to ensure outbound
orders are filled in full and on time. A practice called safety stocking
allows businesses to maintain a predetermined number of inventory
items at its warehouse. On the inbound side, safety stocking means that
an emergency such as a transportation delay or a shipment containing
defective or damaged goods won’t delay filling and shipping customers
order. On the outbound side, safety stocking is insurance against out-of-
stock items. The service function that warehouses perform can be
classified into two kinds:
 The general warehouse where goods are stored for long periods and
where the prime purpose is to protect goods until they are needed.
There is minimal handling, movement, and relationship to
transportation. Furniture storage or a depository for documents is
examples of this type of storage. It is also the type used for inventories
accumulated in anticipation of seasonal sales.
 The distribution warehouse has a dynamic purpose of movement and
mixing. Goods are received in large-volume uniform lots, stored briefly,
and then broken down into small individual orders of different items
required by the customer in the marketplace. The emphasis is on
movement and handling rather than on storage. This type of warehouse
is widely used in distribution systems. The size of the warehouse is not
so much its physical size as it is the throughput or volume of traffic
handled.
Role of warehouses
Warehouses serve three important roles: Transportation consolidation
As discussed before, transportation costs can be reduced by using that
concept of warehouse. This is accomplished by consolidating small (LTL)
shipments into large (TL) shipments.
Consolidation can occur in both the supply and distribution systems. In
physical supply, LTL shipments from several suppliers can be
consolidated at a warehouse before being shipped as TL to the factory.
In physical distribution, TL shipments can be made to a distant
warehouse and LTL shipments made to local users.
Product mixing
Although transportation consolidation is concerned with the reduction of
transportation costs, product mixing deals with the grouping of different
items into an order and the economics that warehouse can provide in
doing this. When customers place orders, they often want a mix of
products that are produced in different locations.
Without a distribution centre, customers would have to order from each
source and pay for LTL transport from each source. Using a distribution
centre, orders can be placed and delivered from a central location.
Service
Distribution centres improve customer service by providing place utility.
Goods are positioned close to markets so the markets can be served
more quickly.
Inventory Management
Inventory – raw materials, component parts, work-in-process, or
finished products that are held at a location in the supply chain.
Inventory is an idle stock of physical goods that contain economic value,
and are held in various forms by an organization in its custody awaiting
packing, processing, transformation, use or sale in a future point of
time.
Any organization which is into production, trading, sale and service of a
product will necessarily hold stock of various physical resources to aid in
future consumption and sale. While inventory is a necessary evil of any
such business, it may be noted that the organizations hold inventories
for various reasons, which include speculative purposes, functional
purposes, physical necessities etc.
From the above definition the following points stand out with reference
to inventory:
 All organizations engaged in production or sale of products hold
inventory in one form or other.
 Inventory can be in complete state or incomplete state.
 Inventory is held to facilitate future consumption, sale or further
processing/value addition.
 All inventoried resources have economic value and can be
considered as assets of the organization.
supply chain management VMI Inventory Management -Inventory
management and are the backbone of any business operations. With the
development of technology and availability of process driven software
applications, inventory management has undergone revolutionary
changes. In the last decade or so we have seen adaptation of enhanced
customer service concept on the part of the manufacturers agreeing to
manage and hold inventories at their customers end and thereby affect
Just in Time deliveries. Though this concept is the same in essence
different industries have named the models differently. Manufacturing
companies like computer manufacturing or mobile phone manufacturers
call the model by name -Vendor Managed Industry while Automobile
industry uses the term JIT -Just in Time whereas apparel industry calls
such a model by name -ECR -Efficient consumer response. The basic
underlying model of inventory management remains the same.
Different Types of Inventory
Inventory of materials occurs at various stages and departments of an
organization. A manufacturing organization holds inventory of raw
materials and consumables required for production. It also holds
inventory of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at plant, FG
Stores, distribution centres etc. Further both raw materials and finished
goods those that are in transit at various locations also form a part of
inventory depending upon who owns the inventory at the particular
juncture. Finished goods inventory is held by the organization at various
stocking points or with dealers and stockiest until it reaches the market
and end customers.
Besides Raw materials and finished goods, organizations also hold
inventories of spare parts to service the products. Defective products,
defective parts and scrap also forms a part of inventory as long as these
items are inventoried in the books of the company and have economic
value.
Independent Demand
An inventory of an item is said to be falling into the category of
independent demand when the demand for such an item is not
dependent upon the demand for another item. Finished goods Items,
which are ordered by External Customers or manufactured for stock and
sale, are called independent demand items.
Independent demands for inventories are based on confirmed Customer
orders, forecasts, estimates and past historical data.
Dependant Demand
If the demand for inventory of an item is dependent upon another item,
such demands are categorized as dependant demand. Raw materials
and component inventories are dependent upon the demand for
Finished Goods and hence can be called as Dependant demand
inventories.
Types of Inventory by Function

