SDM Notes Neha
SDM Notes Neha
To enrich students with the dynamics of sales & its strategy for accomplish organizational goal.
To teach various functions of distribution, service outputs to be delivered by marketing channel for
mass coverage and in international market.
Module‐I : Sales Management; Objectives and Functions, Setting up a sales organization, Selling process,
Management of Sales force, Recruitment & Selection, Training, sales force motivation, Compensating
Sales Force, Sale forecasting,
Territory design and Management, Evaluation of sales force, Sales Budget, Sales Quota, concept of Sales
analytics .
Module ‐ II : Distribution Management, Designing customer oriented marketing channel, own sales
channel vs intermediary, Managing channel member behavior, Channel Conflict, Co‐operation &
competition. Omni Channel.
Distribution analysis- Depth and width of distribution, Per Dealer Stocking, Percentage Dealer Stocking,
Per Dealer Off take, Stock Turnover Ratio, Weighted Distribution. Vertical marketing system, Horizontal
Marketing system,
Module ‐ III : Logistics management – Objectives of logistics, Logistics planning, Inventory management
decisions, Transportation decisions, Supply chain Management in Online Marketing and Retailing.
Learning Resources :
1. Sales and Distribution Management, Krishna K. Havaldar, V.M. Cavale, Tata McGraw
2. Fundamentals of Sales Management, Ramneek Kapoor, Macmillan
3. Sales and Distribution Management, Dr.S.L.Gupta, Excel Books
4. Sales Management, Tanner, Honeycutt and Erffmeyer, Pearson
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Dr. Neha Gupta
Assistant Professor (Marketing)
Sales and Distribution Management
American Marketing Association — Sales management is planning, direction and control of Personal selling
including recruiting, selecting, equipping assigning, routing, Supervising, paying and motivating the personal Sales
force.
Module -I
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Assistant Professor (Marketing)
The support activities are either handled within the company or outsourced to specialist like marketing research
agencies and advertisement agencies. The real integration between sales and marketing teams would take place if
there is harmonious relationship that is built on the understanding of common goals and effective process of
delivering service to consumers.
6) Relationship Selling Buyers and sales people , who do business together have some type of business (or working
) relationship. Every relationship is an exchange, which is the process of obtaining a desired product or service from
someone by offering something in return. Sales Management is effective when these relationship results into
customer loyalty and customer delight. There are three types of relationship transactions they are:
a) Transactional- which last for single transaction and customer is not contacted again.
b) Value added- After sale is made sales person contact customer for feedback and to find out customer satisfaction.
c) Collaborative- It is also called as partnering with customer. Leads to creation of customer loyalty.
7) Varying of sales positions Selling includes a variety of sales jobs, which are different from one another. No two
sales positions are similar. The term sales representative will be used frequently and has same meaning as salesman
or salesperson.
The six sales positions or categories mentioned below indicate the varying sales responsibilities / Types of
Salesman
a) Mainly Delivery - In this type of selling, a salesperson is mainly responsible for delivering product to the
consumer .This type of salesperson requires few sales-related negotiation skills. Continued sales are more likely to
come from a pleasant attitude and good service. Example- – Delivery of bread, milk, soft drinks to the household.
b) Inside Order Taker A salesperson acts mainly as an inside order taker, who responds to the customer
demand. A salesperson's task is primarily administrative and provides little opportunity for selling. Customers have
usually made up their minds by this stage so the sales process consists of completing the order and offering advice
only when asked. Example – A healthcare distributor salesperson taking orders of pharmaceutical products from
nursing homes on telephone.
c) Outside Order Taker- Similar to the inside order taker, but here the salesperson visits regular customers on
a regular basis. Most negotiation is conducted at higher hierarchical levels so the salesperson must simply service the
account. This type of sales occasionally includes merchandising activity or introducing and demonstrating new
products. Example – Sales representative of FMCG company getting repeat order from retailers.
d) Missionary Selling A salesperson is expected to build goodwill, educate and ultimately influence the actual
or potential user rather than only solicit orders. Sales personnel also carry out occasional service work as well as
promotional activities. Example- Sales representative in pharmaceutical industry calling on doctors.
e) Technical Selling A salesperson task of explaining the function of a product to a prospect and adapting it to
individual customer needs is basic to this type of selling. 'Sales engineers' use their expert knowledge of product
capabilities and design during commercial negotiations. Their counterparts on the buying side are also often
technically savvy in order to provide counterweight. Example – Sales Engineers of heavy weight machinery
providing technical inputs to customers.
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Dr. Neha Gupta
Assistant Professor (Marketing)
f) Creative Selling Creative selling tends to require the greatest sales 'skills'. Customers often do not realize
that they have a 'need' for certain product or service. The creative salesperson needs to demonstrate and convince the
buyer of this need through effective communications. Example- Sales representative selling products like
automobiles, consumer durables and insurance policies etc.
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Dr. Neha Gupta
Assistant Professor (Marketing)
production is increase thereby creating more jobs opportunities in manufacturing and all other departments. Sales
people create jobs by creating and increasing demand.
4) Rewarding & Challenging Career- The number of position available in sales are more than in any other
profession. Sales people are among the best paid people in business. A career in selling is one of the fastest and
surest routes to the top management.
5) Direct Contact - Sales people are in direct and intimate contact with consumers and industrial users. They are the
first to know the habits, attitude, taste, preferences and other important characteristics of the end users of product and
services. Sales Department act as an intelligence agency. They collect and supply information about markets to
production departments. This information enables the production department to design, develop and manufacture
products and services that meet the needs and expectations of consumers
6) Instant Feedback – Sales people stay in regular touch with customers therefore they can provide instant feedback
about company’s product, competitors product’s, and customer reactions which can be useful in managing sales
processes.
Roles of Sales Manager A modern sales manager performs several tasks some of which are as follows
1) Strategic Role – A sales manager provides key inputs for developing long term sales plans and marketing plans
of the company such as sales forecasting, sales force management, developing sales strategies, implementing and
controlling sale budget and so on.
2) Relationship Management – A sales manager build harmonious and long lasting mutual beneficial relationships
with customer using latest technologies such as CRM (customer relationship management) software.
3) Corporate Team Member- Sales manager is a key member of the corporate team which seeks to achieve
objectives such as market share, sales growth, customer satisfaction and cutting selling costs.
4) Team Leader- Sales Manager serves as the leader of the sales force. He/ She guides , motivates and directs the
efforts of the sales team.
5) Channel Management- The sales manager manages multiple sales and distribution channel such as the company
sales force, telemarketing and on –line (electronic) selling.
6) Monitoring and control- It is the job of a sales manager to continually update information and understand
changes in the marketing environment of the company. Customer’s need and preferences, competitors strategies and
tactics, technological developments and government regulations are the main elements of the environment.
Skills of Sales Manager
A successful sales manager requires several skills which are:
1) People skills- Sales manager must possess good human or people skills. These include the ability to
communicate, motivate, lead and coordinate effectively the activities and efforts of the sales team. Sales managers
should have the ability to develop team spirit and cordial relationship. The sales manager must understand the
individual needs, strengths and skills of sales person. Sales manager must possess interpersonal skills, interactive
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Assistant Professor (Marketing)
skills, leadership quality, and motivational ability and should be able to accept new ideas even from the
subordinates.
2)Managing Skills –The sales manager requires managerial skills like planning, organizing ,staffing, directing,
controlling and decision making ability in order to manager sale force effectively. They should understand the
corporate goals and determine sale objectives in line of corporate perspectives.
3) Technical Skills – These are the skills to perform specific tasks or function such as negotiating, selling, training
and ability to use technology effectively. Sales managers should have the knowledge on technical areas of sales
management such as designing sales territories, determining sales force size, designing compensation package etc.
Technical skills also include problem solving in some specific industry.
4)Analytical Skills- These skills are required to estimate and analyze market conditions, customer demands, market
and sales potentials, strengths and weakness of his own company in comparison with competitors, environmental
threats and opportunities etc. Sales managers should estimate the opportunity cost of decision alternatives and their
expected outcome. Sales managers should have aptitude to select and use mathematical models, econometric models,
statistical techniques, operations research techniques etc. to suitable diagnose the problem and evolve solutions.
5)Conceptual skills-Sales manager should have theoretical background on organization structure, function and roles
of management, organizational theories ,organizational behaviour ,corporate social responsibilities .They should also
have understanding of marketing and sales management, consumer behaviour, market segmentation, market
research, product positioning etc.
Emerging Trends of Sales management
The major trends that are emerging in the field of sales management are as follow
1) Technological Revolution. 2) Globalization. 3) Customer Relationship Management ( CRM). 4)Sales Force
Diversity 5)E-Commerce 6)Team- selling Approach 7)Ethical ,Social and Legal issues 8)Sales Professionalism
9)Social Media
1) Technological Revolution- Innovation in the processing & transformation of the information have increased the
capabilities of both the sales force and consumers. Today consumers can collect information of product and services,
compare prices by different sellers and place orders through the internet. In order to compete successfully, sales
department must adopt the latest technology. These technological innovations help to increase the efficiency and
reduce the cost of sales efforts. For example, the banking industry has reduced the cost of serving its customers by
using technologies such as automated teller machines (ATM‟s), toll-free call centers, and internet banking.
2) Globalization- Global competition is getting intense .Today a company faces competition not only from domestic
companies but also from the companies abroad, sales management must meet foreign competition. Companies
selling goods and services in the global market faces new challenges due to differences in culture, languages,
lifestyle, laws and regulations, social norms etc. Emerging and rapidly growing market offer new opportunities to
sales manager. Sales managers must develop a global perspective to accept these challenges and opportunities.
3) Customer Relationship Management (CRM)-
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Relationship marketing aims to build long-term & mutually satisfying relationships with the key customers,
distributors & suppliers. Information technology enables a company to provide excellent customer service, by
meeting the individual needs of each customer. Creating new customers is more costly as compare to retaining them.
Therefore, companies have started CRM programmes to expand their relationships with the customers. The
challenge before sales management is to identify the market segments who will respond to CRM.
4) Sales Force Diversity -Sales Force is becoming more and more diverse in terms of age, gender, caste, religion,
nationality and other demographic characteristics. The heterogeneity of sales force posses challenge for sales
manager. Today, the sales people are better educated having graduate and post graduate degrees from reputed
institutes. Also, more women are taking up careers in sales management and selling. The needs and expectation of a
diverse sales force are different. Therefore, different motivational techniques are needed. Sales managers face a
challenge in managing a sales force consisting of men and women, young and old, more educated and less educated
and so on
5) E-Commerce - E-commerce involves buying and selling products and services using electronic system and
internet as a principle communication tool. A lot of companies have started selling product and providing services
online. E-commerce also enables existing and potential customers to a)choose right products or services that are
promoted on companies websites b)consult company websites b)interact and exchange information using video
conferencing, web meetings, e-mailing or social websites c)choosing payment modes such as credit card , e-banking
etc d)settle terms with the company regarding the delivery of products and services e)acknowledge the receipt of
goods and services to the seller by sending email E-Bay, Amazon.com are examples of e-commerce websites. A
secure server system is also needed to provide support service to customers before , during and after the purchase.
6) Team- selling Approach- Team selling is a coordinated selling effort that uses multiple personnel to solve
complex buying problems of customers. The purpose is to build long – term and mutually beneficial relationship
with the customers having high sales and profits potential. This approach is also used to sell technical complex
products services to the prospective customer. The selling team usually consist of a company sales people, technical
support people, research and development personnel, product use expert or application specialist, representative of
manufacturing unit, representative of purchase department etc. Team selling approach is the joint selling effort of
several persons. Therefore, it is a challenging task to design and effective compensation plan for the selling team.
7) Ethical Social and Legal Issues-Ethics are the building blocks of a business based on moral principles and
values. Sales managers have social and ethical responsibilities. Any deliberate wrong doing with an aim to seek short
term interest is unethical for a salesperson .Salesperson should be advised to provide a complete description of the
product to the prospective customer. Hiding any fact on product information (such as life, safety standards, handling
etc) , price components (such as value added tax, service tax, sales tax etc) , warranty guidelines (such as warranty of
parts, policy after the expiry of warranty etc, replacement policy leads to unethical business dealing and may subject
to legal intervention if customer desires so. Today sales manager have no choice but to ensure standards from the
sales force otherwise they may be out of business or even land in legal problems.
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Dr. Neha Gupta
Assistant Professor (Marketing)
8)Sales Professionalism – Sales professionalism is defined as a customer –oriented approach that employs truthful,
non-manipulative activities to satisfy long term needs of both customer and the selling firm. Today’s top salespeople
are largely made, not merely born. Selling has increase in complexity, because competition is more intense,
customers are more sophisticated, and the products/services have become more technical. Success mostly comes to
those salespeople who have combination of natural ability and acquired skills. The knowledge, skills and the right
attitudes to meet complex and competitive market conditions of today are acquired by the professional salesperson
through intensive training and practice. Systematic and well-designed training programmes helps in creating base of
professionalism. Some of the successful organizations have their own canters for training and management
development. Today’s companies spend a lot of money each year to train salespeople in the art of selling and make
them professional.
9) Social Media- Social media as sales and marketing channel is growing at an exponential rate. Social media help
companies to share marketing intelligence with their community members and persuade online customers to respond
quickly to its products and services. Facebook, Twitter, LinkedIn etc have created a landmark in the social
networking .Applications of social media are being effective in selling entertainment products, lifestyle products,
wellness products, travel deals etc. Companies on social networking websites are creating fan clubs or following
clubs so that large base of online community can be converted into customers by exposing them to online
advertisements and user friendly web based applications.
Sales organisation
Need and Importance
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Assistant Professor (Marketing)
production-system; and the management has to recognize this fact, that each person is unique. This makes an
organisation, in the present-day context, quite complex.
Functions of Sales Organisation:
A sales organisation performs the following functions:
(i) Analysis of markets thoroughly, including products and market research.
(ii) Adoption of sound and defensible sales-policy.
(iii) Accurate market or sales forecasting and planning the sales campaign, based on relevant data or information
supplied by the marketing research staff.
(iv) Deciding about prices of the goods and services; terms of sales and pricing policies to be implemented in the
potential and existing markets.
(v) Labelling, Packaging and packing, for the consumer, who wants a container, which will satisfy his desire for
attractive appearance; keeping qualities, utility, quantity, and correct price and many other factors in view.
(vi) Branding or naming the product(s) and/or services to differentiate them from the competitors and to recognize
easily by the customer.
(vii) Deciding the channels of distribution for easy accessibility and timely delivery of the products and services.
(viii) Selection, training and control of salesmen, and fixing their remuneration to run the business operations
efficiently and effectively.
(ix) Allocation of territory, and quota setting for effective Selling and to fix the responsibility to the concern person.
(x) Sales-programmes and sales-promotion-activities prepared so that every sales activity may be completed in a
planned manner
(xi) Arranging for advertising and publicity to inform the customer about the new products and services and their
multiple uses.
(xii) Order-preparation and office-recording to know the profitability of the business and to evaluate the performance
of the employees.
(xiii) Preparation of customers’ record-card to the customer loyalty about the products.
(xiv) Scrutiny and recording of reports to compare the other competitors and to compare with the past period.
Structure of Sales Organization
The structure of sales organization differs from company to company. There may be a very small and simple one
with only a few salesmen. At the other extreme, there may be quite complex, with many sub-organizations, based
upon divisions, according to territory, product and marketing-functions. The structure of the sales-organization
usually depends upon the following factors:
(i) Nature and size of the firm.
(ii) Methods of distribution, adopted by the firm.
(iii) Selling-policies of the firm.
(iv) Financial conditions of the firm.
(v) Personality of the sales manager.
The other dimension of the sales-organization structure, is related to
(i) What shall be the status of the sales manager?
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Assistant Professor (Marketing)
(ii) What functions shall his department perform?
(iii) What shall be the strength of the department?
Types of Sales Organization
An organization is designed in a manner where we can identify the work or activity performed by an individual or
group. The roles and responsibilities are defined, which helps in building relationships to enable people to work
effectively and efficiently. This helps in achieving the goals of the organization. The following are the four types of
sales organizations −
Functional Type
Functional type of organization is divided and classified on the basis of the functions performed. The following
illustration shows a functional type organization.
This depicts the functional type organization. We will now discuss the advantages and disadvantages of this type.
Advantages of functional type
The following are the advantages of a functional type of organization −
Specialization − In the figure, we can see the division has been made according to the functions. By this, we can
expect each function is specialized in its activity.
Flexibility − The number of departments can be added or removed as per the requirements.
Decision making − Decisions can be made quickly as the person would be an expert in his department and will be
aware of the impact of his decision.
Co-ordination − The co-ordination between functions can be done easily
Disadvantages of functional type
Let us now understand the disadvantages associated with functional type of organization −Due Attention − each
department is only specialized in their own activity; hence there is no attention focused on the product.
Delay − There is delay in making decisions because of co-ordination between all the departments.
Co-ordination − from the figure, we can see that all departments report to the General Manager. Therefore, .in
peak times, it may become difficult for the General Manager to maintain co-ordination between the departments.
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Assistant Professor (Marketing)
Conflicts − There is always conflict between departments due to being specialized only in one core area and lack
of cross training.
In general, functional type of organization is suitable where the organization structure is small having limited
products.
Product Type Organisation Structure
This type of division is made according to the products. The organization divides the departments based on the
products. The following illustration shows the layout of the product type.
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Dr. Neha Gupta
Assistant Professor (Marketing)
When the products of an organization are more technical oriented, the organization can divide the departments
according to the products as the salesperson will be efficient and effective to discuss the product with the customer
in an effective way.
Consumer Specialization Type
According to consumer specialization, the departments are divided on the basis of the costumers to whom the
products are offered. Most of the time, market appearance plays an important role in knowing the consumer needs
and to divide the departments accordingly. The following illustration shows the layout of the consumer
specialization type.
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Dr. Neha Gupta
Assistant Professor (Marketing)
Consumer type is suitable in the following cases −
When there is a large number of consumers who are looking out for special services.
The costumer is ready to pay for the services offered. Here, the target is mostly premier customers.
Area/ Geographic Type
In this type of organization, departments are divided accord ing to the attributes of areas. They can also be divided
geographically. The following illustration shows the layout of the area type organization.
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Dr. Neha Gupta
Assistant Professor (Marketing)
Personal Selling
INTRODUCTION
Sales management, personal selling and salesmanship are all related. Sales management directs the personal selling
effort, which in turn, is implemented largely through salesmanship. The term personal selling and salesmanship are
often used without distinction. However, there are vital differences between two terms. Personal selling is a broader
concept than salesmanship. Salesmanship is one of the aspects of personal selling. Salesmanship is one of the skills
used in personal selling, it is not all of it. ‘Salesmanship is the art of successfully persuading prospects or customers
to buy products or services from which they can derive suitable benefits, thereby increasing their total satisfaction’.
Salesmanship is seller initiated effort that provides prospective buyers with information, and motivates them to make
favorable decisions concerning the seller’s products or services.
2.2 PERSONAL SELLING OBJECTIVES
The qualitative personal selling objectives are long term and concern the contribution management expects personal
selling to make in achieving long-term company objectives. These objectives generally are carried over from one
period’s promotional program to the next. Depending upon company objectives and the promotional mix, personal
selling may be assigned such qualitative objectives as-
1. To do the entire selling job (as when there are no other elements in the promotional mix).
2. To “service” existing accounts (that is, to maintain contacts with present customers, take orders, and so forth).
3. To search out and obtain new customers.
4. To secure and maintain customers’ cooperation in stocking and promoting the product line.
5. To keep customers informed on changes in the product line and other aspects of marketing strategy.
6. To assist customers in selling the product line (as through “Missionary selling”).
7. To provide technical advice and assistance to customers (as with complicated products and where products are
especially designed to fit buyers’ specializations).
8. To assist (or handle) the training of middlemen’s sales personnel.
9. To provide advice and assistance to middlemen on management problems.
10. To collect and report market information of interest and use to company management.
RELEVANT SITUATION FOR PERSONAL SELLING
Let us discuss some of the situations when personal selling in a company becomes more relevant.
1. Product situation: Personal selling is relatively more effective and economical in case:
(a) When a product is of a high unit value like Xeroxing machine, computers etc.
(b) When a product is in the introductory state of its life cycle and requires creation of core demand.
(c) A product requires personal attention to match specific consumer needs e.g. insurance policy.
(d) Product requires demonstration e.g. most of the industrial products.
(e) Product requires after-sales service.
(f) Product has no brand loyalty or very poor brand loyalty.
2. Market situation: Personal selling situation can be best utilized when:
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Assistant Professor (Marketing)
(a) A company is selling to a small number of large-size buyers.
(b) A company sells in a small-local market or in government or institutional market.
(c) Desired middle men or agents are not available.
(d) An indirect channel or distribution is used for selling to merchant-middlemen only.
3. Company situation: Personal selling is relatively more effective and economical when:
(a) The company is not in a position to identify and make use of suitable non-personal communication media.
(b) A company cannot afford to have a large and regular advertising outlay.
4. Consumer behaviour situation: Personal selling is more effective when:
(a) Purchases are valuable but infrequent.
(b) Consumer needs instant answers to his questions.
(c) Consumer requires persuasion and follow-up in the face of competitive pressure.
DIVERSITY OF SELLING SITUATIONS/ KINDS OF SALESMAN
All of us as consumers often come across variety of selling situations. Differences in marketing factors cause each
company to have individualized selling styles. Each different type of selling job requires the sales person to perform
a variety of different tasks and activities under different circumstances. The job of a soft drink driver salesperson
who calls in routine fashion on a number of retail stores is different from that of a computer sales person who sells a
system for managing information to executive of a consultancy firm.