INPUT PROCESS OUTPUT

Finished
Raw Materials Work In Process
Goods

Consumables Semi-Finished Production in Finished

required for various stages, lying with various Goods at
processing. Eg : Fuel, departments like Production, WIP Distribution
Stationary, Bolts & Stores, QC, Final Assembly, Paint Centres
Nuts etc. required in Shop, Packing, Outbound Store throughout
manufacturing etc. Supply Chain

Finished
Maintenance Items/Consumables
Production Waste and Scrap Goods in
transit

Finished
Packing Materials Rejections and Defectives Goods with
Stockiest

and Dealers

Local purchased Items required for

production Spare Parts Stocks & Bought Out items

Defectives, Rejects and Sales Returns

Repaired Stock and

Parts

Sales Promotion & Sample Stocks

How Inventory is used

 Anticipation or seasonal inventory
 Safety stock – buffer demand fluctuation
 Lot-size or cycle stock – take advantage of quantity discounts or
purchasing efficiencies
 Pipeline or transportation inventory
 Speculative or hedge inventory protects against some future events
like labour strike
 Maintenance, repair and operational inventory (MRO)
Objective of Inventory Management
 The objective of inventory management is to strike a balance
between inventory investment and customer service.
 Provide acceptable level of customer service (on-time delivery)
 Allow cost-efficient operations
 Minimise inventory investment
Functions of Inventory management
 To meet anticipated demand
 To smooth production requirements
 To decouple operations
 To protect against stock-out
 To take advantage of order cycles
 To help hedge against price increase
 To permit operations
 To take advantage of quantity discounts
Need for Inventory Management
Inventory is a necessary evil that every organization would have to
maintain for various purposes. Optimum inventory management is the
goal of every inventory planner. Over inventory or under inventory both
cause financial impact and health of the business as well as effect
business opportunities.
Inventory holding is resorted to by organizations as hedge against
various external and internal factors, as precaution, as opportunity, as a
need and for speculative purposes.
Most of the organizations have raw material inventory warehouses
attached to the production facilities where raw materials, consumables
and packing materials are stored and issue for production on JIT basis.
The reasons for holding inventories can vary from case to case basis.
Meet variation in Production Demand
Production plan changes in response to the sales, estimates, orders and
stocking patterns. Accordingly the demand for raw material supply for
production varies with the product plan in terms of specific SKU as well
as batch quantities. Holding inventories at a nearby warehouse helps
issue the required quantity and item to production just in time.
Cater to Cyclical and Seasonal Demand
Market demand and supplies are seasonal depending upon various
factors like seasons; festivals etc and past sales data help companies to
anticipate a huge surge of demand in the market well in advance.
Accordingly they stock up raw materials and hold inventories to be able
to increase production and rush supplies to the market to meet the
increased demand.
Economies of Scale in Procurement
Buying raw materials in larger lot and holding inventory is found to be
cheaper for the company than buying frequent small lots. In such cases
one buys in bulk and holds inventories at the plant warehouse.
Take advantage of Price Increase and Quantity Discounts
If there is a price increase expected few months down the line due to
changes in demand and supply in the national or international market,
impact of taxes and budgets etc., the company’s tend to buy raw
materials in advance and hold stocks as a hedge against increased costs.
Companies resort to buying in bulk and holding raw material inventories
to take advantage of the quantity discounts offered by the supplier. In
such cases the savings on account of the discount enjoyed would be
substantially higher that of inventory carrying cost.
Reduce Transit Cost and Transit Times
In case of raw materials being imported from a foreign country or from
a faraway vendor within the country, one can save a lot in terms of
transportation cost buy buying in bulk and transporting as a container
load or a full truck load. Part shipments can be costlier.
In terms of transit time too, transit time for full container shipment or a
full truck load is direct and faster unlike part shipment load where the
freight forwarder waits for other loads to fill the container which can
take several weeks.
There could be a lot of factors resulting in shipping delays and
transportation too, which can hamper the supply chain forcing
companies to hold safety stock of raw material inventories.
Long Lead and High demand items need to be held in Inventory
Often raw material supplies from vendors have long lead running into
several months. Coupled with this if the particular item is in high
demand and short supply one can expect disruption of supplies. In such
cases it is safer to hold inventories and have control.
Effective Inventory Management
 To be effective, management must have the following:
 A system to keep track of inventory on hand and on order
 A reliable forecast of demand
 Knowledge of lead times and its variability
 Reasonable estimates of
 Inventory holding (carrying cost)