Before categorizing sales persons into basic selling styles, one convenient way to classify the many different types of
sales job is to array them on the basis of the creative skill required in the job, from simple service-or repeat order
selling to the complex developmental selling. Let us now discuss the different kinds of selling positions prevalent in
Indian companies.
Delivery sales person: The primary job of the delivery sales person is to deliver the product e.g. soft drink, bread,
milk etc. The selling responsibilities are secondary. Good service and a pleasant personality may lead to more sales.
Inside order taker: The retail sales person standing behind a counter is an inside order taker. The customer comes
to the sales person with the intention to buy a product or service, the sales person only serves him or her. The sales
person may use suggestion selling but ordinarily cannot do much more.
Outside order taker: The soap or spices sales person calling on retailer is an outside order taker. They do little
creative selling. In contract with store personnel these representatives actually may be discouraged from doing any
hard selling. That task is left to executives higher in the hierarchy.
Missionary sales people: These sales persons are not expected or permitted to solicit an order. Their job is to build
goodwill or to educate actual or potential user or provide services for the customers, as in the case of Medical
representatives, working for the pharmaceutical company.
Consultative sales person: Consultative sales are characterized by the product or service that is sold at the higher
level of an organization e.g. computer system or management consultancy service. The decision to purchase such
products involves higher capital outlay thus sales job requires a low key, low pressure approach by the sales person.
It would also require a very strong knowledge about product, patience to discuss product with several people of
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Assistant Professor (Marketing)
organization and potential benefits to the user. Even at times when the progress of sales slows down representative
has to make creative and sensitive efforts to resume interest but without appearing to exert pressure on the prospect.
Technical sales personnel: The most distinctive characteristic of technical sales is the product knowledge required
by its sales person, unlike the consultative sales, where sophistication in organization relationship and persuasive
ability are sales persons’ most valuable assets. Even time required to sell the product is relatively less than
consultative sales.
Most of the technical purchasing requires approval of several people but only one or two people with technical
knowledge influence decision. If the sales representative is able to satisfy these people with product characteristics,
application, installation process, approval from higher management is usually forthcoming. The technical sales
persons though not strangers to the process of making a sale, are trained to utilize the rational approach, by going
into details of product utility and features.
Commercial sales person: This field generally includes nontechnical sales to business, industry, government and
non-profit organization e.g. office equipment, wholesale goods, building products, business services and others.
Unlike the previous two types, it is customary for the commercial sales person to make sales on first or second call.
The process stresses approach to right person (decision maker), making a smooth presentation and closing the sales.
The field is composed of order takers, to follow up and maintenance of accounts and order getter, to develop new
accounts. Since these require different approaches, they normally require different personality traits e.g. the order
getter are more aggressive and more highly motivated.
Direct sales people: Direct sales are primarily concerned with the sales of products and services to ultimate
consumers e.g. restaurants, door to door sales, insurance, encyclopedias, magazines etc. There is normally some
emotional appeal associated with this type of selling, thus sales persons are required to possess strong persuasive
ability. Often length of time to close sales is shortest in the case of above product categories. In fact, sales person are
trained to close the sales on the first visit because it is felt if consumers are given time, they will either cool off from
buying or will buy from competitor.
SELLING PROCESS
All selling process contains the same basic steps, though the detail of each step and time required to complete it will
vary according to the product that is being sold. For example: door to door sales representative may go through all
the steps from prospecting to closing of sale in a matter of ten to fifteen minutes in contrast, the selling process for
computer or electronic typewriter may take several visits, even years, for getting an order.
1 Prospecting
The selling process begins with prospecting or finding qualified potential customers. Except in retail selling, it is
unlikely that customers will come to the sales person. In order to sell the product, the sales person must seek out
potential customers, prospecting involves two major activities-
(a) Identifying potential customers also known as prospects; and
(b) Qualifying them in order to determine if they are valid prospects.
(a) Identifying prospects
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Assistant Professor (Marketing)
The identification of potential customers is not an easy job, especially for a new sales person. Rejection rate is quite
high and immediate payoffs are usually minimal. In some consumer goods businesses, identification of prospects
usually comes from friends and acquaintances, other sales people, former customers, present customers etc. Few of
the best sources and techniques for finding prospects are discussed below.
Present customers: The best source of prospects is usually the sales person’s existing satisfied customers. It is much
easier to sell additional goods and services to existing customers than to attract new customers. Indian companies are
using this method of selling successfully. For example person or an organization who has purchased a portable
typewriter from an office automation product company and is pleased with it is usually more receptive to purchase a
bigger typewriter and similar product from the same company than someone else. This is the main reason; present
customers should get first priority by the company when new products and services are introduced.
Endless chain: This is also an effective prospecting tactics. In this method companies use satisfied customers as
source of referrals. Sales representatives ask current customers for names of friends or business associates who
might need similar products or services. Then, as the sales person contacts and sells to these prospects, more
referrals are solicited. In this way the process continues further.
Centre of Influence: Another effective prospecting technique based on referrals is the center of influence approach.
A center of influence is people with information about other people or influence over them that can help a sales
person identify good prospects. Some frequently used centers of influences are housewives, bankers, local,
politicians etc.
Spotters: Some companies use spotters as a source for prospecting potential customers. Spotters are usually ‘sales
trainees’ who help sales person identifying prospects, thus saving time and qualifying sales lead.
Cold call: Cold call is also known as unsolicited sales calls. This prospecting technique involves knocking on doors.
The sales person makes contact with potential customers, introduces him or herself, and asks if there is a use for the
product or service. This technique is utilized by the sales person when they have time available between scheduled
appointments.
Directories: A wide variety of directories are full of prospect. The classified telephone directory is the most obvious
one. A sales person may also find that membership directories of trade associations, professional societies, and civic
and social organizations are good sources for prospects.
Mailing lists: In India, specialized companies compile lists of individuals and organizations for direct mail
advertisers. These lists may also be used to identify sales prospects. The major advantages of mailing list are that
they are often more current and more selective than directories.
Trade shows and exhibitions: A cost effective way to make personal contacts and locate prospective buyer is to
participate in trade shows and exhibitions. Now a days more and more companies are increasing their participation
in these shows and exhibitions to company’s booth by mailing invitations or promising a gift. Advance
announcements sent to trade publications may also help to attract prospects. In view of the rising costs of personal
selling trade shows have become an increasingly important source of prospecting. India International Trade Fair
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Assistant Professor (Marketing)
organized by Trade Fair Authority of India every year provides a good example of usage of trade shows for
prospecting.
(b) Qualifying prospects
Once the sales person has identified potential customers, he or she must qualify them to determine, if they are valid
prospects. Unless this is done, time and energy is wasted in trying to sell to people who cannot or will not purchase
the product or service.
There are several factors to consider while qualifying a prospect. One approach to qualifying often called MAN
(Money, Authority and Need) approach is given below:
Money: Does the prospect have the money or resources to purchase a product or service? Ability to pay is very
critical factor in qualifying a prospect. The sales people must be familiar with financial resources of a prospect.
Authority: Does the prospect have the authority to make commitment? This is a particular concern when dealing
with corporation, government agencies or other large organizations. Even while selling to a married couple; it may
be difficult to identify who actually makes the purchase decision. A sales person must identify the key decision
maker early to economize on selling time more effectively.
Need: Does the prospect need the product or service? If a sales person cannot establish that the customer will benefit
from purchasing a product or service, there is noreason to waste a sales call. The prospect either will refuse the offer
or will end up dissatisfied with the purchase. Before proceeding further the sales person should first appraise
whether money, authority and need exist with the prospect.
Preparation
After a prospect has been identified and qualified, the sales person prepares for the sale of product or service. The
preparation stage involves the two key activities i.e. Pre-approach and Call Planning.
(a) Pre-approach
The pre-approach step includes all the information gathering activities necessary to learn relevant facts about the
prospect and his or her needs and situations.
Four necessary steps of pre-approach are:
1. It should disclose the party need and ability to buy.
2. It should provide information that will enable the seller to tailor the presentation to the prospect.
3. It should provide information that may keep the sales person from making serious tactical errors during the
presentation.
4. Finally, a good pre-approached increases the sales person confidence and makes him confident to handle whatever
may arise during the sales.
(b) Call planning
Call planning involves a specific planning sequence. The sales person defines the objective of the call, devises a
selling strategy to achieve this objective, and makes the appointments. The primary objective of any sales effort is to
get an order. For some sales call intermediate objectives may be needed. Some examples of intermediate objectives
are:
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• To obtain more information about the prospect.
• To relate the prospects needs and concerns to features and benefits of the product or service.
• To obtain permission for demonstration of the product.
• To introduce a new distributor.
The sales person must develop a strategy, or course of action to achieve his or her objective. Careful consideration of
the prospect’s background and needs is required in order to able to formulate a tailor made strategy appropriate for
the prospect. Since sales calls are costly, they should be arranged in advance. Cold calls i.e. calls without specific
appointment may be appropriate for introducing the sales person or dropping off information. This method is
generally inefficient for selling most products and services and is not consistent with modern professional selling.
Presentation
After establishing rapport with the prospects through calls, the sales person proceeds to the formal sales presentation.
The objective of the presentation is to explain how the product meets the special needs of the consumer. The job of
the sales person is to inform the prospect about the characteristics, capabilities and availability of goods and services
that are for sale. In order to ensure that the presentation is understood by the prospect, the sales person should be
clear in his/her communication. Presentation should also be interesting enough to keep the attention of the prospect
focused on the proposal.
Sales presentations are classified into the different categories: Fully automated, Semi-automated, Memorized,
Organized, and Unstructured.
Fully automated: It is the presentation which is mostly a structured approach based on film or slide presentation.
The sales person simply answers questions or clear up doubts. e.g. selling life insurance to the rural or semi-urban
prospects.
Semi-automated: In this approach, the sales person reads from brochures or literatures, adding comments to the
prepared materials when necessary. A common example is selling of pharmaceutical products by medical
representatives.
Memorized: In memorized presentation, company message is presented, with few changes initiated by the sales
person.
Organized presentation: The most popular and often the most effective sales presentation method is the organized
presentation. With this method the sales person has complete flexibility in oral communication but follows a
company prepared outline or checklist. The organized approach best exemplifies the selling process in which
customers are moved through four stages to a purchase decision; i.e. attention, interest, desire and action (AIDA).
Unstructured presentations: (Also referred to as problem solving) In this approach, the buyer and seller together
explore the problems that are the real sources of the company’s needs. Although unstructured presentations are often
effective and widely used, they have a number of limitations. Such presentations tend to be not too well-focused. As
a result, points are often missed and time is wasted. Further, sales person do not usually anticipate objections but
may have to face surprise complaint from the prospects. Because it is difficult to teach sales person how to use the
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unstructured method, the problem solving presentation seems best suited to experienced, sales person who are selling
to established customers.
Sales presentation comprises of two distinct activities, approach and demonstration.
a) Approach
When the sales person has the name of the prospect and adequate pre-approach information, the next step is the
actual approach. It frequently makes or breaks the entire presentation. If the approach fails, the sales person often
does not get a chance to give a presentation or demonstration. It gets the prospect attention, it immediately inspires
interest in hearing more about the proposition, and it makes easy transition into the demonstration phase.
Four basic approaches are in common use:
1. The introductory approach, the sales person introduces him to the prospect and states what company he represents.
2. The product consists of handling the product to prospect with little conversation. It can be most effective when the
product is unique and creates interest on sight.
3. The sales person starts the sale in a consumer-benefit approach by informing the prospect of what the firm can
provide in benefits. In other words, directs the prospects attention toward the benefits the firm has to deliver.
4. Lastly, referral approach successful in getting an audience with prospect that is difficult to see directly. It consists
of obtaining the permission of a past or present customer to use his or her name as a reference in meeting a new
prospect.
(b) Demonstration
The demonstration is the core of the selling process. The sales person actually transmits the information and attempts
to persuade the prospect through product demonstration to make a customer. Two factors should be taken into
consideration in preparing an effective product demonstration:
i) The demonstration should be carefully rehearsed to reduce the possibility of even a minor malfunction.
ii) The demonstration should be designed to give customers ‘hand on’ experience with the product wherever
possible. For example an industrial sales representative might arrange a demonstration before the purchaser’s
technical personnel.
Handling objections
All sales person confront sales resistance i.e. actions or statements by a prospects that postpone, hinder or prevent
the completion of the sale. Normally sales resistance takes the form of an objection which can be classified as stated
or hidden. Prospects may state their objections to a proposition openly and give the sales person a chance to answer
them. This is an ideal situation because everything is out in the open and the sales person does not need to read the
prospect’s mind. Unfortunately, in many instances prospects hide their real reasons for not buying. Besides having
hidden objections, their stated objection may be phone. Unless one can determine the real barrier to the sale one shall
not be able to overcome it. There are two major techniques for discovering hidden objections. One is to keep the
prospect talking by asking probing questions. The other is to use insights gained through experience in selling the
product, combined with knowledge of the prospects situation, to perceive the hidden objection. Often objection to
price and product are also faced by sales person either in a form of unaffordable or too high price. Product objections
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can be answered best when sales people have extensive product knowledge of both their own products and
competitors. Many times prospects may be misinformed or may not understand some of the technical aspects of the
proposition. In this case, the sales person should provide additional information. Even the prospects objections can
be met simply and effectively by altering the product to suit the customer.
Closing
After having answered and overcome objections, it is the stage for sales person to ask for the order from the
prospects. The entire effort is wasted unless the sales person can get the prospect to agree to buy the product. There
are several closing techniques which are being used by sales person in India. Sales person should select among these
technique one that fits the specific prospect and selling situation. Now we would discuss few effective closing
techniques.
In action close technique the sales person take an action that will complete the sale e.g. in case of high priced
products like Motorcar, photocopier or industrial product the sales person may negotiate with the financial institution
for financial assistance for the prospects.
The gift close technique provides the prospect with an added incentive for taking immediate buying action. In
one more yes close techniques, the sales persons restates the benefits of the products in a series of questions that will
result in positive responses by the prospects. The process may result in an order.
The direct close is clear and simple technique, many sales persons feel that this is the best approach for closing,
especially if there are strong positive buying motives, the sales person will summarize the major points that were
made during presentation to the prospects prior to asking for the sale. Experienced sales people always try to close
early. If they are not successful, they continue the presentation and then try a different closing technique. Good sales
person know that if they have successfully completed all of the earlier steps, then the prospect is worth an extra
effort at closing. In most cases this simply means switching to a different type of close.
Closing is the most important aspect of the sales process. Unless the sales person can close the sale, the other steps in
the sales process are meaningless.
Follow-up
The selling process is not completed by merely making the sale, as generally assumed by many sales people.
After sales activities is important part of the whole selling process. Effective sales-follow-up reduces the buyer’s
doubt about the product or services and improves the chance that the person will buy again in the future.
In addition to post-sale activities, sales person are also required to maintain good customer relations. Now-a-days
many companies are evolving specific policies and practices to ensure that customer’s needs are not neglected. No
matter how efficient a company is, there are always some customer complaints. The complaint should be taken
seriously and handled with concern. The customer must know that the company cares about maintaining good
customer relations.
Reasonably frequent contacts with the present customers are, an expected part of the sales person’s job. For
important customers, personal visit are appropriate. Letters, notes, phone calls, greetings are also good ways to keep
in touch with customers. Many good business houses also offer customer newsletter.
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KEYWORDS
Personal Selling: Personal selling is finest form of promotion done by sales force.
Salesmanship: It is the art of successfully persuading customer in selling situations for mutual benefits.
Prospecting: It is the act of finding or identifying potential customers.
SALESFORCE RECRUITMENT AND SELECTION PROCESS
Recruitment is a positive process in which a company attract a pool of talented people, whereas selection is a
negative process through which they screen people and finally select desired number of personnel who are offered
appointment. Attracting and selecting new sales personnel is an important aspect of the sales manager's job.
Recruitment is the procedure to obtain a good number of people with the potential capability of becoming good sales
personnel. After attracting a large number of people, it becomes feasible to select the individuals, which fit the needs
of the organization. Appropriate recruiting and selection policies and procedures, and their skilful execution result in
greater overall efficiency of sales department. Good selection fits the right person to the right job, thereby increasing
job satisfaction and reducing the cost of personnel turnover. In addition training costs are reduced, either because
those hired are more capable of absorbing training or because they require less formal training.
SOURCES OF RECRUITMENT
There are many places a sales manager can go to find recruits. Sales managers should analyze each potential source
to determine which ones will produce the best recruits for the sales position to be filled. Once good sources are
identified, sales managers should maintain a continuing relationship with them, even during periods
when no hiring is being done. Good sources are hard to find, and goodwill must be established between the firm and
the source to ensure good recruits in the future.
Some firms will use only one source; others will use several. The most frequently used sources are persons within
the company, competitors, non-competing companies, educational institutions, advertisements, and employment
agencies.
(a) Persons within the company
Companies often recruit salespeople from other departments, such as production or engineering, and from the non-
selling section of the sales department. The people are already familiar with company policies as well as the
technical aspects of the product itself. The chance of finding good salespeople within the company should be
excellent because sales managers know the people and are aware of their sales potential. In fact, most firms turn to
non-sale personnel within the company as their first source of new sales recruits.
Hiring people from within the company can lift morale because a transfer to sales is often viewed as a promotion.
But transferring outstanding workers from the plant or office into the sales department does not guarantee success. In
some cases hostility can arise among plant and office supervisors, who feel their personnel are being taken by the
sales department. Recommendations from the present sales force and sales executive usually yield better prospects
than those of other employees because the people in sales understand the needed qualifications.
(b) Competitors
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Salespeople recruited from a competitor are trained, have experience of selling similar products to similar markets,
and should be ready to sell almost immediately. But usually a premium must be paid in order to attract them from
their present jobs. Some sales managers are reluctant to hire competitors' salespeople because the practice is
sometimes viewed as unethical. But is it? Is it really any different than attempting to take a competitor's customers or
market share? No. But it is unethical if the salesperson uses valuable confidential information in competing against
the former employer. Recruiting competitors' salespeople may bring other problems. Although, these people are
highly trained and know the market and the products are very well. It is often hard for them to unlearn old practices.
They may not be compatible with the new organization and management. Also, recruits from competitors usually are
expected to switch their customers to the new business; if they are unable to do so, their new employer may be
disappointed.
The potential for these problems to arise may be evaluated with one question: why is this person leaving the present
employer? A satisfactory answer to this question frequently clears up many doubts and usually leads to a valuable
employee. The difficulty arises, however, in determining the real answer. Often, it is almost impossible to assess
accurately why someone is looking for another job. Good sales managers must be able to evaluate effectively the
information they get.
(c) Non-competing companies
Non-competing firms can provide a good source of trained and experienced salespeople, especially if they are selling
similar products or selling to the same market. Even though some recruits may be unfamiliar with the recruiting
firm's product line, they do have selling experience and require less training.
Companies that are either vendors or customers of the recruiting firm can also be an excellent source of candidates.
Recruits from these sources already have some knowledge of the company from having sold to or purchased from it;
their familiarity reduces the time it will take to make them productive employees. Another advantage of recruits
from the sources is that they are already familiar with the industry.
(d) Educational institutions
High schools, adult evening classes, business colleges, vocational schools, junior colleges, and universities are all
excellent sources of sales recruits. Large firms usually are successful in recruiting from universities, but small firms
tend to be more successful in recruiting from small educational institutions or from other sources. While most
college graduates lack specific sales experience, they have the education and perspective that most employers seek in
potential sales managers. College graduates tend to adapt more easily than experienced personnel. They have not yet
developed any loyalties to a firm or an industry. A major problem in recruiting from college campuses used to be the
unfavourable image of sales. Selling typically was associated with job insecurity, low status, and lack of creativity,
but this situation has been changing in recent years. Colleges’ graduates are beginning to realize that selling provides
challenge and a sense of accomplishment, that it is complex and exciting, that it allows them to be creative, that it
rewards them well and in direct proportion to their level of achievement, and that it provides opportunity for rapid
advancement. In short, many students today know that a sales career is a good use of a college education. Small
firms are less likely to recruit on college campuses because many graduates prefer large, well-known corporations
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with training programs and company benefits. College students tend to avoid small companies because these
companies usually employ few college graduates, and students are afraid that people without college degrees will not
understand or appreciate their needs and expectations.
(e) Advertisements
Classified advertisements in newspapers and trade journals are another source of recruits. National newspapers and
various trade journals are used in recruiting for high-caliber sales and sales management positions. However, most
firms that use advertising, especially in local newspapers, are recruiting for low-level sales positions. Many
businesses use advertising only as a last resort.
While advertisements reach a large audience, the caliber of the average applicant is often second-rate. This places a
burden on those doing the initial screening. The quality of applicants recruited by advertisements can be increased
by carefully selecting the type of media and describing the job qualifications specifically in the ad. To be effective, a
recruiting ad must attract attention and have credibility. The following elements should be included to ensure an ad's
effectiveness: company name; product; territory; hiring qualifications; compensation plan, expense plan, and fringe
benefits; and the way to contact the employer.
(f) Employment agencies
Employment agencies are among the best and the worst sources. Most of the time it depends on the relationship
between the agency and the sales manager. The agency should be carefully selected, and a good working relationship
must be developed. Sales managers should make sure that the agency clearly understands both the job description
and the job qualifications for the position to be filled.
In recent years agencies have steadily improved and expanded their services. They can provide a highly useful
service to sales managers by screening candidates so that recruiters may spend more time with those prospects who
are most highly qualified for the job.
g)Company Website/Job Portals-
Many companies can use their own websites to approach the applicants for various positions including sales.
Advantage of using this source is that cost is very low of getting applicants resume.. Many companies use the
Internet recruiting websites, such as www.naukri.com, www.jobsserach.com etc to search for right applicant.