 Ordering cost
 Shortage cost
 A classification system for inventory items
Components of Inventory Cost
Ordering Cost
Cost of procurement and inbound logistics costs form a part of Ordering
Cost. Ordering Cost is dependant and varies based on two factors -The
cost of ordering excess and the Cost of ordering too less. Both these
factors move in opposite directions to each other. Ordering excess
quantity will result in carrying cost of inventory. Whereas ordering less
will result in increase of replenishment cost and ordering costs.
These two above costs together are called Total Stocking Cost. If you
plot the order quantity vs the TSC, you will see the graph declining
gradually until a certain point after which with every increase in quantity
the TSC will proportionately show an increase. This functional analysis
and cost implications form the basis of determining the Inventory
Procurement decision by answering the two basic fundamental questions
-How Much to Order and When to Order? How much to order is
determined by arriving at the Economic Order Quantity or EOQ?
Carrying Cost Inventory storage and maintenance involves various types of costs namely:
 Inventory Storage Cost
 Cost of Capital
Inventory carrying involves Inventory storage and management either
using in house facilities or external warehouses owned and managed by
third party vendors. In both cases, inventory management and process
involves extensive use of Building, Material Handling Equipment, IT
Software applications and Hardware Equipment coupled managed by
Operations and Management Staff resources.
Inventory Storage Cost
Inventory storage costs typically include Cost of Building Rental and
facility maintenance and related costs. Cost of Material Handling
Equipment, IT Hardware and applications, including cost of purchase,
depreciation or rental or lease as the case may be. Further costs include
operational costs, consumables, communication costs and utilities,
besides the cost of human resources employed in operations as well as
management.
Cost of Capital
Includes the costs of investments, interest on working capital, taxes on
inventory paid, insurance costs and other costs associate with legal
liabilities. The inventory storage costs as well as cost of capital is
dependent upon and varies with the decision of the management to
manage inventory in house or through outsourced vendors and third
party service providers.
Current times, the trend is increasingly in favour of outsourcing the
inventory management to third party service provides. For one thing the
organizations find that managing inventory operations requires certain
core competencies, which may not be in line with their business
competencies. They would rather outsource to a supplier who has the
required competency than build them in house.
Secondly in case of large-scale warehouse operations, the scale of
investments may be too huge in terms of cost of building and material
handling equipment etc. Besides the project may span over a longer
period of several years, thus blocking capital of the company, which can
be utilized into more important areas such as R & D, Expansion etc. than
by staying invested into the project.
Inventory Classification
Every unit of inventory has an economic value and is considered an
asset of the organization irrespective of where the inventory is located
or in which form it is available. Even scrap has residual economic value
attached to it. Depending upon the nature of business, the inventory
holding patterns may vary. While in some cases the inventory may be
very high in value, in some other cases inventory may be very high in
volumes and number of SKU. Inventory may be help physically at the
manufacturing locations or in a third party warehouse location.
Inventory Controllers are engaged in managing Inventory. Inventory
management involves several critical areas. Primary focus of inventory
controllers is to maintain optimum inventory levels and determine
order/replenishment schedules and quantities. They try to balance
inventory all the time and maintain optimum levels to avoid excess
inventory or lower inventory, which can cause damage to the business.
ABC Classification
Inventory in any organization can run in thousands of part numbers or
classifications and millions of part numbers in quantity. Therefore
inventory is required to be classified with some logic to be able to
manage the same. In most of the organizations inventory is categorized
according to ABC Classification Method, which is based on pareto
principle. Here the inventory is classified based on the value of the units.
The principle applied here is based on 80/20 principles. Accordingly the
classification can be as under:
 A Category Items Comprise 20% of SKU & Contribute to 80% of $
spend.
 B Category Items Comprise 30% of SKU & Contribute to 15% of $
spend.
 C Category Items Comprise 50% of SKU & Contribute to 5% of $
spend.
Advantages of ABC Classification
 This kind of categorization of inventory helps one manage the entire
volume and assign relative priority to the right category. For Example A
Class items are the high value items. Hence one is able to monitor the
inventory of this category closely to ensure the inventory level is
maintained at optimum levels for any excess inventory can have huge
adverse impact in terms of overall value.
 A Category Items: Helps one identify these stocks as high value