Difference between Recruitment and Selection
Recruitment Selection
It the process of searching the candidates for It Involves the series of steps by which the candidates are
employment and stimulating them to apply for screened for choosing the most suitable persons for vacant
jobs in the organization. posts.
The basic purpose of recruitments is to create a
talent pool of candidates to enable the selection
The basic purpose of selection process is to choose the right
of best candidates for the organization, by
candidate to fill the various positions in the organization.
attracting more and more employees to apply in
the organization.
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Recruitment is a positive process i.e. Selection is a negative process as it involves rejection of the
encouraging more and more employees to apply. unsuitable candidates.
Recruitment is concerned with tapping the Selection is concerned with selecting the most suitable
sources of human resources candidate through various interviews and tests
There is no contract of recruitment established in Selection results in a contract of service between the
recruitment employer and the selected employee
It is an activity of establishing contact between It is a process of picking up more competent and suitable
employers and applicants. employees.
It encourages large number of Candidates for a
It attempts at rejecting unsuitable candidates.
job.
It is a simple process. It is a complicated process.
The candidates have not to cross over many
Many hurdles have to be crossed.
hurdles.
It is a positive approach. It is a negative approach.
It precedes selection. It follows recruitment.
It is an economical method. It is an expensive method.
Less time is required. More time is required.
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Assistant Professor (Marketing)
Training is the process of increasing knowledge, skills & other traits of an individual for performing a particular
job. Its purpose is to improve the behavior & performance of the trainees.
Development is the process of preparing employees for future jobs of higher level. It involves growth of a person
in all respects and it is career- bound. For example a salesperson may receive training in personal selling process.
Later on he may be developed to be capable of assuming the responsibility of a sales head.
SALE TRAINING CONTENTS
Sales training can help aspiring salespeople develop and practice the skills they need to succeed and increase their
confidence level. Proper sales training is important for a number of reasons.
1. Improving Communication Skills
While many salespeople enjoy talking to people, they may not possess well-rounded communication skills. Sales
training should help to foster key skills such as listening to gain an understanding of what the prospect truly wants
and needs, as well as the art of asking the right questions during the presentation. Training should also involve
learning how to effectively communicate with all types of personalities and diverse populations.
2. Learning Sales Methodology
Sales training can teach the salesperson a proven methodology that has proven to be successful. This gives the
salesperson a road map to keep her on track throughout the presentation instead of simply "winging it." A key
component of most sales methodologies is the development of various closing techniques to gain a buying
commitment from the prospect. Trainees should learn how to look for the various signals that indicate the prospect
is ready to buy.
3. Overcoming Objections
Objections are a normal part of the sales process, as prospects tend to seek reasons not to buy. An improperly
trained salesperson may simply agree with the objection and stop selling. On the other hand, the most successful
salespeople expect to receive objections during their presentation. Sales training can teach salespeople how to
anticipate objections as well as techniques for overcoming them. A commonly used training technique is role
playing, where the "prospect" offers numerous objections to the trainee during a mock presentation.
4. Developing Administrative Skills
Some salespeople have a tendency to focus solely on the "people" aspects of the position, such as prospecting and
making sales calls, while overlooking the administrative tasks. Effective sales training points out the importance of
functions such as tracking daily activities, keeping accurate records and analyzing closing ratios. This information
can help the salesperson better manage their time, increase organization and determine areas that need improving.
Training can include how to use software programs those can simply the administrative process and save precious
time.
5. Product Knowledge
Product Knowledge quite simply is the salesperson’s knowledge of the product or service that they are selling and
the ability to answer any question the customer may have about it. Product knowledge is one of those things that
you have to have. However, you may not need to use it. If the customer needs a technical presentation, then you
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have to be prepared to give a technical presentation. If the customer is more emotionally driven, you may not need
to use any of your technical product knowledge. Be prepared for every different type of customer.
6. Customer Service Skills
Customer Service is the salesperson’s knowledge of how to treat a customer in order to gain their respect and
commitment to the individual salesperson. It is the salesperson’s ability to build a customer base of clients that will
knowingly and willfully come back to them again and again to satisfy their needs and to recommend that particular
salesperson to others. That is the difference between extremely successful and mediocre. Providing outstanding
customer service happens before the sale, during the sale, and after the sale has been completed.
Objectives of sales force training are:
1. Sales Growth
The most basic of sales force objectives is to raise the total sales numbers in each period, generally each week,
month or quarter. Sales forces record the number of customers served daily, and sales managers view detailed
reports displaying trends in daily sales volume.
2. Sales Force Turnover
The sales component of marketing can experience one of the highest employee turnover rates of any area of
business, as new salespeople are often ill equipped for the stresses and demands of the job. One possible objective
of sales forces is to continually reduce their level of employee turnover, which can increase sales productivity and
reduce training costs.
3. Repeat Customers
Repeat customers can be a company's most profitable customers. One possible objective of a sales team is to
increase the number of sales made to existing customers compared to first-time buyers. Customer-relationship
management or CRM strategies can help to achieve this objective, strengthening relationships with customers and
turning repeat customers into champions for the brand.
4. Up-Sell Strategies
In settings where customers come to salespeople, such as retail outlets and inbound call centers, sales forces
commonly have an objective of increasing the average total amount of each transaction through a technique called
up-selling. Up-selling is the art of strategically suggesting one more item to compliment what a customer has
already ordered. While up-selling can contribute to the sales growth objective mentioned above, it can also reduce
inventory holding costs, reduce inventory cycle time and boost profitability. Sales team competitions with rewards
that employees actually want can motivate team members to try up-selling with each customer and to be more
strategic in their up-selling pitches.
5. Increase Productivity
Using best practices to improve sales force productivity — achieving substantial sales growth from an existing
sales force, which produces improved profitability — may offer a fast, attractive payback for many businesses
with a large direct sales force.
6. Sales effectiveness
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It refers to the ability of a company’s sales professionals to ―win‖ at each stage the right time frame. Improving
sales effectiveness is not just a sales objective issue; it’s a company issue, as it requires deep collaboration between
sales and marketing to understand what’s working and not working, and continuous improvement of the
knowledge, messages, skills, and strategies that sales people apply as they work sales opportunities.
Phases of Sales Training Programme
Sales Training is most expensive process. Sales manager should take care special so that time & money as wisely
spread.
Sales training process consist of the following phases:-
(i) Assessing needs of training program- the purpose of assessing the training needs is to understand specific goals
of training for individual sales person such as improving project knowledge, selling techniques, relationship
building .However offen the needs of sales training become obvious. Only after knowledge the declining sales
force performance.
(ii) Designing & execution of training program – after the first phase of accessing the sales training needs, the
second phase of designing & execution of STP (Sales Training Program) is considered. There are 5 decisions a
sales manager has to take while planning STP.
(iii) These decisions are popularly known as ACMEE, where A stands for Aim of the training , C stands for
content of the training, M stands for methods for training , E Stands for execution of training & E stands for
evaluation . The first 3 parts of ACMEE i.e. ACM & organizational decisions relating to the design aspects are
considered in second phase whereas evaluation of sales training is considers in third phase.
The steps involved in designing a sales training program.
After the first phase of assessing the sales training needs, the second phase of designing and execution of sales
training program is considered. There are 5 decisions, a sales manager has to take while planning on a sales
training program. These are popularly called ACMEE where,
A- Aim
C- Content
M- Method
E- Execution
E- Evaluation
a) A- Aim of training
The first step of designing the sales training program is to decide the specific aims or objectives. Although,
training needs and objectives vary from 1 company to another, some of the common objectives are as follows:-
i. To increase sales productivity.
ii. To increase sales, profit or both.
iii. To improve customer relations.
iv. To introduce new products, market and promotional programs.
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v. Preparing new sales person for assignment to new sales territory.
vi. To create positive attitude and to increase sales force morale.
b) C- Content of training
The content of the initial training for new sales trainee will be broader and different from experience sales person.
Usually the content of training program may include :-
i. To understand the nature and importance of selling job.
ii. Knowledge of company, its goals, its policies, procedures, history and values.
iii. Knowledge of the features, advantages and benefits of the company’s products and services.
iv. Knowledge about competitor’s products and services.
v. Knowledge about customers.
vi. Selling skills and relationship building skills.
vii. Team work skills.
viii. Knowledge of legal constraints.
ix. Computer skills.
c) M- Method of training
It involves 2 methods that are as follows :-
I. On the job training : On the job training includes various methods such as:
i. Coaching
ii. Mentoring
iii. Understudy
iv. Job rotation
v. Job instruction technique(JIT)
II. Off the job training : Off the job training includes the following methods:
i. Case study
ii. Role play
iii. Presentations
iv. Simulation games
v. Demonstrations
vi. Group discussions
vii. Lectures
viii. Sensitivity training
d) E- Execution of training
The execution step of ACMEE requires 5 important organizational decisions, which are also the components of
designing the sales training program. These decisions are:-
i. Who will be the trainees?
ii. Who will conduct the training?
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iii. When should be the training take place?
iv. Where should training be done?
v. What will be the budgeted expenditure for training?
Execution or implementation of the sales training program is the most tedious part of the sales training program.
Preparation of training time period, arranging internal and external trainers, making travel arrangements for
participants, arranging conference calls and teaching aids like multimedia projectors, sound system etc and many
other details have to be arranged. It is important to pay attention to the details in order to ensure successful
execution.
e) E- Evaluation of training
It is difficult to evaluate or find value of a sales training program. This difficulty arises because it is hard to decide
which future sales performance variations are due to sales training. There are factors such as:- environmental ( like
economic conditions, changes in companies marketing and sales strategies, which may affect sales and profit
performance of the company more or less than the sales trade.
In evaluation the company must decide what outcomes to be measured? How these outcomes to be measured? And
when these outcomes are to be measured?
These outcomes are:-
1. Reaction: These outcomes point out the participants, perception and reaction whether the sales training achieve
the objectives and whether the training staff can be measured by using interview method or asking them to
complete few questionnaire.
2. Learning: This outcome measures how much knowledge, skills or attitudes were learned or absorbed by the
sales trainees. The information collection method are test and interviews of the sales trainees. There may be before
and after test or a test and an interview taken after the training is completed.
3. Behaviour: The outcome here measures whether there was change in the trainees behaviour. The assessment of
the trainees, change of behaviour is conducted by immediate supervisor, who can observe the trainees after the
sales training is over. The measurement may also include self-assessment by the trainee or observation from
customers.
4. Result: These are the most important outcomes. They point out whether the outcome of the training has
improved performance results and whether the benefits of training more than the cost.
The measures used to assess the final result are: sales, profit, customer satisfaction, no. of new customer and
market share etc.
Sales Training Methods
Sales training is done to through different methods to improve attention and interest the sales force. It helps the
organisation to enhance and increase their sales in terms of units, in profit etc.. Training methods are divided under
two heads these are on the job training and off the job training.
On the job methods:-
The most important and frequently used method of training salespeople is on-the-job training. Most of the
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companies use on the job methods for training. The following are the on –the-job method used by the companies.
1. Learning and mentoring - it is an informal type of on the job training used by many companies. Mentors
usually provide the new employee advice and support, as well as information about the culture. In some of
companies sales managers or senior salespersons serve as mentors.
2. Job rotation - the sales trainee or new salesperson work in different jobs for short stints. For instance, in a fast
moving consumer goods company, a new salesperson, as a part of training is asked to work for two months in each
retail shop, company logistics department, and field selling sales person. In some companies, job rotation is used to
groom sales person for management positions.
3. Under study - Under this system, senior and experienced workman is assigned the job of teaching the new
employee as this understudy. The trainee under this system loses is motivation an morale because the person under
whom he is working does not take interest in him. A common version of such training is ―three position plan‖.
Under it, a man learns from the man above him and teaches the man below in. This system is more suitable in
circumstances where the trainer requires an assistant.
Off the job methods:-
Off the job method is the method organized by the companies outside the company for the improvement and
betterment of the work of sales force . and improving the sales.
1. Lecture method – this method is used by the trainee to present more information in a short time to a large
number of participants. Because lectures usually do not generate active participants of the trainees, it leads to
boredom and therefore, lecture secessions should be short and placed between other activities. Company
information, customer and competitive information, and outline of a subject can be presented by the lecture
method.
2. Presentation/Demonstration – A good method to give product knowledge is to demonstrate the operation and
us of the product. Whirlpool Corporation used a unique method of demonstration, by asking newly hired
salesperson to live for two months in a house that is equipped with its appliances. The salespeople learnt about the
company products by using these appliances in their daily lives.
3. Case studies – A case is a business situation. Cases try to present real life business or sales situation. Cases
should be linked to learning objectives, such as understanding the consumer behaviour or commercial terms and
condition, to make it an effective learning. Case studies are beneficial to salespersons’ for better understanding of
consumer behaviour and for building abilities to identify problems and key issues. Small cases of one or two pages
may be given to trainees for reading and analysing in advance, preferably as an overnight home work. One method
of case teaching is open discussion, in which trainees steers the class towards learning objectives. Another method
is called group exercise in which trainees discuss the case in a group of 6 to 8participants and prepare themselves
to make presentations, after the presentation, the instructor summaries the case, keeping in mind the learning
objective.
4. Role play – it is a very popular method for teaching the sales techniques. Typically, one trainee plays the role of
a salesperson and another trainee acts as a buyer. The role playing is videotaped or performed live for a group of
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trainee observers, who then do critical assessment of the role play. A good method is to first ask the person who
has played the role of sales person to express opinion and then asked the opinions from the observers who should
assess positive points of the role play performance and then suggest the areas of improvements. In role playing
trainees learn the importance of being knowledgeable about the customers, competitors, companies, product and
industry. They also learn that a good role playing session is learning by doing.
5. Stimulation games and management games – these are pre-programmed computer packages, and are based on
reality. These games help in learning impact of decision making, by allowing sales trainees to make decisions
either in their own or customer’s organization. Trainees make decision on sales forecast, pricing, advertising, size
of orders and the like. Thereafter the trainees are given feedback regarding the outcomes of their decision.
Business games generate a lot of enthusiasm due to competitive game playing. However, they do take a lot of time
for generating decision and for making the whole process effective.
6. Vestibule Training: This training method attempt to duplicate situation in a company classroom. It is a
classroom training that is often imported with the help of the equipment and machines, which are identical with
those in use in the place of work. This technique enables the trainees to concentrate on learning new skill rather
than on performing on actual job. This type of training is efficient to train semi-skilled personnel, particularly
when many employees have to be trained forthe same kind of work at the same time. Often used to train – bank
tellers, inspectors, machine operators, typists etc.
7.Online Training
a) EPSS
Electronic Performance Support System improves on traditional computer based training by making the
information available to the salespeople immediately and in a personalized manner. b) Interactive multimedia
training
It is faster, less expensive and more effective than conventional employee instruction. It is used for retaining
salespeople, who can repeat or skip material as desired.
c)Distance Learning
It is personal training method. The system is interactive. Salespeople can ask questions to the experts and also
share information with their peers by calling on toll free numbers.
Sales Force Compensation
Every firm has to formulate a good compensation plan while recruiting salesmen. The salesmen’s compensation
plan means the monetary payment by a firm to its salesmen, in consideration of the performance or service
rendered by them. The salesmen play a significant role and are important, because they create income for the firm
through sales and their role decides the success or failure of the firm. Therefore, it is an important matter for the
management to formulate a good, sound and motivating compensation plan.
Attributes of Good Compensation Plan: -
1. It should be simple to understand.
2. It must be fair to salesmen and the firm.
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3. It should be flexible enough to provide scope for adjustment of changes in business.
4. It should be reviewed periodically in order to keep it up-to-date.
5. It should provide adequate incentive to ensure living wages.
6. It should motivate the salesmen to boost performance.
7. It should ensure a minimum earning to a salesman.
8. Its monetary benefit should be in proportion to the objectives to be attained.
9. It should be easy and inexpensive to administer.
10. It should be competitive with the compensation plan of rivals.
11. It must have provisions to reward a salesman whose performance is above average.
12. It should have provision for periodic increment or promotion from the lower to the higher grade.
Objectives of a Compensation Plan
A. The company’s viewpoint
The company wants to attract, retain and motivate competent salespeople. Good compensation plan should attract
and keep top quality salespeople.
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Examine Job Description
Disadvantages:
1. It provide no financial incentive to salespeople
2. Fixed salaries may be a burden to new firms
3. May lead to adequate but not superior performance.
B. Straight Commission Plan:
Straight commission plans present strong financial incentives in order to ensure superior performance. A
commission is a payment for the performance of a unit of work.
Advantages:
1. Strong financial incentives improves results
2. It attract high performers and removes ineffective salespeople
3. It controls selling costs.
4. It required less supervision from the sales manager.
Disadvantages :
1. Focus is on getting the sales rather than building long term customer relations.
2. Less control of sales manager on non-selling activities
3. Little loyalty of salespeople to the company.
C. Combination Plan:
Types of combination compensation plan:
1. Salary plus commission
This plan achieves the balance between the fixed and vafriable components of a salesperson’s pay. This plan is most
suitable when the company wants to get increased sales as well as superior customer service or customer
satisfaction.
2. Salary plus bonus
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This plan is used by the companies who want to control selling and non-selling activities of the salesforce with a
large portion of fixed elements of salary, and still present some incentives to achieve either a short term or a long
term objectives.
3. Salary plus commission plus bonus plan
This plan allows a company an adequate control of sales force activities, incentives to increase sales to the expected
level, and a bonus to achieve specific goals like developing new customers and introducing new products.
4. Commission plus bonus
This is not a popular plan for compensating salespeople. It is used when team selling activities are plasticized by
companies for selling to major customers.
Advantages of combination compensation plan:
1. The company management can have a control over the activities of the salespeople.
2. There is a flexibility to reward the desirable activities of salespeople.
3. Allows rewards for frequent and specific sales behavior, such as selling as selling excess inventory, introducing
new products, and obtaining new customers.
Disadvantages of combination compensation plan:
1. Plan is more complex and difficult to administer.
2. if too many short term and fire fighting type objectives, such as liquidating excess inventory and collecting
overdue payments are achieved, more important long term objectives can be delayed.
STEP V Decide indirect payment plan
Indirect payment plan which is also called fringe benefits, perks, range from 25 to 40 % of the total sales
compensation packages. There are medical reimbursements and payments group life insurance, travel insurance,
accident insurance, pension plan. Social security, profit sharing, paid vacations and so on. These benefits give a
degree of security to salespeople and make them loyal to the company.
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Assistant Professor (Marketing)
Motivation is derived from the Latin word ―movere‖. Which means to move? Motivation is the effort the
salesperson makes to complete various activities of the job.
Dimension of Sales Motivation
Intensity refers to the amount of physical and mental effort the salesperson spends on a given task.
Persistence describes how long the sales person continues to put forth effort.
Direction suggests the salespersons choice of direction of effort among various tasks.
Motivation can be looked at as intrinsic and extrinsic. If salespeople consider their job as permanently rewarding
they are intrinsically motivated. However, if salespersons are motivated by the rewards from their organization, such
as financial incentives and recognition, they are extrinsically motivated.
IMPORTANCE OF MOTIVATION: The nature of the sales job, the individuality of salespeople, the diversity of
company goals, and the continuing changes in the marketplace make motivating sales persons a particularly difficult
and important task.
Unique nature of the sales jobs - Salespeople experience a wonderful sense of exhilaration when they make a sale.
But they must also frequently deal with the frustration and rejection of not making the sale. Even very good sales
person does not make every sale. Also, while many customers are gracious, courteous, and thoughtful in their
dealings with salespeople, some are rude, demanding, and even threatening. Salespeople spend a large amount of
time by themselves calling on customers and travelling between accounts. This means that most of the time they are
away from any kind of support from their peers or leaders, and they often feel isolated and detached from their
companies. Consequently, they usually require more motivation than is needed for other jobs to reach the
performance level management desires.
Individuality of salespeople- Sales people have their own personal goals, problems, strengths, and weaknesses.
Each sales person may respond differently to a given motivating force. Ideally, the company should develop a
separate motivational package for each sales person; but a totally tailor-made approach poses major practical
problems. In reality, management must develop a motivational mix that appeals to a whole group but also has the
flexibility to appeal to the varying individual needs. A related point is that the sales people themselves may not know
why they react as they do to a given motivator, or they may be unwilling to admit what these reasons are. For
example, a salesperson may engage in a certain selling task because it satisfies his ego, rather than admit this;
however, he will say that he is motivated by a desire to serve his customers.
Diversity in company goals- A company usually has many diverse sales goals, and these goals may even conflict
with each other. One goal may be to correct an imbalanced inventory and another may be to have the sales force to
missionary selling to strengthen long-term customer relations. These two goals conflict somewhat and require
different motivating forces. With diverse goals such as these, developing an effective combination of motivators is
difficult.
Changes in market environment- Changes in the market environment can make it difficult for management to
develop the right mix of sales force motivational methods. What motivates sales people today may not work next
month because of changes in market conditions. Conversely, sales executives can face motivational problems when
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market conditions remain stable for an extended period of time. In this situation, the same motivators may lose their
effectiveness.
Motivational techniques for sales force
I. COMPENSATION: money is often used as an incentive to motivate sales people .salespersons prefer cash
incentives and pay raise over other rewards. Compensation may be in the form of salary ,commission and
performance linked bonus.
II. MERCHANDISE GIFTS: SOME COMPANIES OFFER THEIR SALES PEOPLE PERFORMANCE
INCENTIVES IN THE FORM OF MERCHGANDISE GIFTS.
III. SALES CONTESTS: contests capitalize on the competitive instinct in sales persons.in s sales prizes and
rewards are given to those salespersons who achieve the specified sales goals such as getting new customers, selling
specified products, attaining specified sales volume etc.
IV. PROMOTION: Opportunities for promotion provide a strong stimulus to sales person towards increased effort
and better performance.
V. RECOGNITION AND HONOUR AWARDS: most salespersons enjoy public recognition of their
accomplishments. Plague trophies and certificates can be used to recognize accomplishments of sales people.
VI. Praise and encouragement: personnel encouragement and praise from the boss is the easiest and least
expensive technique of motivation.
VII. SALES MEETINGS AND CONVENTIONS: sales meetings serve as a means of communication and
interaction between sales people and sales managers.
VIII. JOB ENRICHMENT: sales managers can offer challenges to sales force by giving them greater
responsibilities, authority and control over their jobs.
MOTIVATION THEORIES
Researchers in the behavioural sciences have shown that all human activity is directed toward satisfying certain
needs and reaching certain goals. How sales-people behave on the job is directly related to their individual needs and
goals. Thus, some individuals will behave differently and will be more successful because of different motivational
patterns. Many people feel that individual motivation is dependent upon whether or not salespersons find something
in the job that is personally motivating for them. Therefore, the job of the sales manager must be redefined, with
greater emphasis placed upon understanding and accepting the idea of how motivation works. The sales manager is
responsible not only for motivating the sales force per se but also for counseling each salesperson individually to
find the source of that person’s self-motivation.
Maslow’s Need Theory
Maslow’s well-known theory contends that people are motivated by a “hierarchy” of psychological growth needs.
Relative gratification of the needs at one level activates the next-higher order of needs. The hierarchy-of-needs
theory implies that salespeople come to their jobs already motivated and that they only need the opportunity to
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respond to the challenges of higher-order needs. The following Exhibit presents the order of priority of the needs
individuals seek to fulfill and the needs sales managers must consider
HIERARCHY OF HUMAN NEEDS AND THEIR IMPLICATIONS
FOR SALES MANAGERS
Maslow’s Hierarchy Salesperson’s need Sales Manager’s Task
Self-actualization need Self-development Provide greater freedom
Creativity
Self-fulfillment
Esteem needs Recognition status Provide greater job responsibilities,
promotion opportunities, public
recognition for achievements
Social needs Social interaction Maintain close relationships with
Friendship sales force
Acceptance among peers Sales meetings
and superiors Newsletters, memoranda etc.
Safety needs Freedom from worry about security of Provide a balanced package of fringe
jobs, incomes, medical expenses, etc benefits
Physiological needs Food, shelter, overall health etc. Be aware of general health and
living conditions of sales force
Sales managers applying need theory should keep in mind its two major premises:
• The greater the deprivation of a given need, the greater its importance and strength.
• Gratification of needs at one level in the hierarchy activates needs at the next-higher level.
Sales managers must keep track of the level of needs most important to each salesperson, from the beginning trainee
to the senior sales representative. Before salespeople become stagnated at one level, they must be given
opportunities to activate and satisfy higher-level needs if they are to be successfully motivated toward superior
performances. Since various salespeople are at different need levels at any one time, sales managers have to retain
their sensitivity to the evolving needs of individual sales person through close personal contact with each member of
the sales force .
Motivator-Hygiene Theory: Herzberg’s classic research studies found two types of factors associated with the
satisfaction or dissatisfaction of employees. Sources of satisfaction are called motivators because they are necessary
to stimulate individuals to superior efforts. They relate to the nature or content of the job itself and include
responsibility, achievement, recognition, and opportunities for growth and advancement. Sources of dissatisfaction
are called hygiene factors because they are necessary to keep employee performance from dropping or becoming
unhealthy. They comprise the environment; include salary, company policies and administration, supervision, and
working conditions.
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Assistant Professor (Marketing)
According to Herzberg’s theories, to improve productivity, sales managers must maintain hygiene factors (pleasant
work environment) while providing motivators (job enrichment) for the sales force. Here are some examples of job
enrichment:
Give salespeople a complete natural unit of work responsibility and accountability (e.g. specific customer category
assignments in a designated area).
Grant greater authority and job freedom to the salespeople in accomplishing assignments (e.g., let salespeople
schedule their time in their own unique way as long as organizational goals are met).
Introduce salespeople to new and more difficult tasks and to challenges not previously handled (e.g., opening new
accounts, selling a new product category, or being assigned a large national account).
Assign salespeople specific or specialized tasks enabling them to become experts (e.g., training new salespeople on
“how to close a sale”).
Send periodic reports and communications directly to the salesperson instead of forwarding everything via the sales
supervisor. (Of course, the supervisor must be informed about what information the salespeople are receiving).
Achievement Theory: Research by McClelland and his associates confirmed that some people have higher
achievement needs than others; they labeled such persons “achievement oriented”. Children who are given greater
responsibilities and trusted from youth to do things on their own are more likely to have achievement-oriented
profiles. Achievement oriented people readily accept individual responsibility, seek challenging tasks, and are
willing to take risks doing asks that may serve as stepping stones to future rewards. These individuals receive more
satisfaction from accomplishing goals and more frustration from failure or unfinished tasks than the average person.
Any achievement-related step on the “success path” may include rewards (positive incentives) or threats (negative
incentives). A path is contingent if the individual feels that immediate success is required in order to have the
opportunity to continue toward further successes and that immediate failure causes loss of the opportunity to
continue on the path. If immediate success or failure has no effect on the opportunity to continue on the path toward
future success or failure, the path is non-contingent.
Sales managers need to identify the achievement-motivated salespeople and then give them personal responsibility
for solving definable problems or achieving certain goals. Frequent, specific feedback is also essential so that these
sales-people can know whether they are successful or not. Managers may have to temper negative feedback because
achievement-motivated people may resign if they feel that they are going to be unsuccessful. Finally, competition
among such salespeople can become cut-throat and damaging to the organization unless carefully monitored and
controlled.
Contrasted with these achievement-oriented individuals, affiliative people are not as competitive nor are they as
anxious about uncompleted tasks; they require only general feedback regarding goal achievement. Affiliative types
like to work in groups and want to be accepted by others. They are less self-centered, usually help bind the group
together, and are less able to tolerate traveling jobs involving long periods of solitude.
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Assistant Professor (Marketing)
Although salespeople generally exhibit traits of both task achievement and group affiliation, it is up to the sales
manager to learn the dominant needs of individual salespeople in order to devise specific strategies for motivating
them.
Inequity theory: According to the inequity theory of motivation, people compare their relative work contributions
and rewards with those of other individuals in similar situations. As “positive-thinking” minister and author Robert
Schuller says: “Many people hear through their peers, not their ears”. Inequity is experienced when a person feels
either under rewarded or over rewarded for his or her contribution relative to that of others. The stronger the feeling
of inequity of a person the stronger is the drive to reduce tension. Although individuals may respond in unique ways
to inequity, most people who feel underpaid or under rewarded, relative to others making similar contributions, tend
to decrease their work efforts: people who feel overpaid tend to increase their efforts. People may also reduce their
inequity tensions by distorting their perceptions of their rewardsand contributions versus those of others. Finally,
individuals may leave a perceived inequitable situation by quitting the job or changing the comparison group.
According to inequity theory, it is important that sales managers learn how individual sales representatives feel about
the equity of their contributions and rewards compared with those of others. If inequity is perceived by some of the
salespeople, the sales manager needs to correct the situation if inequity really does exist or help the salespeople
reduce tensions by altering their perceptions of the comparison group’s relative contributions and rewards.
Sales Territory
INTRODUCTION
No sales manager can afford to ignore the planning and organisation of the territorial coverage. Although much has
been done to improve the efficiency of individual salesman, there is still much room left for the improvement in
territorial management. There are still some sales organisations that believe that planning and organisation of sales
territories would be too difficult to attempt, and there is nothing wrong if salesmen just go out and make calls”.
However, the sensible thing to do is to guide the salesman’s field activities properly, control them, and plan them so
as to achieve the sales objectives. No doubt, the establishment and maintenance of the sales territories involves a
substantial expenditure of time and effort; but wherever sales manager have paid attention to its organisation and
planning, they have reaped substantial rewards by way of decreased selling cost and increased sales. In this way,
they have also helped individual salesman to achieve greater earnings for himself and greater profits for the
company.
A sales territory comprises a group of customers or a geographical area assigned to a salesperson. The territory may
or may not have geographical boundaries. Typically, however, a salesperson is assigned to a geographical area
containing present and potential customers. Assigning sales territories helps the sales manager achieve a match
between sales efforts and sales opportunities. The total market of most companies is usually too large to manage
efficiently, so territories are established to facilitate the sales manager’s task of directing, evaluating, and controlling
the sales force.
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Assistant Professor (Marketing)
The emphasis in sales territory concept is upon customers and prospects rather than only upon the area in which an
individual salesperson works. Customers and prospects are grouped in such a way that the salesperson serving these
accounts can call on them as conveniently and economically as possible.
Operationally defined, a sales territory is a grouping of customers and prospects assigned to an individual
salesperson. Many sales executives refer to sales territories as geographical areas. But, in contrast, in some
companies particularly in which technical selling style is predominant, geographical considerations are ignored and
sales personnel are assigned entire classes of customers, regardless of their locations. When sales personnel sell
mainly to personal acquaintances, as in selling property, insurance, and investment securities; little logical base
exists for dividing the market geographically.
Small companies, and companies introducing new products requiring the use of different marketing channels, often
do not use geographically defined territories at all, or if they do, use rough divisions such as entire states or census
regions: In these instances, there is no reason to assign territories, since existing sales coverage capabilities are
inadequate relative to sales potentials.
REASONS FOR ESTABLISHING TERRITORIES
The primary reason for establishing sales territories is to facilitate the planning and controlling of the selling
function. Well-designed sales territories, however, may result in increased motivation, morale, and interest of the
sales force, improving the total sales performance. But sales managers typically have more specific reasons for
establishing territories.
(i) To obtain thorough coverage of the market: Sales territories help in proper market coverage. A salesperson’s
calling time is planned as efficiently as possible in order to ensure proper coverage of present as well as potential
customers. Coverage is likely to be more thorough when each sales person is assigned to a properly designed sales
territory rather than when all sales personnel are allowed to sell anywhere. With
proper coverage of the territories, the company can more closely reach the sales potential of its markets.
(ii) To Establish Salesperson’s Job and Responsibilities: Sales territories help in setting the tasks and responsibilities
for the sales force. Salespeople have to act as business managers for their territories. They have the responsibility of
maintaining and generating sales volume in their territories. Once all call frequencies are calculated and assigned, it
is easier to determine the total wor1doad and then to break it down into equal assignments among salesmen. When
an equitable workload is assigned on the basis of call frequencies, better results are obtained. An equitable workload
assignment creates greater interest and enthusiasm among the salesmen.
(iii) To evaluate sales performance: Sales territories help in the evaluation of sales performance of a company.
Actual performance data can be collected, analyzed, and compared with expected performance goals. Even present
sales figures can be compared with past figures to judge the performance over the years. Individual territory
performance can also be compared to district performance, district performance compared to regional performance;
and regional performance compared to the performance of the entire sales force.
(iv) To Improve Customer Relations: Properly designed sales territories allow sales people to spend more time with
present and potential customers and less time on the road. Customer goodwill and increased sales can be expected
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when customers receive regular calls. Since the salesman’s visits are decided under a call frequency schedule
programme, he comes in contract with his customers on the basis of a regular schedule. Such regular contacts enable
both the salesman and the customer to understand each other well and get their difficulties solved in respect of the
supply of, and demand for, goods, and also raises the general reputation of the company which the salesman
represent.
(v) To Reduce Sales Expenses: Sales territories are designed to avoid duplication of effort so that two or more
salespersons are not travelling in the same geographical area. This lowers selling cost and increases company profits.
Sales territories also result in such benefits as fewer travel miles and fewer overnight trips.
(vi) To improve control of the sales forces: When customer calls frequencies, routes and schedules are determined,
the performance of salesmen can be measured. It, then, becomes difficult for a salesman to neglect a “hard” territory
and only go ahead with the easiest-to- sell accounts. Over and above this, no salesman can devote more time and get
himself “lost” in one territory when he is supposed to follow a pre-established schedules and route. When all
frequencies, routes and schedules are predetermined, the work habits of salesmen, in general, are improved, resulting
in better control of the sales force.
(vii) To co-ordinate selling with other marketing, functions: A well designed sales territory can aid management in
performing other marketing functions. Sales and cost analyses can be done more easily on a territory basis than for
the entire market. Marketing research on a territory basis can be used more effectively for setting quotas and
establishing sales and expense budgets. If salespeople are to aid customers in launching advertising campaigns,
distributing point of purchase displays, or performing work related to sales promotions, the results are usually more
satisfactory when the work is assigned and managed on a territory-by-territory basis rather than for the market as a
whole.
BASES FOR TERRITORY DEVELOPMENT
The objectives & criteria for sales territory formation are directly related to the bases used in creating the territories.
The actual division of a firm’s customer base into individual territory can be achieved by means of several methods,
depending on which of the three alternative types of bases used. The three important bases are- geography, potential
and servicing requirements, & work load.
(a) Geography: For the establishment of territories, geographical considerations are the most frequently used base.
This base is simple, as it tends to adopt existing geopolitical boundaries such as states, countries, or cities. The major
advantage of the geographic approach is the ready availability of secondary data from different sources.
(b) Potential and servicing requirements: The potential approach refers to splitting up a firm’s customer base
according to sales potential. It would seem to provide equality of opportunity and thus bring out the best in sales
people. The procedure is relatively simple. First management has to estimate the sales potential for the entire
company and then try to divide this potential equally among salespersons. Assume that a firm has estimated its total
sales potential at Rs. 10 million for a given year. Sales manager has further determined that each sales person can
handle a personal sales potential of Rs. 500,000. This would mean that twenty territories would be formed, all of
which would have identical sales potential of Rs. 500,000 each.
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(c) Workload: The third sales territory base, workload, goes one step further. It not only considers individual account
potential & servicing requirements in creating territories, but also reflects differences in coverage difficulty caused
by topographical features, account locations, competitive activity & so forth. Some companies try to attain equity by
assigning finite number of accounts and establishing average call frequencies. For instance, a firm may give every
territory manager two hundred accounts to service and prescribe an average frequency often calls per day; This
would mean that all accounts visited once during a month’s twenty working days.
APPROACHES OF DESIGNING TERRITORIES
Three approaches may be used to design the sales territories.
The building up approach of designing territories involves combining enough pieces of a company’s overall market
to create units presenting sufficient sales challenges. To use this approach, actual & potential customers have to be
identified and their individual sales volumes assessed. After classifying them according to desirable call frequencies
& determining how many calls a salesperson can reasonably be expected to make, account mixes can be created to
satisfy the dual goals of adequate consumer coverage. This method is favored by many consumer goods
manufacturers looking for intensive distribution.
The breakdown approach proceeds in the opposite direction. It starts with the overall sales forecast for the entire
company, which is in turn derived from a projection of the total market potential and an estimate of the company’s
likely share of it. The method then sets an average sales figure per salesperson to reach at the number of territories to
be formed using this as divisor to total market potential. Such an approach may prove satisfactory for industrial
goods producer that desire selective distribution. The method, however, suffers from a severe conceptual paradox:
Instead of viewing sales as a result of sales force effort and then forecasting sales accordingly, the number of
members in the sales organization is determined by the expected overall sales. This can lead to a self-fulfilling
prophecy.
The incremental approach is conceptually the most appealing. With this approach, additional territories are created
as long as the marginal profit generated exceeds the cost of servicing them. Administrative difficulties, however,
hamper the method’s applicability since it requires a cost accounting system capable of determining sales, costs, and
profits associated with various levels of input. If a company can determine this kind of information, profits can be
maximized by increasing the number of territories up to the point of negative returns.
PROCEDURE FOR SETTING UP SALES TERRITORIES
A sales territory should not be so large that the sales person either spends an extreme amount of time travelling or
has time to call on only a few of the scattered customers. On the other hand, a sales territory should not be so small
that a sales person is calling on customers too often. The sales territory should be big enough to represent a
reasonable workload for the ales force but small enough to ensure that all potential customers can be visited as often
as needed.
Whether a company is setting up sales territories for the first time or revising ones that are already in existence, the
same general procedure applies: (1) select a geographic control unit, (2) make an account analysis, (3) develop a
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Assistant Professor (Marketing)
salesperson workload analysis, (4) combine geographic control units in to territories, and (5) assign sales personnel
to territories.
1. Selecting a basic geographical control unit
The starting point in territorial planning is the selection of a basic geographical control unit. The most commonly
used control units are districts, pin code numbers, trading areas, cities, and states. Sales territories are put together as
consolidations of basic geographical control units.
Management should strive for as small a control unit as possible. There are two reasons for selecting a small control
unit. One reason is to realize an important benefit of using territories, precise geographical identification of sales
potential. If the control unit is too large, areas with low sales potential are hidden by inclusion with areas having
high sales potentials, and areas with high sales potentials are obscured by inclusion with those having low sales
potentials. The second reason is that these units remain relatively stable and unchanging, making it possible to
redraw territorial boundaries easily by redistributing control units among territories. If, for example, a company
wants to add to Ram’s territory and reduce Sham’s territory, it is easier to transfer city-sized rather than state- sized
control units. Political units (state, district, or city) are presently used quite often as geographic control units. These
are commonly used because they are the basis of a great deal of government census data and other market
information.
Counties: In the United States and U.K., the county is the most widely used geographical control unit. County, in
these countries, typically is the smallest unit for which government sources report statistical data. Districts may be
used on: similar lines in India.
Zip code areas: It is also used in USA. Typical Zip code area is smaller than the typical county. In India Pin code
areas may be used on similar lines.
Cities: When a company’s sales potential is located entirely or almost entirely, in urbanized areas, the city is used as
the control unit. The city rarely is fully satisfactory as a control unit, suburbs adjacent to cities possess sales
potentials at least as great as those in the cities them-selves and, in addition, they can often be covered by the same
sales personnel at little additional cost.
Trading areas: Another control unit used for establishing sales territories is the trading area. The trading area is
perhaps the most logic’ al control unit, since it is based mainly on the natural flow of goods and services rather thin
on political or economic boundaries. Firms that sell through Wholesalers or retailers often use the trading area as a
control unit. The trading area is a geographical region that consists of a city and the surrounding areas that serve as
the dominant retail or wholesale center for the region. Usually, customers in one trading area will not go outside its
boundaries to buy merchandise; nor Will a customer from outside enters the trading area to purchase a product. The
trading area as a geographic control unit has several advantages. Since trading areas are based on economic
considerations, they are representative of customer buying habits and patterns of trade. Also, the use of trading areas
aids management in planning and control.
States: Many companies have used state boundaries in establishing territory boundaries. A state may be an adequate
control unit if used by a company with a small sales force that is covering the market selectively rather than
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intensively. The use of states as territory boundaries may also work well for a company that is seeking nationwide
distribution for the first time. In fact, in these situations salespeople may be assigned to territories that consist of
more than one state. This may be done on a temporary basis until the market develops, at which time a change can
be made to a smaller control unit. State sales territories are simple, convenient, and fairly inexpensive.
2. Making an Account Analysis
After a company selects the geographic control unit, the next step is to conduct an audit of each geographic unit. The
purpose of this audit is to identify customers and prospects and determine how much sales potential exists for each
account.
First, accounts must be identified by name. Many sources containing this information are available. For example, the
yellow Pages have become computerized, and they represent one of the most effective sources for identifying
customers quickly. Other sources include company records of past sales; trade directories; professional association
membership lists; directories of corporations; publishers of mailing lists; trade books and periodicals; chambers of
commerce; central, state, and local governments; and personal observation by the salesperson.
After potential accounts are identified, the next step is to estimate the total sales potential for all accounts in each
geographic control unit. The sales manager estimates the total market potential and then determines how much of
this total the company can expect to get. The estimated sales potential for a company in a particular territory is often
a judgmental decision. It is based on the company’s existing sales in that territory, the level of competition, any
differential advantages enjoyed by the company and the relationships with the existing accounts. The Personal
Computer has become a tremendous management aid in analyzing the sales potential in a territory. The PC can also
calculate the estimated sales potential based on the pre-determined criteria much faster than the sales manager can.
Once the sales potential estimates have been made, the PC can classify each account according to its annual buying
potential. One commonly used approach is to employ an ABC classification. The computer identifies all those
accounts whose sales potential is greater than a predetermined amount, and classifies them as an account. Next, the
accounts that are considered to be of average potential are classify as C accounts. Finally, accounts whose potential
is less than a certain amounts are classified as C accounts.
Developing a Salesperson Workload Analysis
A salesperson workload analysis is an estimate of the time and effort required to cover each geographic control unit.
This estimate is based on an analysis of the number of accounts to be called on, the frequency of the calls, the length
of each call, the travel time required, and the non-setting time. The result of the workload analysis estimate is the
establishment of a sales call pattern for each geographic control unit.
Several factors affect the number of accounts that can be called on in each geographic control unit. The most basic
factor is the length of time required to call on each account. This is influenced by the number of people to be seen
during each call, the amount of account servicing needed, and the length of the waiting time. Information about these
factors can be determined by examining company records or by talking with sales people.
One factor that affects the number of accounts that can be called on is the travel time between accounts. Travel time
will vary considerably from one region to another, depending on factors such as available transportation, conditions
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of highways, and the weather. The sales manager seeks ways to minimize travel time and thereby to increase the
number of accounts that can be called on.
The frequency of sales calls is influenced by a number of factors. Accounts are generally grouped into several
categories according to sales potential. Group A accounts are called on most frequently, group B accounts less
frequently, and group C accounts the least of all. Other factors that influence the call frequency are the nature of the
product and the level of competition. The level of non-selling activities influences the time and effort required to
cover a geographic control unit.