items and ensure tight control in terms of process control, physical
security as well as audit frequency.
 It helps the managers and inventory planners to maintain accurate
records and draw management’s attention to the issue on hand to
facilitate instant decision-making.
 B Category Items: These can be given second priority with lesser
frequency of review and less tightly controls with adequate
documentation, audit controls in place.
 C Category Items: Can be managed with basic and simple records.
Inventory quantities can be larger with very few periodic reviews.
Disadvantages
 Inventory Classification does not reflect the frequency of movement
of SKU and hence can mislead controllers.
 B & C Categories can often get neglected and pile in huge stocks or
susceptible to loss, pilferage, slackness in record control etc.
Models of Inventory
Economic Order Quantity Models
The question of how much to order is frequently determined by using an
Economic Order Quantity (EOQ) model. EOQ model identify the optimal
order quantity by minimising the sum of certain annual costs that vary
with order size. Three order size models are:
 The basic economic order quantity model
 The economic production quantity model
 The quantity discount model
The Economic Order Quantity Model Assumptions:
 Only one product is involved
 Annual demand requirements are known
 Demand is even throughout the year
 Lead time does not vary
 Each order is received in a single delivery
 There are no quantity discounts
EOQ model inventory cycle:
The inventory cycle begins with receipt of an order of Q units, which are
withdrawn at a constant rate over time. When the quantity on hand is
just sufficient to satisfy demand during lead time, an order for Q units is
submitted to the supplier. Because it is assumed that both the usage
rate and lead time don’t vary, the order will be received at the precise
instant that the inventory on hand falls to zero. Thus, orders are timed
to avoid both excess and stock outs.
The Economic Production Quantity Model
 Production done in batches or lots
 Capacity to produce a part exceeds the part’s usage or damage rate
 Assumptions of EPQ are similar to EOQ except orders are received
incrementally during production
Assumption:
 Only one item is involved
 Annual demand is know
 Usage rate is constant
 Usage occurs continually but production occurs periodically
 Production rate is constant
 Lead time does not vary
 No quantity discounts
Quantity Discount Model
 Quantity discounts are price reductions for large order offered to
customers to induce them to buy in large quantities. In this case the
price per unit decreases as order quantity increases.
 If the quantity discounts are offered, the buyer must weigh the
potential benefits of reduced purchase price and fewer orders that will
result from buying in large quantities against the increase in carrying
cost caused by higher average inventories.
 The buyer’s goal with quantity discounts is to select the order
quantity that will minimise the total cost, where the total cost is the sum
of carrying cost, ordering cost and purchasing cost
Factors Leading to Inventory Inefficiencies
In any company inventory management is one area that the
managements always focus on when it comes to improving business
efficiencies and cutting costs. An inventory reduction drive always yields
results, which are visible and releases cash back into business. Does this
mean that inventory management is inefficient? The answer can be a
yes and a no.
Inventory management function is dependent upon physical operations
involving multiple locations and agencies and processes. The inter
dependence upon transactions which are sequential and parallel,
renders inventory susceptible to inefficiencies occurring in operations,
transactions, and documentation over a period of time.
Another possible factor that can hamper the inventory efficiencies is the
system setup that is used to manage the inventory. Quite often one can
find that the system setup and process defined in the system is not user
friendly and cumbersome. An efficient system should define and guide
the physical process as well as documentation process. The system
process should in turn be developed based on the business process
requirement. In many cases the operations are made to suit the system
setup, which already exists in some basic form and not suited to the
particular business process on hand.
Poor system setup that does not match with the shop floor warehouse
set up renders operations in efficient. It is very common to come across
complaints from users with regard to non-availability of features to work
around the processes; at times processes are lengthy and cumbersome
leading to operational delays. Non availability of different reports and
loops and bugs in the system can often push the operations teams to
find shortcut methods to bypass the system processes and carry on with
the work, resulting in inventory inefficiencies as well as inefficient
operations.
In cases where a company has outsourced the inventory management
to a third party service provider, the inventory management
complications increase manifold. You have the company’s ERP or
inventory system on one hand and the third part service provider’s
inventory management system or warehouse system on the other hand.
At any given point of time both have to be reflecting the same inventory
accuracy and also match with physical stock available on shop floor, but
this is not the case always. In cases where the systems are interfaced
too inventory in one system cannot mirror the other and reconciling
transactions between the two systems can be cumbersome and time
consuming.
Health of the inventory accuracy as well as inventory management can
also depend upon the inventory strategy of the company and its outlook.
A few companies treat inventory to be a necessary evil and just about
ensure processes are compliant and inventory audits are regularly held.
They do not deal with and treat inventory as an important asset that
needs to be managed and reviewed to keep it lean and accurate.
Those companies, which are aware of the implications and benefits that
a lean inventory management practice can have on their business, strive
to build good management practices and keep finding ways to optimize
the processes. Any efficiency brought about with change in processes
adds to the company’s profits. Hence they give attention to and invest in
driving inventory management strategy and practices, which are
benchmarked against the best in the industry.
Decisions with regard to level of inventory to be carried, who owns and
carries the inventory in the supply chain are some of the key decisions
that drive efficiencies in inventory management. Besides this technology
can also bring about process improvements speeding up the sales and
delivery processes and to a certain extent reduces manpower resources
and associated costs too.
Inventory management is an ongoing and dynamic process. To keep out
the inefficiencies in systems, processes and physical operations, calls for
active management participation and continuous improvement in all
processes and systems that are involved in inventory management.
Factors affecting Inventory Operations
Inventory management operations are increasingly being outsourced to
third party service providers, thereby ensuring that the investments and
costs in managing the inventories are reduced. This is a welcome trend
provided the company’s focus on overseeing and reviewing both
inventory management as well as inventory operations periodically to
ensure proper controls are maintained and processes followed.
Inventory management entails study of data on movement of inventory,
its demand pattern, supply cycles, sales cycles etc. Active management
calls for continuous analysis and management of inventory items to
target at lean m inventory Management.
Inventory Management function is carried out by the inventory planners
in the company in close coordination with procurement, supply chain
logistics and finance, besides marketing departments.
The efficiencies of inventory management are largely dependent upon
the skills and knowledge of the inventory planners, the focus and
involvement of management and the management policies coupled with
the inventory management system.
However inventory operations management is not under the control of
the inventory management team but rests with the third party service
providers. In this section of the article we aim to uncover few of the
critical areas and action points on the part of operations that can impact
the inventory of the company. Unskilled Labour and Staff: Inventory
operations management is a process-oriented operation. Every task and
action required to be carried out by the operatives will impact the
inventory as well as the delivery lead times and other parameters.
Therefore knowledge of what one is required to do and the effect of the
action should be known to the operatives who are on the shop floor. For
Example: If an operative is given a put away task, he should know how
and where he should put away the pallet, how to scan the pallet ID and
confirm it back to the system. Besides he should also know the impact
of not completing any of these actions or doing something wrong. The
impact his action will have on the system as well as physical inventory
should be clear to the operative.
Secondly different inventory items would have to be handled differently.
Operatives who are carrying out the task should know why and what is
required to be done. They should also know the consequences of not
following the process. A pallet might have to be scanned for the pallet id
and put away on a floor location, while a carton might have to be
opened and scanned for individual boxes inside and put away into a bin.
The operatives should be trained on the entire process and understand
why and what he is doing.
The WMS systems are quite operational and task intensive. Where the
warehouses are being managed on RF based systems, the operatives
should be able to manage the RF readers, understand how to access
and complete transactions through the RF Guns.
Often it is noticed that when the warehouse operations are being
managed by a third party service provider and the principle customer is
not present at the location, the quality of staff and operatives is
compromised and people are not given adequate training before being
allocated their responsibility. Such situations can lead to inventory
discrepancies.
In adequate SOP, Training and emphasis on processes compliance:
When an inventory management project kicks off at a third party
warehouse location, both the principle customer as well as the third
party service provider work on the project and setup basic processes,