4. Combining Geographical Control Units into Sales Territories
Up to this point the sales manager has been working with the geographic control unit selected in the first phase of the
procedure for setting up sales territories. The unit may be a state, county, city or some other geographical area. The
sales manager is now ready to group adjacent control units into territories of roughly equal sales potential.
In the past the sales manager used to develop a list of tentative territories by manually combining adjacent control
units. However, this was a long procedure that, in most cases, resulted in split control units and territories with
uneven sales potential. Today, computers are handling this task in a much shorter time period. Territories with
unequal sales potential are not necessarily bad. Salespeople vary in ability and experience as well as initiative, and
some can be assigned heavier workloads than others. The sales manager should assigns the best salespeople to
territories with a high sales potential and newer less effective salespeople to the second and third-rate territories, Of
course, some adjustment in sales quotas and commission levels may be necessary; depending on the relative sales
potential of a specific area and the types of selling or non-selling tasks assigned to the sales representatives.
Territory Shape
The planner now considers territory shape. The shape of a territory affects both selling expenses and ease of sales
coverage. In addition, if the shape of a territory permits the salesperson to minimize time on the road, shape
contributes to sales force morale. Three shapes are in wide use; the wedge, the circle, hopscotch, and the cloverleaf.
The wedge is appropriate for territories containing both urban and non-urban areas. It radiates out from densely
populated urban centre. Wedges, of course, can be in many sizes. Travel time among adjoining wedges can be
equalized by balancing urban and non-urban calls.
The circle is appropriate when accounts and prospects are evenly distributed throughout the area. Circular territory
involves starting at the office and moving in a circle of stops until the salesperson ends up back at the office. The
salesperson assigned to the circular M shaped territory is based at some point near the center, making for greater
uniformity in frequency of calls on customers and prospects. This also makes the salesperson nearer to more of the
customers than is possible with a wedge- shaped territory.
The cloverleaf is desirable when accounts are located randomly through a territory. Careful planning of call
schedules results in each cloverleaf being a week’s work, making it possible for the salesperson to be home
weekends. Home base for the salesperson assigned to the territory is near the centre. Cloverleaf territories are more
common among industrial marketers than they are among consumer marketers and among companies cultivating the
market extensively rather than intensively.
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In the case of hopscotch territory, the salesperson starts at the farthest point from the office and makes calls on the
way back to the office. The salesperson would typically go non-stop to the farthest point in one direction and on the
way back stops at many places. On the next trip the salesperson will go in the next direction.
5. Assigning Sales Personnel to Territories
When an optimal territory alignment has been devised the sales manager is ready to assign salespeople to territories.
Salespeople vary in physical condition, as well as ability, initiative and effectiveness. A reasonable and desirable
workload for one salesperson may overload another and cause frustration.
In assigning sales personnel to territories, the sales manager must first rank the salespeople according to relative
ability. When assessing a salesperson relative ability, the sales manager should look at such factors as product and
industry knowledge, persuasiveness and verbal ability. In order to judge a salesperson’s effectiveness within a
territory, the sales manager must look at the salesperson’s physical, social and cultural characteristics and compare
them to those of the territory. For instance, the salesperson born and brought up in a village is likely to be more
effective with rural clients than with urban customers because he or she speaks the same language and shares the
same value as the rural clients. The goal of the sales manager in matching salespeople to territories in this manner is
to maximize the territory’s sales potential by making the salesperson comfortable with the territory and the customer
comfortable with the salesperson.
REVISING SALES TERRITORIES
Two major factors may cause a firm to consider revising established territories. First, a firm just starting in business
usually does not design territories very carefully. Often, it is unaware of the problems inherent in covering a certain
territory, and sometimes it overestimates or under-estimates the territory’s sales potential and required workload. But
as the company grows and gains in experience, the sales manager recognizes that some territory revision is needed.
In other situations, a well- designed territory structure may become outdated because of changing market conditions
or other factors beyond the control of management.
With the aid of a PC, the sales manager can produce several revised territory alignments in minutes. Without a
computer this task would consume days. Before embarking on the revision, the sales manager should determine
whether the problems with the original alignment are due to poor territory design, market changes, or
faultymanagement in other areas. For example, it would be a serious mistake for management to revise sales
territories if the problems are really due to a poor compensation plan.
Signs that justify territory revision
As a company grows, it usually needs a larger sales force to cover the market adequately. If the company does not
hire additional sales personnel, the sales force will probably only skim the territory instead of covering it intensely.
If sales potential have been estimated in an inadequate manner, the performance of the sales force may be very
misleading.
Territories may also need revision because of an overestimation of sales potential. For instance, a territory may be
too small for a good salesperson to earn an adequate income. Certain environment changes could also warrant the
revision of a sales territory.
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Overlapping territories are another reason for revision. This problem usually occurs when territories are split, and it
can cause a tremendous amount of friction in the salesforce. Sales people are very reluctant to have their territories
divided because that means handing over accounts they have built up and nurtured. The mere thought that another
salesperson is reaping the benefits of their hard work can lead to much bitterness. The organization should
immediately correct this problem in a way that will benefit the existing representatives, the new representatives, and
the company.
Territory revisions may be necessary when one salesperson jump into another salesperson’s territory in search of
business. This is an unethical practice, and it will cause problems with in the sales force. If territories have been
designed properly, there should be no need for jumping. Territory jumping is usually a sign that a salesperson is not
developing his or her territory satisfactorily. However, it can also indicate that the sales potential due territory is
greater than that in another. If a salesperson is doing a good job covering his or her market but the contiguous market
has more potential, the representative may be forced to enter the adjacent market.
The effects of territory revision
Salespersons, .like most others, dislike change. Management, therefore, must make a decision either to avoid
territory revisions for fear of damaging sales force morale or to revise the territories in order to eliminate problems.
When a territory is reduced, a salesperson might face a reduction in potential income and the loss of key accounts
that he or she has developed over years. Both of these can result in low morale. Therefore, before revisions are
made, sales manager should ask the sales force for ideas and suggestions that might alleviate such problems.
Compensation adjustments sometimes must be made to avoid low morale. The salesperson whose territory is being
reduced should be taken into confidence and told that a smaller territory can be covered more intensively, thereby
Offering a higher volume for the same travel time. One approach to compensating the salesperson is to guarantee the
previous level of income.
WHY SALES TERRITORIES MAY NOT BE DEVELOPED
In spite of the stated advantages, there are disadvantages to developing sales territories:
• Sales people may be more motivated if they are not restricted by a particular territory and can develop customers
wherever and whenever they find them. For example, in the case of industrial products, organizations/customers are
scattered geographically and not concentrated at one place, sales people, therefore, may be allowed to sell to any
potential customer.
• The company may be too small to be concerned with segmenting the market into sales areas.
• Management may not want to take the time, or may not have the know-how for territory development.
• Personal friendship may be the basis for attracting customers. For Example, Life insurance salespeople may first
sell policies to their family and friends and then use their contacts.
KEYWORDS
Sales Territory: It comprises a group of customers or a geographical area assigned to a sales person.
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Building up Approach: To use this approach of designing territory, actual and potential customers have to be
identified and their sales volumes assessed.
Break down Approach: This approach sits an average sales figure per salesperson to reach at the number of
territories to be formed.
Incremental Approach: In this approach additional territories are created as long as the marginal profit generated
exceeds the cost of servicing them.
SELF ASSESSMENT QUESTIONS
1. What do you understand by sales territory? Discuss the procedure of setting sales territories.
2. Clarify the concept of sales territory and discuss its advantages and significance.
3. Discuss the types of sales territories highlighting their utility and importance.
4. Why is it necessary to establish sales territories that are equal?
Sales Quota
INTRODUCTION
A sales quota is a quantitative goal assigned to a sales unit for a specific period of time. A sales unit may be a sales
person, territory, branch office, region or distributor. Sales quotas are used to plan, control and evaluate selling
activities of a firm. As standards for appraising selling effectiveness, quotas specify desired performance levels for
sales volume, expenses, gross margin, net profit, selling and non-selling activities, or some combination of these
items. Sales quotas provide a source of motivation, a basis for incentive, compensation, standards for performance
evaluation of sales person and uncover the strengths and weaknesses in the selling structure of the firm.
Quotas are devices for directing and controlling sales operations. Their effectiveness depends upon the kind, amount,
and accuracy of marketing information used in setting them, and upon management’s skills in administering the
quota system. For effective results, quotas are designed on the basis of information derived from sales forecasts,
studies of market and sales potentials, and cost estimates. Accurate data are important to the effectiveness of a quota
system, but, they are not sufficient; judgement and administrative skills are required of those with quota setting
responsibilities. Soundly administered quotas based on thorough market knowledge are effective devices for
directing and controlling sales operations.
PURPOSE OF THE SALES QUOTA
(i) To provide standards for evaluating performance: Quotas provide a means for determining which sales
personnel, territory, other units of sales organisation, or distributive outlets are doing average, below average, or
above average job. They are yardsticks for measuring sales performance. Comparisons of quotas with sales
performance identify weak and strong points, but management must dig deeper to uncover reasons for variations.
(ii) To furnish goals and incentives for the sales force: Quotas provide salespersons, distributive outlets and others
engaged in selling activities, goals and incentives to achieve certain performance level. Many companies use quotas
to provide their salesforce the incentives of increasing their compensation through commissions or bonus if the quota
is surpassed and/or recognized for superior performance. Needless to say, to be true motivators, sales quota should
be perceived as being realistic and attainable and to an extent surpassable.
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(iii) To control salespeople’s activities: Quotas provide an opportunity to direct and control the selling activities of
sales persons. Sales persons are responsible for certain activities e.g. customer calls per day, calling on new
accounts, giving a minimum number of demonstrations and realization of firm’s account. If the sales people fail to
attain these quotas, the company can take corrective action to rectify the mistake
(iv) To evaluate the productivity of sales people: Quotas provide a yard-stick for measuring the general
effectiveness of sales representatives. By comparing salespersons’ actual results with set quotas the areas of
activities are determined where the sales force need help for improving productivity.
(v) To control selling expenses: Quotas are also designed to keep selling expenses within limits. Some companies
reimburse sales expenses only up to a certain percentage of sales quota. Others tie expenses to the salesperson’s
compensation in order to curb wasteful expenditure. Expense quota helps companies to set profit quotas.
(vi) To make effective compensation plan: Quotas play an important role in the company’s sales compensation plan.
Some Indian companies follow the practice that their salespersons will get commission only when they exceed their
assigned quotas. Companies may also use attainment of the quotas in full or in part as the basis for calculating the
bonus. If the salesperson does not reach the minimum
desired quota, he will not be entitled for any bonus.
(vii) To evaluate sales contests results: Sales quotas are used frequently in conjunction with sales contests.
Companies mostly use ‘performance against quota’ as the main basis for giving away awards in sales contests. Sales
contests are more powerful incentives if all participants feel they have a more or less equal chance of winning by
basing awards on percentage of quota fulfilment which is a common denominator. Hence, it causes average
salesperson to turn into above average performers.
TYPES OF QUOTAS
Differences in forecasting and budgeting procedures, management philosophy, selling problems, and executive
judgment, as well as variations in quota-setting procedures, cause each firm to have somewhat unique quota.
Ignoring small differences, however quotas fall into four categories:
(i) Sales volume quota: The most commonly used quotas are those based on sales volume. These types of quotas are
set for an individual sales person, geographical areas, product lines or distributive outlet or for only one or more of
these in combination. Sales volume quotas are also set to balance the sales of slow moving products and fast moving
products or between various categories of customers per sales unit. The sales volume quota may be set in terms of
units of product sales, or rupee sales or both on overall as well as product wise basis.
Some companies combine these two and set quota on the point basis. Points are awarded on the attainment of a
certain specific level of sales in units and rupee terms for each product/customer. For example: A company might
consider Rs. 1000 equal to 1 point, Rs. 2000 equal to 2 points and so on. At the same time company may award 3
points for unit sales of product A and 5 points-for unit sales product B. Companies use this type of approach
generally because of problems faced in implementing either rupee sales volume or unit sales volume quota. Unit
sales volume quotas are found useful in market situations where the prices of the products fluctuate considerably or
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when the unit price of the product is rather high. Rupee sales volume quotas are found suitable in the case of sales
force selling multiple products to one or different types of customers.
(ii) Financial or budget quotas: Financial or budget quotas are determined to attain desired net profit as well as to
control the sales expenses incurred. In other words, it is set for various units in the sales organisation to control
expenses, gross margin, or net profit. The intention in setting financial quota is to make it clear to sales personnel
that these jobs consist something more than obtaining sales volume. It makes personnel more conscious that the
company is in business to make a profit. Expense quotas emphasize keeping expenses in alignment with sales
volume, thus indirectly controlling gross margin and net profit contribution. Gross margin or net profit quotas
emphasize margin and profit contributions, thus indirectly controlling sales expenses.
Expense quotas: In order to make the sales force conscious of the need to keep selling costs within reasonable
limits, some companies set quota for expenses linked to different levels of sales attained by their sales force. And to
ensure its conformity they even link compensation incentives to keep expenses within prescribed limits. Since sales
are the result of the selling tasks performed which vary across sales territories, it is not easy to determine expense
quotas as percentage of sales in a uniform manner. Also very strict conformity to expense quota norms result in
demotivation of sales force. As such expense quota is generally used as a supplement to other types of quotas.
Net profit quotas: Net profit quotas are particularly useful in multiproduct companies where different products
contribute varying level of profits. Its emphasis is on the sales force to make right use of their time. It is important
for the management to ensure that its sales force do not spend more time on less profitable products, because the
salespersons are costing the company the opportunity of earning higher profits from their high margin products. In
other words, it should ensure that its salespersons spend their maximum time on more profitable customers. The
objective can be achieved by setting a quota on net profit for its sales force, and thus, encouraging them to sell more
of high margin products and less the low margin products.
(iii) Activity quotas: Good performance in competitive markets requires the sales force to perform the sales as well
as market development related activities. The latter activities have long term implications on the goodwill of the
firm. To ensure that such important activities get performed, some companies set quotas for the sales force in terms
of various selling activities to be performed by them within a given period. Finally the company must set a target
level of performance for the sales persons. Some of the common type of activity quotas prevalent in Indian firms is
as under:
• Number of prospects called on
• Number of new accounts opened
• Number of calls made for realizing company’s account
• Number of dealers called on
• Number of service calls made
• Number of demonstrations made
The chief merit of activity quota lies in its ability to direct the sales force to perform the urgent selling activities and
important non-selling but market development related activities in a balanced and regular manner.
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(iv) Combination Quotas: Depending upon the nature of product and market, selling tasks required to be performed
as well as selling challenges facing the company, some companies find it useful to set quotas in combination of the
two or three types discussed above. Rupee sales volume and net profit quotas or unit sales volume and activity quota
in a combined manner are found in common use in a large number of consumer and industrial products companies in
India.
PROCEDURE FOR SETTING SALES VOLUME QUOTA
(i) Quotas based on sales potential: One common practice in quota setting is to relate quotas directly to the
territorial sales potentials. These potentials are the share of the estimated total industry sales that the company
expects to realize in a given territory. Asales volume quota sums up the effort that a particular selling unit should
expend. Sales potential represents the maximum sales opportunities open to the same selling unit. Many companies
derive sales volume quota from sales potentials, and this approach is appropriate when - territorial sales potentials
are determined in conjunction with territorial design or bottom-up planning and forecasting procedures are used in
obtaining the sales estimate in the sales forecast. Thus, if the territorial sales potentials or forecasts have already
been determined and the quotas are to be related to these measures, the job of quota setting is largely completed. For
instance, let us assume that the sales potential in territory A is Rs. 300000 or 4 per cent of the total company
potential. Then management may assign this amount as a quota for the salesperson that covers that territory. The
total of all territorial quotas then would be equal the company sales potential. In some cases, management chooses to
use the estimate of potential as starting point in determining the quota. These potentials are then adjusted for one or
more of the factors discussed below:
Human factors: A quota may have to be adjusted downwards because an older salesperson is covering the district.
The salesperson may have done a fine job for the company for years but is now approaching retirement age and
slowing down because of physical limitations. It would not be good on human relations - or ethical - to discharge or
force the person into early retirement. Sometimes such persons are given smaller territories with corresponding
lower quotas. Likewise sometimes new sales people are given lower quotas for the first few years until they learn a
greater level of competence.
Psychological factors: Management understands that it is human nature to relax after a goal has been reached.
Therefore, sometimes sales managers set their quotas a little higher than the expected potential. On the other hand
management must not set the goals unrealistically high. A quota too far above the sales potential can discourage the
sales force. The ideal psychological quota is one that is bit above the potential but can still be met and even exceeded
by working efficiently.
Compensation factors: Sometimes companies relate their quotas basically to the sales potential, but adjust them to
allow for the compensation plan. In such a case, the company is really using both the quota and compensation
systems to stimulate the sales force. For example, one company may set its quota at 90 percent of potential. It pays
for one bonus if the quota is met and an additional bonus if the sales reach 100 per cent of the potential.
(ii) Quotas based on past sales alone: In some organisations, sales volume quotas are based strictly on the preceding
year’s sales or on an average of sales over a period of several years. Management sets each salesperson’s quota at an
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arbitrary percentage increases over sales in some past period. The only merits in this method of quota setting are
computational simplicity and low-cost administration. If a firm follows this procedure, it should at least use an
average figure for the past several years as a base, not just the previous year’s sales. Random or irregular events
would greatly affect a sales index based on only one year. However, a quota setting method based on past
performances alone is subject to severe limitations. This method ignores possible changes in a territory’s sales
potential. Generally business conditions this year may be depressed in a district, thus cutting the sales potential or
promising new customers may have moved into the district, thus boosting the potential volume. Basing quotas on
previous year’s sales may not uncover poor performance in a given territory. A person may have had sales of Rs.
1,00,000 last year, and the quota is increased by 5 per cent for this year. The salesperson may even reach the goal of
Rs. 1,05,000. However, the potential in the district may be Rs. 2,00,000. This salesperson may perform poorly for
years without letting the management realize that a problem exists. Quotas set on past sales also ignore the
percentage of sales potential already achieved. Moreover, ‘chase your tail’ quotas- in which the more the salespeople
sell, the more they are supposed to sell-destroy morale and ultimately cause top achievers to leave the company.
(iii) Quotas based on executive judgment: Sometimes sales volume quotas are based solely on the executive
judgment, which is more precisely called guesswork. Executive judgment is usually an indispensable ingredient in a
sound procedure for quota setting, but to use it alone is certainly not recommended. Even though the manager may
be very experienced, too many risks are involved in relying solely on this factor without referring to quantitative
market measures. This method is justified when there is little information to use in setting quotas. There may be no
sales forecast, no practical way to determine territorial sales potential. The product may be new and its probable rate
of market acceptance is unknown, the territory may not yet have been opened, or a newly recruited salesperson may
have been assigned to a new territory. In such situations, management may set sales volume quotas solely on a
judgment basis.
(iv) Quotas based on total market estimates: In some companies management has neither statistics nor salesforce
estimates of territorial sales potentials. These companies use top-down planning and forecasting to obtain the sales
estimate for the whole company; hence, if management sets volume quotas, it uses similar procedures. Management
may either (i) breakdown the total company sales estimate, using various indexes of relative sales opportunities in
each territory and then makes adjustments or (ii) convert the company sales estimate into a companywide sales quota
and then breakdown the company volume quota, by using an index of relative sales opportunities in each territory. In
the second procedure, another set of adjustment is made for differences in territories and sales personnel before
finally arriving at territorial quotas. Note that these choices are similar, the only difference being whether
adjustments are made only at the territorial level, or also at the company level. The second alternative is a better
choice.
(v) Quotas related only to compensation plan: Companies sometimes base sales volume quotas solely upon the
projected amounts of compensation that management believes sales personnel should receive. No consideration is
given to territorial sales potentials, total market estimates, and past sales experiences, and quotas are tailored
exclusively to fit the sales compensation plan. If for example, salesperson A is to receive Rs. 5,000 monthly salary
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and a 5 per cent commission on all monthly sales over Rs. 50,000. A’s monthly sales volume quota is set at Rs.
50,000. As long as A’s monthly sales exceed Rs. 50,000, management holds A’s compensation-to-sales ratio to 5 per
cent. Note that A is really paid on a straight-commission plan, even though it is labeled “Salary and commission”.
Such sales volume quotas are poor standards for appraising sales performance, they relate only indirectly, if at all, to
territorial sales potentials. It is appropriate to tie in sales force quota performance with the sales compensation plan,
that is, as financial incentive to performers, but no sales volume quota should be based on the compensation plan
alone.
(vi) Salesperson set their own quota: Some companies turn the setting of sales volume quotas over to the sales
staffs, which are placed in the position of determining their own performance standards. The reason for this is that
sales personnel, being closest to the territories, know them best and therefore, should set the most realistic sales
volume quotas. The real reason, however, is that management is transferring the quota setting responsibilities and
turns the whole problem over to the sales staff, thinking, they will complain less if they set their own standards.
There is, indeed, a certain ring of truth in the argument that having sales personnel set their own objectives may
cause them to work harder to attain them and complain less. But sales personnel are seldom dispassionate in setting
their own quotas. Some are reluctant to obligate themselves to achieve what they regard as ‘too much’; and others
far this is just as common-overestimate their capabilities and set unrealistically high quotas. Quotas set
unrealistically high or low-by management or by the sales force cause dissatisfaction and results in low salesforce
morale. Management should have better information; therefore, it should make final quota decisions. How, for
instance, can sales personnel adjust for changes management makes in price, product, promotion, and other policies?
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Assistant Professor (Marketing)
Activity Quota: It is the various activities assigned to sales force to be performed regarding sales.