document them in Standard Operating Procedures and conduct training
as a part of the project management methodology.
However over a period of time the nature of business requirements
changes, resulting in change in the operating processes. These do not
get documented in terms of amendments and the SOPs become
outdated. Thereafter one finds that the new comers who are introduced
on the shop floor are required to learn the processes by working along
with others whereas no training or SOP document is provided to him for
reference. With the result they often have half-baked knowledge of the
processes and carry on tasks not knowing why they are doing and what
they are required to do.
This situation is very dangerous for the health of the inventory and it
shows slackness in the attitude of the third party service provider.
Continuation of such a situation will lead to bad housekeeping, inventory
mismatches, and discrepancies and also affect the service delivery and if
left unchecked can lead to theft, pilferage and misuse of inventory.
In any third party owned inventory operations warehouse, the principle
client should ensure that periodic review and training is conducted for all
staff. Inventory operations should be periodically reviewed and inventory
counts and audits carried out regularly.
Operational Challenges in Inventory Management
The latest trend in all industries has been to outsource inventory
management functions to Third Party Service providers. Companies
outsource both Raw Material Inventory as well as Finished Goods to the
Service Provider. In case of finished goods inventory, depending upon
the supply chain design, there may be multiple stocking points at
national, regional and state levels. In such an event each of the
warehouses a different service provider may manage operations, as one
may not be able to find a supplier having operations all over the
country. Therefore the inventory in such a situation will be managed in
the Company’s system as well as in the Service provider’s system.
Inventory management and control becomes a critical function especially
in such situations where multi locations and multiple service providers
are involved.
To ensure Inventory control is maintained across all locations, following
critical points if focused upon will help:
 Establish and outline Operations Process for Service Providers: Draw
up SOP -Standard Operating procedure detailing warehouse operations
process, warehouse inventory system process as well as documentation
process.
Especially in a 3rd Party Service Provider’s facility, it is important to have
process adherence as well as defined management, authorization and
escalation structure for operations failing which inventory operations will
not be under control.
 Establish inventory visibility at each of the location through MIS
Reports: Draw up list of reports and MIS data for all locations and
ensure they are mailed to a central desk in the inventory team for daily
review. The inventory team leader should analyse daily reports of all
locations and highlight any non-conformity and resolve them as well as
update the management.
 Initiate Daily Stock count procedure to be carried out at all of the
locations and reported back to the inventory desk. Daily stock count
should be able to reflect location accuracy, stock accuracy as well as
transaction summary for the day.
 Monthly audits and inventory count should be implemented at all
locations without fail and insist on one hundred percent adherence.
 Quarterly inventory -wall-to-wall count or half yearly and annual
wall-to-wall count should be implemented depending upon the volume
of transactions as well as value of transactions at each location.
 Central Inventory team to be responsible for ensuring review of all
reports and controlling inventories at all locations.
 Inventory reconciliation -involves reconciling physical inventory at
site with the system inventory at 3PL Site and then reconciling 3PL
System stocks with company’s system stock.
 Visiting major sites and being present during physical stock audits on
quarterly or half yearly basis is very important.
 Lastly keep reviewing processes and ensure training and re training
is carried out regularly and at all times at site so that a process oriented
culture is imbibed and all operating staff understand the importance of
maintaining processes as well as inventory health.
 Inventory is nothing but money to the company. If 3PL vendor is
managing the inventory, needless to say you should have your
processes in place to be able to control and maintain inventory health.
Reverse Logistics and cost control in SCM
Increasingly, companies must deal with the flow of goods coming back
from the final customer or other companies in the distribution channel.
This reverse flow of goods is due to the increased quality demands of
customers in the goods they purchase and to financial pressure on
distributors to reduce slow-moving or unwanted inventories.
The eleventh edition of the APICS Dictionary defines reverse logistic a
complete supply chain dedicated to the reverse flow of products and
materials for the purpose of return, repair, remanufacture and/or
recycling.
In some distribution channels, reverse logistics can represent major
costs, which are growing partly due to the increased use of the Internet.
In addition to this, companies are being forced to take responsibility for
the return packaging. There are two main categories of reverse logistics:
 Asset recovery, which is the return of actual products.
 Green reverse logistics, which represents the responsibility of the
supplier to dispose of packaging materials or environmentally sensitive
materials such as heavy metals and other restricted materials.
The costs of green reverse logistics are reduced through the use of
reusable packaging, such as bins or racks rather than corrugated
containers, or an overall reduction in the amount of packaging.
Environmentally sensitive materials can be sorted and either reused in
manufacturing or disposed of in the most cost-effective method
possible, hopefully avoiding landfalls. Refillable beverage container
reduces the need for landfill space but imposes a cost on the producer
for sorting and handling.
Reducing costs associated with asset recovery involves coordinating the
handling of the materials perhaps with the outbound flow of new goods.
Information on the returned materials is necessary to ensure proper
reuse or disposal of the materials. If the return will generate a credit to
the sender, then this will also require information.
An example of this working quite well occurs with the replacement of a
starter motor, which should be the same size and model as the
replacement, is placed in the original carton and sent back to the
supplier for a credit. The carton will have all the information describing
the motor and can be sued for identification as it travels back to the
builder. To reduce costs, distributors will coordinate the outbound
shipments of new motors with the return of old motors for rebuilding.
Hidden Opportunities for Supply Chain Cost Reductions
Of course hidden costs, if you can find them, mean hidden
opportunities. In the management of returns, costs you can look for and
aim to eliminate or reduce include the following:
 Labour costs associated with customer relations (where there is a
return, there may be an unhappy customer who must be appeased)
 Customer service labour costs (identifying warranty eligibility,
determining what return and credit rules apply in each individual case)
 Transaction costs
 Transport and shipping costs
 Warehouse and storage costs
Much depends upon the nature of your supply chain operation of course.
Some industries experience more returns than others. The impact of
returns too, can differ from one industry or organisation to another.
That’s why the most important first step in improving reverse logistics
management is to dig down and understand the true costs of product
returns in your operation.
The Causes of Excessive Costs in Reverse Logistics
Unlike the forward flow of products through your supply chain,
management and streamlining of the reverse process is seldom seen as
a priority. That’s typically for the following reasons:
 Unlike customer orders, there is usually no deadline for returns to
arrive at their destination
 Products are moving against the normal flow, making for challenging
process integration
 For many organisations, it’s very difficult to forecast and plan for
return volume
 Returns are typically seen as an inevitable cost and a low priority for
management action
 These characteristics conspire to hide the costs of returns, making it
difficult to see exactly where and when they impact budgets, which are
geared towards a one-way flow of goods and materials.
Improving Reverse Logistics Management
Some companies that successfully manage reverse logistics have
implemented automated process management. Others have formed
dedicated reverse logistics functions, employing a team of people who
do nothing else but manage the return of unwanted, damaged or
recalled products. Another possibility, if your organisation handles a high
volume of returns, is to outsource reverse logistics to a 3PL partner.
Whatever approach you take though, the important thing is to create a
clear dividing line between the processes for outbound orders and those
for returns. That’s the bit which many companies miss and as a result,
struggle to get visibility of costs attributable to product return.
Minimising Returns for Supply Chain Cost Reductions
Of course, the best solution of all is to eliminate or dramatically reduce
the number of returns your company has to handle. In order to do that,
you’ll still need to improve traceability as a first step.
Once you have visibility of return volumes and reasons for return, you
can put the necessary effort into understanding root causes and finding
ways to diminish their impact. This may require the development of
initiatives to improve manufacturing, storage, transportation, and/or
customer service in relation to outbound product supply.
Putting It All Together
For most supply chain organizations, improving reverse logistics and
reducing its cost will require steps to prevent or minimise returns, taken
in conjunction with measures to streamline the reverse supply chain.
As with most cost reduction efforts, you’ll probably have to spend
initially, in order to save. If reverse logistics was easy, every company
would excel in its management and execution and I wouldn’t be writing
about the issues. Few things worth doing are easy though, so why not
at least take a look for the hidden costs in your product-return
processes? You might find there are some decent savings to be had
enough perhaps, to do more than just look.
***************The End**************
All The Best