Budget/Financial Quota: It is determined to attain designed net profit as well as to control the sales expenses
incurred.
SELF ASSESSMENT QUESTIONS
1. Define ‘Sales Quota’ and discuss in brief the different types of sales quota.
2. Discuss the purpose of sales quota. Also write the characteristics of a good quota system
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Establishing Performance Standards
Standards serve as benchmark for measuring performance. Performance standards can be expressed in quantitative
and qualitative terms. Standards indicate salesperson as to what is expected from them. The established performance
standards are communicated and explained to the salesperson beforehand to avoid any misunderstanding. Some of
the examples of quantitative and qualitative standards are given below:
Establish
performance
standards
Measuring
actual
performance
comparing
actual
performance
with
standards
Taking
Corrective
Actions
Most companies use quantitative performance standards. The particular combination of standards chosen varies with
the company and its marketing situation. Quantitative standards, in effect, define both the nature and desired levels
of performance. Quantitative standards provide descriptions of what management expects. Each person on the sales
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force should have definitions of the performance aspects being measured and the measurement units. These
definitions help sales personnel make their activities more purposeful. Sales personnel with well-defined objectives
waste little time or effort in pursuing activities that would not contribute to reaching those objectives. A single
quantitative standard, such as one for sales volume attainment, provides an inadequate basis for appraising an
individual’s total performance. In the past the performances of individual sales personnel were measured solely in
terms of sales volume. Today’s sales managers realize that it is possible to make unprofitable sales, and to make
sales at the expense of future sales. In some fields, for example, industrial goods of high unit price, sales result only
after extended periods of preliminary work, and it is not only unfair but misleading to appraise performance over
short intervals solely on the basis of sales volume.
Sales personnel have little control over many factors affecting sales volume. They should not be held accountable for
“uncontrollable” such as differences in the strength of competition, the amount of promotional support given to the
sales force, the potential territorial sales volume, the relative importance of sales to national or home accounts. Each
company selects the combination of quantitative performance standards that fits its marketing situation and selling
objectives. If necessary, it develops its own unique standards designed best to serve its objectives. The standards
discussed here are representative of the many types in use.
(i) Sales Quotas
A quota is a quantitative objective expressed in absolute terms and assigned to a specific marketing unit. The terms
may be rupees or units of product; the marketing unit may be a salesperson or a territory. As the most widely used
quantitative standards, quotas specify desired levels of accomplishment for sales volume, gross margin, net profit,
expenses, performance of non-selling activities, or a combination of these and similar items.
(ii) Selling expense ratio Sales manager uses this standard to control the relation of selling expenses to sales
volume. Many factors, some controllable by sales personnel and some not, cause selling expenses to vary with the
territory, so target selling expense ratios should be set individually for each person on the sales force. Selling
expense ratios are determined after analysis of expense conditions and sales volume potentials in each territory. An
attractive feature of the selling expense ratio is that the salesperson can affect it both by controlling expenses and by
making sales.
(iii) Territorial net profit or gross margin ratio Target ratios of net profit or gross margin to sales for each
territory focus sales personnel’s attention on the needs for selling a balanced line and for considering relative
profitability. Managements using either ratio as a quantitative performance standard, in effect, regard each sales
territory as a separate organizational unit that should make a profit contribution. Sales personnel influence the net
profit rations by selling more volume and by reducing selling expenses. They may emphasize more profitable
products and devote more time and effort to the accounts and prospects that are potentially the most profitable. The
net profit ratio controls sales volume and expenses as well as net profit. The gross margin ratio controls sales volume
and the relative profitability of the sales mixture, but it does not control the expenses of obtaining and filling orders.
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Assistant Professor (Marketing)
Net profit and gross margin ratios have shortcomings. When either is performance standard, sales personnel may
neglect new accounts, and over-emphasize sales of high profit or high margin products while under-emphasizing
new products that may be more profitable in the long run.
(iv) Territorial market share: This standard controls market share on a territory by territory basis. Management
sets target market share percentages for each territory. Management later compares company sales to industry sales
in each territory and measures the effectiveness of sales personnel in obtaining market share. Closer control over the
individual salesperson „s sales mixture is obtained by setting target market share percentages for each product and
each class if customer or even for individual customers.
(v) Sales coverage effectiveness index - This standard controls the thoroughness with which a sales person works in
the assigned territory. The index consists of the ratio of the number of customers to the total prospects in a territory.
To apportion the sales persons efforts more among different classifications of prospects, individual standards for
sales coverage effectiveness are set up for each class and size of customer.
(vi) Call frequency ratio- A call frequency ratio is calculated by dividing the number of sales calls on a particular
class of customers by the number of customers in that class. By establishing different call frequency ratios for
different classes of customers, management directs selling effort to those accounts most likely to produce profitable
orders. Management should assure that the interval between calls is proper, neither so short those unprofitably small
orders are secured, nor so long that sales are lost to competitors. Sales personnel who plan their own route and call
schedules find target call frequencies helpful, in as much as these standards provide information essential to this type
of planning.
(vii) Calls per day in consumer product fields, where sales personnel contact large numbers of customers, it is
desirable to set a standard for the number of calls per day. Otherwise, some sales personnel make too few calls per
day and need help in planning their routes, in setting up appointments before making calls or simply in starting their
calls early enough in the morning and staying on the job late enough in the day. Other sales personnel make too
many calls per day and need training in how to service accounts. Standards for calls per day are set individually for
different territories taking into account territorial difference as to customer density, road and traffic conditions and
competitors‟ practices. (viii) Order call ratio This ratio measures the effectiveness of sales personnel in securing
orders. Sometimes called a “batting average”, it is calculated by dividing the number of orders secured by the
number of calls made. Order call ratio standards are set for each class of account. When a salesperson‟s order-call-
ratio for particular class of account varies from the standard then the salespersons need helping in working with that
class of accounts.
(ix) Average cost per call To emphasize the importance of making profitable calls, a target for average cost per call
is set. When considerable variation exists in cost of calling on different sizes or classes of accounts, standards are set
for each category of account.
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(x) Average order size - Average order size standards control the frequency of calls on different accounts. The usual
practice is to set different standards for different sizes and classes of customers. Using average order size standards
along with average cost per call standards, management controls the salesperson’s allocation of effort among
different accounts and increases order size obtained.
(xi) Non-selling activities- Some companies establish quantitative performances standards for such non-selling
activities as obtaining dealer displays and cooperative advertising contracts, training distributors personnel, and
goodwill calls on distributors customers. Whenever, non-selling activities are critical features of sales job,
appropriate standards should be set. Since quantitative standards for non-selling activities are expressed in absolute
terms, they are, in reality, quotas
Qualitative performance criteria Qualitative criteria are used for appraising performance characteristics that affect
sales results, especially over the long run, but whose degree of excellence can be evaluated only subjectively.
Qualitative criteria defy exact definition. Many sales executives do not define the desired qualitative characteristics
with any exactitude; instead they arrive at informal conclusion regarding the extend to which each sales person
possesses them. Other executives consider the qualitative factors fomal1y, one method being to rate sales personnel
against a detailed checklist of subjective factors such as given below: Job Factors • Product knowledge • Customers‟
knowledge • Competitor‟s knowledge • Handling sales presentations • Customer satisfaction • Time management
Personal Factors • Punctuality • General Attitude • Dress and Appearance • Co-operation • Adaptability • Reliability
• Communication skills • Decision-making ability • Initiative
Executive judgment plays the major role in the qualitative performance appraisal. Written job descriptions, up to
date and accurate, are the logical points of departure. Each firm develops its own set qualitative criteria, based upon
the job description, but the manner in which these criteria are applied depends upon the needs of management.
Measuring Actual Performance Sales management’s next task is to measure actual performance. There are two basic
sources of performance information: sales and expense records and reports of various sorts. Almost every company
has a wealth of data in its internal sales and expense records, but this purpose. Field sales reports The fundamental
purpose of field sales reports is to provide control information. They provide a basis for discussion with sales
personnel. They also indicate the matters on which sales personnel need assistance. The sales executive uses field
sales reports to determine whether sales personnel are calling on and selling to the right people, and whether they are
making the proper number of calls. Similarly, field sales reports assist in determining how to secure more and larger
orders. Field sales reports provide the raw materials that sales management processes to gain insights on giving
needed direction to field sales personnel. A good field sales reporting system assists sales personnel in their self-
improvement programs. Recording accomplishments in written form forces individuals to check their own work.
They become their own critics and self-criticism often is more valuable and more effective than that from
headquarters.
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Assistant Professor (Marketing)
Purposes of field sales reports The general purpose of all field sales reports is to provide information for measuring
performance; many reports, however, provide additional information. Consider the following list of purposes served
by field sales reports: 1. To provide data for evaluating performance- for example, details concerning accounts and
prospects called upon, number of calls made, orders obtained, days worked, miles travelled, selling expenses,
displays erected, cooperative advertising arrangements made, training of distributors personnel, missionary work,
and calls made with distributors sales personnel. 2. To help the sales person plan the work- for example, planning
itineraries, sales approaches to use with specific accounts and prospects. 3. To record customers‟ suggestions and
complaints and their reactions to new products, service policies, price changes, advertising campaigns, and so forth.
4. To gather information on competitors‟ activities- for example, new products, market tests, changes in promotion,
and changes in pricing and credit policy.
5. To provide information requested by marketing research- for example, data on dealers‟ sales and inventories of
company and competitive products. 6. To report changes in local business and economic conditions. 7. To keep the
mailing list updated for promotional and catalogue materials. Types of sales force reports from sales personnel fall
into six principle groups. 1. Progress or call report: Most companies have a progress or call report. It is prepared
individually for each call or cumulatively, covering all calls made daily or weekly. Progress reports keep
management informed of the salesperson’s activities; provide source data on the company’s relative standing with
individual accounts and in different territories, and record information that assists the sales person on revisits.
Usually the call report form records not only calls and sales, but more detailed data, such as the class of customer or
prospect, competitive brands handled, the strength and activities of competitors, best time to call, and “future
promises”. 2. Expense report: The purpose is to control the nature and amount of salesperson expenses. This report
also helps the salesperson exercise self-control over expenses. The expense report reminds salesperson that they are
under moral obligation to keep expenses in line with reported sales-some expense report forms require sales persons
to correlate expenses with sales. The details of the report form vary with the plan for reimbursing expenses.
3. Sales work plan: The salesperson submits a work plan (giving such details as accounts and prospects to be called
upon, products and other matters to be discussed, routes to be travelled, and hotels or motels) for a future period,
usually a week or a month. The purposes are to assist the salesperson in planning and scheduling activities and to
inform management of the salespersons whereabouts. The work plan provides a basis for evaluating the salespersons
ability „to plan the work and to work the plan‟.
4. New-business or potential new-business report: This report informs management of accounts recently obtained
and prospects who may become sources of new business. It provides data for evaluating the extent and effectiveness
of development work by sales personnel. A subsidiary purpose is to remind sales personnel that management expects
them to get sales reports point the way to needed sales training, changes in customer service policies, and product
improvements. The salesperson reports the reasons for the loss of the business; but receipt of a lost-sales report also
causes management to consider further investigation.
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5. Report of complaint and/or adjustment: This report provides information for analyzing complaints arising from
a salesperson’s work, complaints by class of customer, and cost of complaint adjustment. This assists management in
detecting needed product improvements and changes in merchandising „and service practices and policies. These
data also are helpful for decisions on sales training programs, selective selling, and product changes. The optimum
number of reports is the minimum necessary to produce the desired information. Holding down the number of
reports is important, since they are generally made out after the selling day. Report preparation places demands on
free time, and, unfortunately, the best people often have the least time. All reports are reviewed from time to time to
determine whether the information is worthwhile. When a new report is proposed, the burden of proof of its need is
upon its advocates. Information obtainable through other means at no higher cost should not be gathered through
field sales reports. The amount of detail required in sales reports varies from firm to firm. A company with many
sales personnel covering a wide geographical area needs more detailed reports than does a company with a few
salespeople covering a compact area. The more freedom that sales personnel have to plan and schedule their
activities, the greater should be the detail required in their reports.
Comparing Actual Performance with Standards: The most difficult step in sales force control is the evaluation
step the comparing of actual performances with standards. This is more than a mechanical comparison; this step is
difficult because evaluation requires judgment. The same standards cannot be applied to all sales personnel-there are
differences in individual territories, their sales potentials, the impact of competition and the personalities of sales
personnel and their customers. It is possible to take territorial differences into account by setting individual
performance standards for each territory, but it is not possible to adjust fully for differences in the personalities of
the salesperson and the clientele. Furthermore, complications often develop in relating individual performances to
standards, for example, when two or more sales persons work on the same account or when an account deals both
with the salesperson and the home office. Evaluating sales personnel requires both a comparison of performance
with quantitative standards and an appraisal against qualitative performance criteria. Sales personnel with poor
performances, as gauged by quantitative standards, may be making offsetting qualitative contributions. Individual
who do not reach sales quotas or keep to prescribed call schedules, for instance, may be building for the future by
cementing relations with distributors and dealers. Evaluating performance of sales personnel requires judgment and
deep understanding of market factors and conditions.
Judgment enters into the evaluation of sales personnel in still other ways. Performance trends, as well as the current
record, are relevant- an individual showing improvement but with still substandard performance needs
encouragement. There is always the chance, too, that something is wrong with a standard-when an individual
continually fails to reach a standard, management should investigate whether the standard has been set too high. In
comparing actual results with projected results, the general procedure in scientific work is to set up tests that
measure the variable under observations while taking account of the effects of other variables. In the evaluation of
sales personnel it is not possible to set up such tests. Each salesperson’s performance results from complex
interactions of many variables, some beyond the control of either the salesperson or of management. The time
element changes and so do the sales personnel, the customers, general business conditions, competitors‟ activities
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Assistant Professor (Marketing)
and other variables. However, some companies measure the impact of particular variable on personnel performance
through careful design of experimental and control groups.
Take Corrective Actions The evaluations, or comparisons of actual performances with standards, and adjusted by
executive judgment, point the way to needed action. If performance and standards are in alignment may no action
needed. Otherwise the three alternatives are: 1. Adjust performance to the standards, thus increasing the degree of
attainment of objectives; 2. Revise the policy and/or plan, or the strategies used for their implementation to better for
the achievement of objects; 3. Lower or raise the objectives or the standards and/criteria used in measuring degree of
attainment to make them more realistic. Similarly actions to be taken depend on the performance in terms of
quantitative as well as quantitative evaluation. Four such situations, as discussed below, may be anticipated: 1. Good
performance in both qualitative and quantitative evaluation- The appropriate response would be praise, monetary
rewards and may be promotion. 2. Good performance in quantitative but poor in qualitative evaluation- The good
quantitative result suggest performance in terms of sales/profits and in front of customers is good. However, poor
performances on qualitative criteria warrant advice and training on qualitative aspects.
Poor performance in quantitative but good in qualitative evaluation- Good qualitative input is failing to be reflected
in quantitative success. The specific causes need to be identified and training and guidance should be provided. 4.
Poor performance in both quantitative and qualitative evaluation- Critical and thorough discussion is required on
problem areas. Training may be provided to improve the performance. In some situations, punishment including
dismissal is required.
Difficulties in Evaluating Performance There are some basic issues involved in all performance evaluations
systems for salesmen, which require consideration while the system is being designed. The first issue relates to
evaluation based on qualitative vis-a-vis quantitative data. It is obvious that in any qualitative assessment, personal
bias and subjective value judgment may vitiate evaluation. On the other hand evaluation based entirely on statistical
data may not give entirely valid results as certain important determinants of a salesman's effectiveness (for example
personal effectiveness of a salesman in handling consumer relations problems) do not lend themselves to quantitative
definition. In addition selling skills are broadly determined by one's ability to impress, influence or persuade
prospects as well as an alternation between aggressiveness and submissiveness depending upon the situation. It
therefore is evident that sales managers, based upon their own set of circumstances, would have to evolve a judicious
mix of qualitative and quantitative criteria on which to base the evaluation of their sales personnel. Another issue
relates to the comparisons between salesmen on the basis of the results of evaluation. Such comparisons can never be
on a "man to man" basis since a great deal of human element is involved and different salesmen have to work under
different geographical and environmental conditions; and may handle different set of products or customers. The
third issue is related to the problem of determining standards of performance. The whole evaluation exercise rests on
the comparison of actual sales performances against predetermined standards or norms. If these norms or standards
are not realistic, the whole exercise would become self-defeating.
Another issue worthy of consideration is the periodicity of evaluation. Evaluation based on very short-term results
may not be very correct as it ignores the value of some criteria which are of long-term valve to the company. A small
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Assistant Professor (Marketing)
example is the effectiveness of particular salesman in cultivating good customer relations, which may .give the
company an added acceptability when it introduces a new product. On the other hand, evaluation based on very
long-term results is not desirable because if the results are unsatisfactory, it will have a great impact on the operating
results of the company for a longer period. Periodicity of evaluation has been found to vary with the type of product
sold, industry practice and management's outlook towards control. Yearly evaluations are a very common practice
though longer periods are also prevalent, especially in case of capital goods and industrial goods companies. The last
issue here refers to the accounting system or the database of the company as a basis of developing the evaluation
system. Actual data taken from typical sales records are not adequate to provide precise comparison of salesmen or
sales group performance. For example, if the product mix sold by different sales groups differs, it will be difficult to
compare the performance of the salesmen in the two different groups merely on accounting data.
Sales Budget
A Sales Budget is a programme designed for a stipulated time frame that highlights selling expenses and anticipated
sales, quantitatively and in value terms. Therefore a budget is a list of planned expenses and revenues. It is a plan for
saving, borrowing and spending. Sales Budget can be created product wise, territory wise, customer wise and
salesperson wise. It serves as a scale to measure the performance or progress of a company. It helps to identify the
areas in which the company needs to strengthen or improve the performance. This can be done by comparing the
actual performance with the budgeted performance and taking corrective measures in case of any deviation. Sales
Budget helps to keep the expenses under control.
Purpose of Sales Budget A sales budget generally serves three basic purposes.
A Planning Tool: In order to achieve goals and objectives of the sales department, a Sales Manager must outline
essential tasks to be performed Purpose of Sales Budget A sales budget generally serves three basic purposes.
1) A Planning Tool: In order to achieve goals and objectives of the sales department, a Sales Manager must outline
essential tasks to be performed and compute the estimated costs required for their performance. A sale budgeting,
therefore, helps overall costing, profit planning and provides a guide for action towards achieving the organizational
objectives.
2) An Instrument of Coordination: Selling is only one of the important functions of marketing. To be effective it
needs support from other elements of the marketing mix. The process of developing realistic sales budget draws
upon backward and forward linkages of selling with marketing and in turn brings about necessary integration within
the various selling and marketing functions. It also establishes co-ordination between sales, finance, production and
purchase function.
3) A Tool of Control : The sales budget on adoption becomes the mark against which actual results are compared
The budget variance analysis approach thus helps in improving insights of sales manager and enables him or her to
refine and develop realistic sales budgets in future with minimal variance.
Methods for Determining Sales Budget A variety of methods ranging from the Sales Manager’s gut feeling to the
application of management science models are used for determining the sales budgets. These methods can be
described as:
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Assistant Professor (Marketing)
What is Affordable: This method is generally used by firms dealing in capital industrial goods. Also, companies
giving less emphasis to sales and marketing function or having small size operations make use of this judgmental
method.
ii) Rules of Thumb: Such as a given percentage of sales. Mass selling goods and companies dominated by finance
function are major users of this method. iii) Competitive Parity: Large sized companies whose products face tough
competition and need effective marketing to maintain profits make use of this method. The use of this method
presumes knowledge of the competitor’s activities and resource allocation.
iv) Objective and Task Method: A systematic method helps in the determination of the sales budget by identifying
the objective of sales function, and then ascertaining the selling and related tasks required to achieve each objective.
Later, the cost of each task/activity is calculated to arrive at the total budget. The finalization of the budget may
require adjustment both in the objectives as well as in the way the task may be performed.
v) Zero based budgeting: It is a relatively new approach to budgeting. It involves a process in which the sales
budget for each year is initiated from Zero base thus justifying all expenditure and discarding the continuation of
conventions and rules of thumb. This method suffers from practical limitations which relate to a very elaborate and
time consuming process required by it. In practice, companies make use of a combination of the above methods and
depending upon the experience gained, sales budgeting approach stands refined. The status of the sales and
marketing function within the organisation determines the extent of sophistication used in the approach to sales
budgeting. Sales Budgeting procedure
Preparation of sales budget is one of the most important elements of the sales planning process. Generally, three
basic budgets are developed, the sales budget, the selling expense budget and the sales department
administrative budget.
Mostly sales organizations have their own specified procedures, formats and timetables for developing the sales
budget. While all sales budgets relate to the sales forecasts, the steps taken in systematic preparation of budget can
be identified in the following sequence:
i) Review and Analysis of Marketing Environment: Generally, companies prepare sales budget on the principle of
bottom up planning with each echelon. To prepare a tentative budget of revenue and expense, depending on the
organizational structure of the sales department, each departmental head is asked to predict the departmental sales
volume and expenses for the coming period and the contribution of overheads.
For example, in a leading/national travel agency each city‟s sales manager prepares his/her budget and submits to
the Regional or Divisional office, where they are added together and included with divisional/regional budget. In
turn, these divisional budgets are submitted to the Sales Manager for the particular service or market groups. At the
end of this chain of subordinate‟s budgets, the top executives in the sales department, scan and prepare a final sales
budget for the company. Now the marketing budget is combined with the budgets of the sales department and the
staff marketing departments, to give a total of sales revenues and of selling and other marketing expenses for the
company. Some of the common items in each sales budget include the following: • Salaries of the sales persons,
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Assistant Professor (Marketing)
administrative support, etc. • District selling expenses – travel, lodging, food, entertainment. • Commissions on sales,
bonus. • Benefit packages covering medical insurance, gratuity and retirement contribution. • Office expenses –
mailing, telephone, office supplies and other miscellaneous costs. • Advertising and promotional materials, selling
aids, contest awards, product samples, catalogues, price-lists, etc. A review of past budget performance also helps
the sales manager to minimize variances in the coming period.
ii) Communicating Overall Objectives: Sales executives at the top level must communicate their sales goals and
objectives to the marketing department and argue effectively for an equitable share of funds. The chief sales
executive of the firm should encourage participation of all superiors and managers in the budget process so that, as a
part of its development, they will accept responsibility for it and later enthusiastically implement it.
iii) Setting a Preliminary Plan: For allocation of resources and selling efforts to different activities, particularly
products, customers and territories a preliminary plan is made. This helps in revisions that can be made in the initial
sales budget. The Sales Manager must emphasize that the budget should be as realistic as possible at each stage of its
development, so that it can maximize its favourable impact on the firm. When budget goals are achieved through a
co- operative team effort, a strong feeling of organizational confidence is created.
iv) Selling the Sales Budget to Top Management: The top sales and marketing executives must visualize that
every budget proposal they are presenting to the top management must remain in competition with proposals
submitted by the heads of other divisions. Each and every division usually demands for an increased allocation of
funds. Unless the sales managers rationally justify each item in their budget on the basis of profit contribution, the
item may not get due consideration by the top management.
Factors affecting sales budget while preparing the sales budget, the following factors should be taken into
consideration:
Past sales figures
Estimation of sales force
Plant efficiency
Proposed Expansion
Introduction or Discontinuance of any product
Orders on hand.
General business prospects
Seasonal fluctuations
Market size.
Market potential
Sales potential.
Availability of raw material
Distribution Cost
Company‟s financial resources.
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Assistant Professor (Marketing)
Degree of competition in industry
Government regulation and control.
Political situation influencing market.
Advantages of Sales budget a sales budget offers the following benefits
i) It is helpful in designing sales programmes so as to achieve the sales targets of the firm
ii) It regulates expenditure patterns of selling and confirms that the expenditure never supersedes allocated funds.
iii) It is useful in allocation of resources of different products , sales territories, etc for realising the forecast sales
iv) It helps in keeping expenses under control so that the objectives of net profit are achieved.
v) It serves as a yardstick for evaluating progress and sales performance of the company.
vi) It helps the organization to prevent unnecessary wastage of resources.
vii) It can reveal the areas/products in which the company needs to strengthen its position.
viii) It acts as a controlling tool to bring back unwanted expenditures within the budgetary estimates.
Sales Audit
A sales audit is a comprehensive, systematic and periodic examination of a company‟s sales management process
with a view to find out, shortcoming if any, and to recommend an action plan to improve .It covers a company’s total
sales system. It appraises integration of the individual inputs to the personal selling effort and identifies’ evaluates
assumptions underlying the sales operation.
Specifically, a sales audit is a systematic, critical, and unbiased review field appraisal of the basic objectives and
policies of the selling function and of the organization, methods, procedures, and personnel employed to implement
those policies and achieve those objectives; which are predetermined by the sales organisation. Proponents of the
sales audit stress the importance of focusing on overall selling strategy and methods for implementing it rather than
examining individual components piecemeal. Sales executives, for example, may become so involved in programs to
reduce sales personnel turnover or some new technique for motivating sales personnel that they lose sight of some
key objective, which might be, for instance, to increase the profitability of small accounts. Existing sales personnel
may do a poor job in working with small accounts, yet management focuses more on retaining these sales personnel
than on making them more effective with small customers. In contrary, the new motivational technique maybe
counterproductive; it may be encouraging sales personnel to concentrate upon getting the cream of the business from
the largest customers. Sales audits detect situations of this type. A sales audit uncovers opportunities for improving
the effectiveness of the sales organization. An audit identifies strengths and weaknesses: strengths have potential for
exploitation; weaknesses have potential for improvements. While audit implies an after the fact evaluation or a
backward approach (a carry-over from financial usage), a sales audit provides information useful for planning sales
strategy. Basically, sales audits have no standardized formats. Each company designs a sales audit to fit its needs.
Generally, six main aspects of selling operations come under the purview of sales audit examination:
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Assistant Professor (Marketing)
1. Objectives: Each selling input should have clearly defined objectives, related to desired outputs. For example, a
firm might have the objective of raising its market share from 10 to 15 percent without reducing per unit profit in the
organisation.
2. Policies: In case of policies; both explicit and implicit are appraised for their consistency in achieving the selling
objectives.
3. Organization: In this aspect, it is seen that does the organization possess the capabilities for achieving the
objectives? Are the planning and the control systems appropriate for achieving the targets? If an organization is
understaffed, or staffed with incompetent persons, there is a least probability of achieving predetermined objectives
or ensuring proper control.
4. Methods: In this step; it is felt that the individual strategies for carrying out policies are appropriate or not.
Because, it is a vain to attempt upgrading quality and price if the company has already established a strong
consumer’s image for low quality and price.
5. Procedures: The steps in implementing individual strategies should be logical, well designed, and chosen to fit
the situation. The procedures should allocate responsibility for implementation to particular individuals and explain
how the goals are to be achieved.
6. Personnel: All executives playing key roles in planning sales operations and strategy, as well as those
responsible for implementation of sales programmes are evaluated as to their effectiveness relative to stated
objectives, policies, and other aspects of sales operations. Too often an executive is evaluated in terms of ability to
increase sales or profit rather than success in reaching pre-determined objectives, such as increased market share. In
total, it can be observed that a company examines both its markets and its products in sales audit. Process of Sale
Audit The process of Sales audit consists of the following steps:
1. Finding Results- The first step of sales audit involves finding out what has happened. This means measuring
sales performance and comparing it with sales targets. The actual performance may be lower (negative variance) or
higher (positive variance) than the targets.
2. Identifying Causes- The second step is to find out possible reasons as why it has happened . The specific factors
that led to negative variance must be identified. These may be elements of marketing mix, salespersons, sales
managers and so on. This is a time consuming and difficult task involving analysis of sales, cost, level of customer
satisfaction etc
3. Deciding Action Plan – The last step is to decide the corrective actions for solving the problems and overcoming
consequences. For example, if customer service is poor the action plan may be to improve pre sale and post-sale
service
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Assistant Professor (Marketing)
Sales Forecasting
Corporate objectives
• A major reason for forecasting is to provide a basis for medium and long-range plans. Businesses must plan in
order to achieve goals established on the basis of such forecasts, and these plans will affect various functional
aspects of the business. At the base of such plans is long-term profitability, for without this the company may not be
able to meet its future commitments in achieving the planned-for sales. Company planners will have to assess
whether or not such potential sales can be achieved within the confines of the business as it stands and, if not, what
resources will be needed in order to achieve these sales.
• Medium-term forecasts are also used for business planning, but less so for strategic reasons. They are of particular
importance for costing, and through the sales budget, for marketing management in controlling the marketing
function while it goes about achieving the forecasted sales. With a reasonably accurate sales forecast such plans will
be more realistic, and when they are put into action they have a better opportunity to work.
• Management decisions within a manufacturing concern, together with such external changes as new technology,
fashion and the cost of raw materials, affect the accurate prediction of future sales. It is the accuracy of this
prediction that can single out the successful firm from the unsuccessful. In the current competitive climate there is
little margin for error, and efficiency of operation is a major factor for success.
• Consequently, prediction of a change in demand is essential for continued prosperity. If a company is able to
forecast a change in demand and the extent of that change, it can plan ahead to operate in the most efficient and
profitable manner.
• Managers are surrounded by a multitude of factors that can affect the future operation of the business. By using the
best available forecasting method they can assess their present position and provide more accurate predictions for the
future. Whatever circumstances surround the situation in which the manager makes a forecast there is one clearly
defined objective, which is to profit eventually from this prediction in terms of revenue or knowledge.
• Companies prepare for change by planning. This requires forecasts to be made, followed by an assessment of how
these planning goals are to be reached. In practice, the sales forecast acts as the planning base upon which all
internal forecasting and budgeting takes place. The effect of considering expected levels of sales in making such
decisions is to reduce uncertainty and lower costs.
• Forecasting is thus central to the planning process and should not be used as a substitute for effective decision
making, or management will simply tend to react to short-term fluctuations as they affect sales instead of developing
long-term strategies. The company should first work out its selling plan, because this is really what is going to
determine the level of sales. For example, a price reduction can be expected to influence a company’s share of the
total market, and such considerations should be noted by the sales forecaster. Consequently, the forecaster predicts
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what will happen for a set of decisions in a given set of circumstances, whereas planning states that by taking certain
actions, the decision maker can alter subsequent events relating to a particular situation. Thus, if a forecast is made
which predicts a fall in demand, management can prepare a plan to prevent sales from falling. The future is not
immutable; if it was, there would be little strategic point in forecasting or planning. The objective of the sales
forecast is to predict a company’s sales for some period in advance, and this can be done in one of two ways.
• It can predict the company’s sales directly from past sales data and from anticipated orders the company expects to
receive (called a sales forecast).It can forecast the total market and then determine the company’s share of it (called a
market forecast).
• For many companies, the latter course is the most logical, because a company’s future strategy will affect its
market share and this strategy is directly linked to what is happening in the marketplace. Consideration must also be
given to what competitors are doing, and in many cases sales action by one manufacturer will merely cancel out
similar action by another. It has been said that forecasting is often a fruitless adventure, but difficulties when
forecasting should not be used as
an excuse for inactivity. Forecasting is not a ‘crystal ball’ that enables the manager to foresee the future more
clearly. It is an aid to more informed and better decision making.
Functional objectives
• Forecasts are needed for many different purposes, including production planning; ordering raw materials; ensuring
a steady supply of trained personnel; controlling stocks or inventories; estimating short-term cash requirements, and
a variety of other reasons. All these applications have different ‘time horizons’. That is, the forecast is needed at
different times before the event if it is to be of any practical value. The sales forecast is thus not merely used for
planning marketing; it has company-wide applications.
• It is marketing and sales personnel who should prepare the sales forecast. In fact according to Geiger and Guenzi,
the sales force itself has a key role to play in sales forecasting. This point is made because in many companies, sales
forecasting is left to the finance department, as they have an immediate need for the forecast for business budgeting
purposes. When forecasts are left to finance in this manner it is an abrogation by marketing of its responsibilities.
• The reason is that finance personnel are not expected to be forecasting experts and they will simply take sales from
earlier periods and do extrapolations from past data. Marketing, above all other functions in business, should be in
the best position to ascertain potential sales, including downturns and upturns, of which accountants will be less
aware, since they are much further removed from customers than the marketing department. Forecasting is a risky
business, which is all the more reason why marketing should not abrogate its responsibilities in this regard.
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• We now consider the business functions that are most directly concerned with sales forecasts. Production needs
forecasts for each product line in order that manufacturing can be planned and scheduled on an orderly basis. Thus
machines and manpower can be more effectively utilized. When the transport element of logistics is organized by
production, it is helpful to have advance warning of bulky or awkward items that have to be packed and moved,
particularly when overseas considerations are involved. In the longer term, production needs to
make decisions on levels of plant operation in order to be able to meet production levels to achieve the planned-for
sales. Production’s main need will thus be for accurate short-term forecasts for production planning and control.
• Human resource management (HRM) needs forecasts in order to be able to ascertain staffing levels in the future. It
will then be able to recruit personnel to achieve the forecasted sales. There will be training implications for
employees taken on to achieve an increase in sales, so the concern of HRM will be mainly in respect of the medium-
term forecast, but the long-term forecast will be needed for formulating management succession plans.
• Purchasing needs accurate forecasting so that raw materials and component requirements can be met on a timely
basis. As the forecast will give the purchasing officer more time in which to purchase, rather than having to wait
until the requisition is received from production, he or she may be in a position to purchase on a more favourable
basis because of the increased lead time.
• The purchasing department can also operate more effective stock control for raw materials and part manufactured
goods and work out optimum stock levels. The danger of overstocking, with the risk of deterioration and
obsolescence, will be less, and because less stock will need to be carried, this will result in a saving on working
capital.
• Better forecasting will also avoid the possibility of stock-outs resulting in disruption to the production programme.
In general, the purchasing function will be more interested in short-term forecasts, although the medium-term
forecast will be of value. Clearly the techniques of JIT supply and lean manufacturing the nature of the need for
short-term forecasts in this regard.
• Finance needs forecasts in the medium term to establish budgets based on the planned-for sales. Here, accuracy is
important, because if the forecast is incorrect, then all the company budgets will be incorrect, with consequent
overspending in the case of an optimistic forecast. Cash requirements to fund working capital need to be budgeted,
and an incorrect forecast could mean that the company has to make a request to the bank for increased borrowing.
Many bankruptcies are a result of a shortage of working capital, and better forecasting could, in many instances,
have avoided such an event.
Also, finance needs to engage in long-term profit planning and must predict income flow. It must make provision for
long-term capital needs in terms of plant, machinery etc., and here the long-term forecast is of importance if the
organization is to be ready to produce appropriate products in the correct quantities at the time these are needed.
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Marketing should make the forecasts, and these are needed for the entire company as just illustrated. However,
marketing also needs these forecasts in order to plan promotional campaigns and sales strategies to complement
these campaigns.
• It needs the forecast in order that the correct types of sales and marketing personnel can be recruited and trained to
achieve the planned-for sales. Remuneration plans will also need to be formulated, particularly when these are linked
to sales targets or sales quotas, and these targets or quotas will be a reflection of the sales forecast broken down
among individual sales personnel. When ‘off-the-shelf’ delivery is offered to customers, the sales forecast will help
to determine maximum and minimum stock levels, and here an incorrect forecast will result in either stock-outs (and
possible loss of custom) or overstocking (with a resultant drain on working capital).
• In the longer term, more precise goals can be set for members of the marketing channel, both in terms of the supply
chain and the demand chain. Channel arrangements tend to be of a more stable, long-term nature, and if potential
sales are predicted to be much higher in the long term, then new channel arrangements might be called for. Thus,
marketing is in need of short, medium and long-term forecasts.
• Research, Design and Development (R, D&D) requires technological forecasts. Marketing is the conduit through
which changes in the market place can be relayed to the R, D&D department. Design features and new technology
will affect company sales, and products need to be updated or changed at intervals. Marketing is in close touch with
customers and should be aware of competitive offerings, so marketing is best placed to give advice in this respect.
• It might be that a particular product line is becoming obsolete, in which case R, D&D will need to plan and develop
a new product or make modifications to an existing product in conjunction with marketing research. Only by doing
this will an organization be able to keep ahead of, or apace with, its competitors and continue to produce products
that are appropriate for the marketplace. Marketing, through the medium of marketing research, will liaise with R,
D&D and from medium and long-term forecasts will coordinate new product developments and ultimately product
launches.
• With an accurate forecast, departments can plan more effectively with the reassurance that these action plans can
be carried through and will not have to be modified, as they might be if the forecast was inaccurate. There is thus an
interrelationship and interdependency between the plans and operations of each of the above functions, because they
are all based on the sales forecast.
• If the original sales forecast proves to be incorrect, then it will affect each and every function within the business,
because each department uses the sales forecast as its starting point. The importance of an accurate and timely sales
forecast cannot be overemphasized. What we must do is reduce the extent of the wrongness of the forecast, or at
least provide guidelines as to the extent to which it might be incorrect.
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Marketing and other managerial functions need these three types of forecasting horizon because each directly affects
a different business function, and more importantly, medium and long-term forecasting is critical to the corporate
planning process.
1 Short-term forecast: These are usually made for tactical reasons that include production planning and control,
short-term cash requirements and adjustments that need to be made for seasonal sales fluctuations. This latter factor
can be very important for production, whereas the general trend may be of less consequence. Such forecasts are for
periods of less than one year, with a normal range between one and three months.
2 Medium-term forecasts: These are made for minor strategic decisions in connection with the operation of the
business. They are important in the area of business budgeting for the operating budget, and it is from this forecast
that company budgets are built up. Incorrect forecasting can have serious implications for the rest of the
organization, for if it turns out to be over-optimistic, the organization will be left with unsold stock and will have
overspent on production. Money will be owed to the bank and other creditors, and stock may have to be sold at a
loss to raise money to satisfy thesecreditors. Many bankruptcies among smaller firms can be ascribed to insufficient
attention being paid to medium-term sales forecasting. This forecast is used for such matters as the staffing levels
that are required to achieve expected sales, the amount of money to be spent on sales effort, and short-term capital
requirements for such items as machines to be purchased to meet increased production. The time period for a
medium-term forecast is normally one year.
3 Long-term forecasts: These are for major strategic decisions to be taken within an organization, and they very
much relate to resource implications. They deal with general rather than specific items, and as shown by Raspin and
Terjesen rely more heavily in their computation upon such factors as government policy, social change and
technological change. They are, therefore, concerned more with general trends, and in the light of these trends,
attempt to predict sales over periods greater than two years. In some strategic, heavily capitalized industries,
predictions might be needed for a decade or more. The problem is that for these lengths of time the forecast cannot
be more than vague, and planners in retrospect blame the forecast when things go wrong (often for reasons
completely outside the possible knowledge of the original forecaster) and forecasting thus receives criticism.
4 Techniques of forecasting
Objective methods that are of a mathematical or statistical nature; and Subjective methods based on experience,
judgment and intuition rather than on quantitative analysis.
The wide acceptance of objective techniques in recent years is primarily because objective methods have developed
a record for accuracy and thus have inspired confidence in managers who use them as an aid to decision making. The
development of new forecasting software has greatly improved the accuracy in forecasting. Subjective methods still
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rely largely on intuition, but the practice of objective forecasting is more advanced. Marketers recognize that the
pace of change in the marketing environment, and the increased uncertainty which this gives rise to, is making the
use of such intuitive techniques more appropriate.
The discussion that follows relates to specific practical and managerial problems that can be encountered when using
such techniques.
1 Objective method
Moving averages: This method of time series analysis involves compilation of the arithmetic average of a number
of previous consecutive points in a time series. It is best employed in a situation where an extrapolation of a trend
that is gradually increasing or decreasing is present. It has a low cost with ease of manual computation. Problems
occur in the choice of the number of points to average, and the effects of a non-typical item in the time series.
Seasonality and cyclical trends can be catered for by the application of relevant indices, provided they are known.
The major disadvantage of this technique is that it is purely quantitative in its approach and thus extremely
introspective. It does not take into consideration any salient factors in the environment that may affect future sales.
Exponential smoothing: Using a moving average has the problem that it gives equal weight, or significance, to all
the items in a time series. More recent points in a time series will represent the present situation more accurately than
older items, and it is therefore, only logical to attach more significance to more recent items by using a weighting
method. The different weight attached to an item in a time series can be calculated either simply by using an
arithmetic progression or, more sophisticatedly, by using a geometric progression. When a geometric progression is
used and a graph is drawn, raw sales data are smoothed into an exponential curve; hence the name ‘exponential
smoothing’. In the case where an arithmetic progression is used, this is simply known as a weighted moving average.
Exponential smoothing provides a forecast which is equal to the old one, plus or minus some proportion of the past
forecasting error(s). There are many variations of exponential smoothing, ranging from the very simplistic to the
more complex methods involving a greater number of data points and proportions of forecast errors. These
techniques, because of their statistical nature, lend themselves particularly to purely quantitative data, thus
neglecting other important market factors. A more realistic prediction is gained through the use of this technique
than moving averages because it allows for new factors and influences that have emerged in the most recent sales
period.
Trend projections: By fitting a trend line to a mathematical equation it is possible to make forecasts about future
sales using the equation. A firm may experience four typical growth curves. The danger of using the trend approach
alone is that when the analyst extrapolates, the assumption is that what affected sales in the past will continue to
affect sales in the same way over future periods. An adequate number of past measurements or observations are also
required for adequate statistical significance, but care must be taken not to include too many past observations or
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history will be too heavily weighted. Trend projections, like moving averages and exponential smoothing, are not
ideal for short or medium-term forecasts. They are more fitting for predicting a ‘broad sweep’ trend over the long
term.
The Box-Jenkins forecasting method is a special case of exponential smoothing in which the time series is fitted with
an optimizing mathematical model that attributes minimal error to historical data. Once the model has been
identified and constructed, the parameters must then be estimated. Of the available statistical routines, this is one of
the most accurate and flexible in that it can cope with almost any type of data pattern. However, accuracy involves
complexity, which, along with flexibility, results in a relatively high cost and the need for a skillful operator with
plenty of time to reap the full benefit s of this technique. As this method’s accuracy is limited to the short term it is
not very often used in practice, as there are many other cheaper and easier techniques that can be employed, and
although they do not give as much accuracy, these are often adequate for short-term decisions.
Spectral analysis: Incorporated in the classification of spectral analysis is the technique of Fourier analysis, where a
time series is mathematically decomposed into its constituent sine wave forms. Thus, from one time series, a
spectrum of time series are produced having the name ‘power spectrum’. The mathematical complexities of this
method put it beyond the use of all but the most competent analyst, whose skill and understanding of the technique
are imperative for its successful implementation.
X-11 technique: It is similar to spectral analysis in that it decomposes the original time series into a spectrum of
time series. However, it only separates out the seasonal and cyclical trends, and then fits a time series to the
remainder. It takes the best of spectral analysis and Box-Jenkins and combines them in one technique. Used by a
skilled analyst, it rates as one of the most effective short to medium term forecasting methods, with its ability to
identify turning points being a major asset.
Causal methods: These are still objective techniques, but they all involve some degree of subjectivity. One of the
best known causal methods is that of regression analysis, which attempts to assess the relationship between at least
two variables: one (or more) independent and one dependent, the purpose being to predict the value of the dependent
variable from the specific value of the independent variable. The basis of this prediction generally is historical data.
This method starts from the assumption that a basic relationship exists between two variables, and the least squares
method of estimation is used to formulate the mathematical relationship which exists. Various forms of regression
analysis exist, one being multiple regression analysis, where any number of variables can be considered at one time.
Another form is stepwise regression analysis, where only one independent variable is considered at one time. The
value of this technique is difficult to assess other than in individual cases, as the accuracy is dependent upon the
degree to which the independent variables explain characteristics of the dependent variable. This relationship may
vary considerably, but improved computing techniques have meant that the value of regression analysis is increased
dramatically on a cost/benefit basis.
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Company growth curves
Through techniques such as regression analysis, the Newspaper Society has established clear links between their
different life stage categories with levels of demand for a range of products. Unsurprisingly, Mother care shoppers
are almost four times more likely to have pre-school-aged children than the national average.
Econometric models are an extension of the regression technique whereby a system of independent regression
equations is evolved. These equations describe a particular sector of economic activity whose parameters are usually
estimated simultaneously. Generally, these models are relatively expensive to develop, the precise cost being
dependent on the amount of detail incorporated in the model. However, the inherent systems of equations in such
models express the causalities involved far better than an ordinary regression equation, and thus will predict turning
points more accurately.
Input-output models are particularly applicable in the field of industrial marketing since they are concerned with
inter-industry or interdepartmental flows of goods or services in a company and its markets. The technique is based
on the theory that the output of one industry comprises the basic inputs of products and materials of another, thereby
providing an inter-industry/interdepartmental flow of goods and services within the economy/industry. Major inputs
required for this type of model are not in the operation of the model, but in the collection and presentation of data.
This is because tables and government statistics showing the extent to which one industry obtains its basic inputs
from another are very broadly defined in standard industrial classifications.
Diffusion indexes use the many economic indicators available that represent general economic activity, or the
activity within a particular industry or product class. By formulating an index based on a certain combination of
these indices, an indication of future trends can be compiled. The accuracy and applicability of the index can be
tailored to fit specific requirements, such as predicting turning points in the short term by choosing appropriate
economic indicators. A forecasting technique of this nature can be accurate and relatively economical to apply in
certain industries and product classes.
Tied indicators are used where the sales of one product are closely related to sales of another product and the sales
trend of one product precedes that of the other. The preceding product is the indicator, and in the case of leading
indicator models, the sales of more than one product may be utilized along with indicators of general economic
activity. The leading indicators generally increase or decrease prior to the pending increase or decrease in the
dependent variable, and they usually take the form of a time series of economic activity. As a forecasting method the
real value of this type of model is its ability to predict turning points rather than as a predictor of future trends in
general.
Life cycle analysis is particularly applicable where there is no historical data. Sales of similar products are analysed
over time and usually a particular ‘S’ curve is found to apply for a certain product class. The phases of product
acceptance by various groups i.e. innovators, early adopters, early majority, late majority and laggards are essential
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to the analysis (Roger’s ‘Diffusion of innovations’). Consideration of the concepts of life cycle analysis by
individuals is often more valuable than a thorough detailed expert analysis, as the database for this type of model is
conceptually weak. A manager can readily appreciate that the product has to pass through the various stages in its
life cycle and subjective opinion might even be as accurate as any expert analysis.
2 Subjective methods
Market research involves studying a representative sample of a market involving a systematic formal procedure for
evolving and testing hypotheses about a market. For any valid information to be obtained, two reports should be
made over a period of time soone can be compared with the other and conclusions drawn. This necessitates the
collection of market data from questionnaires, surveys, published statistics, marketing intelligence reports and time
series analyses of market variables.
Due to the relatively high cost of this technique, it is only used in cases where there is a considerable financial risk,
which generally means it is restricted to large companies. The major application of this technique for sales
forecasting is in the area of predicting new product sales by investigating consumer reaction to a new product
concept or prototype.
The Delphi method is a technique that involves the marshalling of expert opinion to cope with the problems of
eradicating the ‘bandwagon effect’ of majority opinion.
Panel consensus is not unlike the Delphi method, except that the panels of experts are encouraged to communicate
and discuss matters in relation to the future prospects of what is to be predicted. Developed primarily for long-term
forecasting, this method is rarely used due to the problems of personal and social bias influencing the members of
the panel. Methods of this nature often do not arrive at a true consensus of opinion because of the effects of such
bias. Experts are not infallible. Predictions regarding the growth in access to the Internet in the UK proved to be too
conservative. Growth rates in the diffusion of this technology into UK households have been much higher than the
experts predicted.
Visionary forecast is where ‘visionary’ forecasters or ‘futurologists’ attempt to prophesy through personal opinion
and judgments. The method is characterized by subjective guesswork and imagination, and in the method is non-
scientific. A set of possible scenarios about the future is prepared by a few experts in the light of past events. At one
time, visionary forecasts were felt to be too subjective to be used in marketing decision making. However, as
mentioned earlier, the pace of chance and dynamic nature of the marketing environment have begun to make
companies appreciate some of the advantages of visionary forecasts even though they may sometimes be wrong.
Many believe that at least in part the success of Microsoft in being ahead of its competitors in many areas is down to
visionary forecasts. The company has a system whereby senior managers are encouraged to think about the future in
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the widest possible sense, including, for example, social trends and developments, and how these developments,
might potentially open up new opportunities for Microsoft for future product development.
Historical analogy is a comparative analysis of the introduction and growth of similar new products, and this bases
the forecast on similarity patterns. By comparing a new product with a similar previous new product, forecasts of
future sales performance can be made. This technique, however, is conceptually weak, as a true new product will not
be similar to any previous product, and even a new version of a product will probably not be similar enough to make
any comparison really valid.
Sales force opinion is where members of a sales force are in constant contact with customers, and are in a position
to predict their buying plans, attitudes and needs. An obstacle to gaining true estimates is that salespeople often tend
to be pessimistic, owing to their compensation system. It is common practice for salespeople to be remunerated
according to the degree to which they attain sales quotas which, in turn, are based on sales forecasts.
Thus it is in their own interest to underestimate future sales, resulting in low quotas and possibilities of high
compensation. However, Jobber and Lancaster5 provided evidence that being involved in the sales forecasting and
hence quota setting process can actually increase sales force motivation, therefore making the achievement of agreed
sales quotas more likely. This method has the advantage of being relatively cheap and easy to introduce and
administer through the existing sales organization.
There can be no general conclusion drawn as to which is the best forecasting technique to employ, but it is certainly
true that a forecast should consider both objective and subjective aspects. The analyst can only consider what is
required, and with the resources that are available, try to match them against a method that will provide the best
result. The techniques considered cover a range of objective and subjective, quantitative and qualitative techniques
that require various resources and data for their employment. It is the situation, within various constraints, that
should determine the method to be used for forecasting, not external constraints of cost, simplicity and personal
preferences.
In theory, a manager should use sales forecasting where the benefit is greater than the effort needed to generate the
forecast. The problem of measuring the effectiveness of a forecast is a major obstacle. A manager can accurately
cost the use of a forecasting technique in terms of current time and money, but not the benefits that could possibly be
enjoyed in the future by having a more accurate forecast. One of the problems the analyst has to face when preparing
a sales forecast for a product or product group is what units should be the units of measurement for future sales?
Even if a total market prediction is undertaken, the forecaster still has to determine what units to use for the forecast.
In most commercial situations this results in a choice between value and volume, dependent upon whichever is the
most consistent over time and likely to provide the most accurate measure of future sales, assuming data are
available in both forms.
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Volume measures are likely to be confusing where the product mix is not homogeneous, e.g. two products may have
similar physical characteristics that classify each of them as one single unit, but they may have widely differing sales
values. A volume measure may state a market of so many units, but the value of this market could vary to a large
extent as the value of the constituent units is not precisely known. However, volume forecasts have the advantage of
not being affected by inflation or deflation because once a physical unit is defined it is not affected by external
factors.
On the other hand, value predictions can be adjusted for variations in the buying power of a currency, but the
application of many of the available inflation/deflation indices is not representative of the same fluctuation
experienced by the product. Indices are invariably computed on the basis of price changes and reflect only one
aspect of inflation/deflation, neglecting to compare the product with other products. The consumer can be regarded
as having a disposable income for which many companies compete by means of their products, and a consumer’s
choice of product is a function of that consumer’s perception of the worth of that product in relation to other
products. A price increase index does not reflect the inflation /deflation experienced by a product in relation to other
products.
Should actual sales fall short of, or exceed, forecasted sales, management must investigate the reasons for the
difference, and from their inquiries determine whether or not it is necessary to adjust the sales forecasting technique.
Thus sales forecasting is a continuous process. The changing nature of the economic and physical environment
means that forecasts should be under continuous scrutiny and revision. Every projection can be improved, and in
competitive situations even fractional increases in accuracy can be translated into higher profits. It has already been
said that all sales forecasts are wrong; they only differ in the extent of their wrongness. Perfection is unattainable,
and the organization must decide what level of accuracy is required within pre-determined time and cost constraints.
Management must fix the level of inaccuracy that can be tolerated, and this will allow it to compare cost with value
when selecting the appropriate technique.
An illustration of how this notion of comparing the costs of different techniques of forecasting can be traded off
against their degree of accuracy in order to arrive at the best-value techniques.
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Module - II
INTRODUCTION
A distribution channel is the route through which goods or services move from the company to the customer or the
transfer of payment happens from the customer to the company.
Distribution channels can mean selling of products directly or selling through wholesalers, retailers etc. The same
applies for payment transfer from customers to company; it can move through a path or can be sent directly to the
company.
Distribution channels basically function to deliver goods from the manufacturer to the customer.
of the environment
economically
tandardize transaction
Objectives of Distribution Channels
Objectives of a distribution channel are planned as per the target of the enterprise and executed respectively. The
following are the various objectives behind the planning of distribution channels −
le
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have an efficient and effective distribution system for making the products and services available readily,
regularly, equitably and fresh.
Major Channels of Distribution
Here is a list of some of the major channels of distribution −
onsumer
alternative designs, evaluating them and selecting the one that suits the firm best
Classification of Wholesalers
A wholesaler purchases from the manufacturer and further distributes the product to customers or retailers.
Wholesalers can be classified into the following categories as per area of functioning –
The planning, implementation, and controlling of the physical flow of material or product from one point to another
to meet the customer requirements in the market is known as physical distribution.
Importance of Physical Distribution
The importance of physical distribution becomes significant when the manufacturers and market are geographically
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Steps in Designing a Physical Distribution System
To design a physical distribution system for a product, following steps need to be followed −
Step 1 − Defining distribution objective and services required for product distribution
Step 4 − Managing the cost of distribution to decrease cost without compromising on the quality of service
Step 5 − Building physical distribution system that is flexible for implementation of changes, if required
Designing of a physical distribution system involves these steps. It is necessary to consider all steps involved for
smooth distribution of goods and services.
Components of a Physical Distribution System
Physical distribution can be controlled and monitored by its different components. Each component should be
evaluated and managed in order to accomplish physical distribution without any problems.
The following are the different components of the physical distribution system −
planning of physical distribution system
warehousing on field
accounting transactions
unication at different levels
CHANNEL MANAGEMENT
INTRODUCTION
Exchange is the core aspect of marketing. Ownership of a product has to be transferred somehow from the individual
or organisation that makes it to the consumer who needs and buys it. Goods also must be physically transported from
where they are produced to where they are needed. Services ordinarily cannot be transported but rather are produced
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and consumed simultaneously. Distribution’s role within marketing mix is getting the product to its target market.
The most important activity in getting a product to market is arranging for its sale from producer to final consumer.
Other common activities are promoting the product, storing it, and assuming some of the financial risk during the
distribution process. A producer can carry out these functions in exchange for an order from a customer. Typically,
however, firms called middlemen perform some of these activities on behalf of the producer. In today’s economy,
most producers do not sell their goods directly to the final users. Between them and the final users stand a host of
marketing intermediaries performing a variety of functions and bearing a variety of names? Some intermediaries,
such as wholesalers and retailers buy, take title to, and resell the merchandise; they are called merchant middlemen.
Others, such as brokers, manufacturer’s representatives, and sales agents, search for customers and may negotiate on
behalf of the producer but do not take title to the goods; they are called agent middlemen. Still others, such as
transportation companies, independent warehouses, banks, and advertising agencies, assist in the performance of
distribution neither take title to goods nor negotiate purchases or sales; they are called facilitators.
Marketing-channel decisions are among the most critical decisions faced by management. The company’s chosen
channels ultimately affect all the other marketing decisions. A distribution system is a key external resource.
Normally it takes years to build, and it is not easily changed. It ranks in importance with key internal resources such
as manufacturing, research, engineering, and field sales personnel. It represents a significant corporate commitment
to large numbers of independent companies whose business is distribution, and to the particular markets they serve.
It represents as well, a commitment to a set of policies and practices that constitute the basic fabric on which is
woven an extensive set of long term relationships. Individual consumers and corporate buyers are aware that literally
thousands of goods and services are available through a very large number of diverse channel outlets. What they
might not be well aware of is the fact that the channel structure, or the set of institutions, agencies, and
establishments through which the product must move to get to them, can be amazingly complex.
Even before a product is ready for market, management should determine what methods and routes will be used to
get it there. This means establishing strategies for the product’s distribution channels and physical distribution. A
distribution channel consists of the set of people and firms involved in the transfer of title to a product as the product
moves from producer to ultimate consumer or business user. A channel of distribution always includes both the
producer and the final customer for the product in its present form as well as any middlemen such as retailers and
wholesalers. When a manufacturer delivers his goods and services to his final consumers and utilizes a set of extra-
corporate institutions to affect this distribution, that is called, a channel of distribution. Marketing channels or
channel of distribution can be viewed as sets of interdependent organizations involved in the process of making a
product or service available for consumption or use. From the outset, it should be recognized that not only marketing
channels satisfy demand by supplying goods and services at the right place, quantity, quality and price; but they also
stimulate demand through the promotional activities of the channel members, e.g., retailers, manufacturers’
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representatives, sales offices, wholesalers etc., constituting them. A channel of distribution, therefore, should be
viewed as a network that creates value for end-users by generating form, possession, time, and place utilities. A
major role that distribution plays in any economy is that it constitutes the process by which goods and services
become available for use or consumption. Producers of goods and services specialize in generating structural or form
utility for their products, in the sense that they create a unique set of demand satisfiers in the form of their offering.
The actual mass scale delivery of these offerings to the consuming public requires a different type of specialized
effort, which generates time, place and possession utility as well. In fact, the four types of utility (form, time, place,
and possession) are inseparable, there can be no complete product without incorporating all four into any given
object idea or service. Furthermore, one cannot obtain and consume a product unless the product is transported to a
place where one can get access to it, stored till one is ready to buy it and ultimately exchange for money so that one
can gain possession of it. Rarely are the producers or manufacturers in a position to do all these tasks by themselves.
A set of intermediaries specializing in some or all of these tasks, therefore, need to be utilized to make the product or
service available for consumption. As marketers continue to face hostile, unstable, and competitive environment,
distribution will play an increasingly important role. Companies are already moving into new distribution channels
that match up with market segments more precisely and effectively. Executives will pay more attention in the future
to the distribution channels they select to gain a competitive advantage over other companies or competitors.
In order to understand the marketing channel, it is important to know the reasons for emergence of distribution
channels. The primary justification of their existence is economic. There is nothing to prevent a producer from
distributing his goods or services by himself. In fact, by using intermediaries, he loses a significant degree of control
over the conditions of sale to the final consumer and incurs the cost of margins to be paid to the middlemen. Why
then, do they use intermediaries? The answer lies in the economy and efficiency generated through division of
labour and specialization. Channels of distribution in any given economic system emerge because of the following
reasons:
Intermediaries arise in the process of exchange and they can improve the efficiency of the process. Marketing
activities revolve around the satisfaction of needs and wants through the exchange process. In order to facilitate
exchange, barriers of exchange need to be successfully overcome. The first barrier for smooth exchange results from
the fact that sources of supply and centres for demand are located at widely dispersed location. Since sources of
supply and centres of demand are dispersed geographically throughout the country, there arises the need for physical
movement. This need for physical movement is further complicated by the fact that consumers, at varying distance
from the manufacturers, require intermittently only small quantities of product which if transported to individual
consumers would make the transportation cost prohibitive. This problem is referred to as spatial discrepancy
between production and consumption. The second barrier to smooth exchange process arises because of time of
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production and the time at which the goods are needed for consumption or use may differ widely. Mass consumption
products have to be produced and stocked for in advance of consumption. This discrepancy, referred to as temporal
discrepancy between time of production of output and its consumption, creates requirement of inventory stocking.
The third barrier arises from the variation in quantities and assortment demanded. Manufacturers typically produce
large quantities of an item or a class of items while the consumers purchase only a limited quantity of a wide variety
of items at a time. While producers specialize in production of a few products, the consumers need a very wide
variety of items to fulfil their needs and wants. Therefore, facilitate the exchange task, specific quantities and unique
assortments must be built up from the range of products produced. This problem signifies the discrepancy of
quantity and assortment in the exchange process. The last barrier to exchange process comes from the intention to
buy. The fact that the right products are available in the right quantities and desired assortments at the right place is
no guarantee that desired exchange would take place. This situation necessitates that the suppliers of product
offerings and utilities try to influence the exchange process towards their own market offerings. Marketing
intermediaries emerge because they perform a very effective role in overcoming these barriers to the exchange
process.
Channel intermediaries arise to adjust the discrepancy of assortment through the performance of the sorting process.
In addition to increasing the efficiency of transactions, intermediaries smooth the flow of goods and services by
creating possession, place and time utilities. These utilities enhance the potency of the consumer’s assortment. One
aspect of this smoothing process requires that intermediaries engage in a sorting function. The sorting function is
performed by intermediaries that include the following activities:
• Sorting out: This involves breaking down a heterogeneous supply into separate stocks that are relatively
homogeneous.
• Accumulation: It concerns bringing similar stocks from a number of sources together into a larger homogeneous
supply. Wholesalers accumulate varied goods for retailers, and retailers accumulate goods for their customers.
• Allocation: It refers to breaking a homogeneous supply down into smaller and smaller lots. Goods received in truck
loads are sold in case lots. A buyer of case lots in turn sells individual items. The allocation process generally
coincides with geographical dispersal and successive movement of products from origin to end consumer.
• Assorting: This is the building up of an assortment of products for resale in association with each other.
Wholesalers built assortment of goods for retailers, and retailers build assortment for their customers.
(c) Routinization
Marketing agencies hang together in channel arrangements to provide for the routinization of transactions. Each
transaction involves ordering, valuating of, and paying for goods and services. The buyer and seller must agree to the
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amount, mode and timing of payment. The cost of distribution can be minimized if the transactions are routinized;
otherwise, every transaction is subject to bargaining, with an accompanying loss of efficiency. Moreover,
routinization facilitates the development of the exchange system. It leads to standardization of goods and services
whose performance characteristics can be easily compared and assessed. It encourages production of items that are
more highly valued. In fact, exchange relationships between buyers and sellers are standardized so that lot size,
frequency of delivery and payment, and communication are routinized. Because of routinization, a sequence of
marketing agencies can perform more efficiently together in a channel.
(d) Searching
Buyers and sellers are constantly engaged in search for consummation of desired exchanges. In other words, both
buyers and sellers are engaged in double-search process in the market place. The process of search involves
uncertainty because producers are not certain of consumers’ needs and consumers are not certain that they will be
able to find what they want. Marketing channels facilitate the process of searching. For example, products such as
over the counter drugs are widely available through a wide variety of outlets like general stores, drug stores, super
markets and provisional stores.
Manufacturers, wholesalers, and retailers as well as the other channel members exist in channel arrangements to
perform one or more of the functions such as, order processing, carrying of inventory, demand generation, physical
distribution, etc. At any given time the functions performed by the channel members are more basic than institutions
themselves. Therefore, while channel institutions can be eliminated or substituted, the functions performed by them
cannot. The functions that need to be necessarily performed in a channel system include transfer of ownership
through selling, transfer of possession through transportation; order processing, inventory carrying, storage, sorting,
negotiation and promotion. The same function in a given channel system may be performed at more than one level
of the marketing channel; the work load for the function is shared by the members at all levels. For example,
manufacturer, wholesalers, and retailers may all carry inventory. This duplication and redundancy in the channel
may increase the distribution cost. However, the increase in cost is justifiable to the extent that it may be necessary
in order to provide goods to customers at the right quantity, time, and place. Flow in channels is referred as a set of
functions performed in sequence by channel members. Therefore, the term flow is descriptive of movement. Figure 1
depicts important marketing flows. Physical possession, ownership, and promotion are typically forward flows from
producer to consumer. Each of these moves down the distribution channel- a manufacturer promotes its product to a
wholesaler, which in turn promotes it to a retailer, and so on. The negotiation, financing, and risk flows move in both
directions, whereas, ordering and payment are backward flows.
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Figure-1: Marketing Flows in Channels
There are two types of participants in the channel. The primary participants in the channels of distribution are the
manufacturer, the middlemen i.e. the wholesalers, manufacturers’ agents and retailers. The secondary participants
include the facilitating agencies like the financial institution, public warehouses, public carriers and the advertising
agencies.
Wholesalers: Wholesalers are defined as all establishment or places of business primarily engaged in selling
merchandise to retailers to industrial commercial, industrial institutional or professional users, or to other
wholesalers or acting as agents in buying or selling merchandise to such companies. Two classes of wholesaler
establishments can be clearly distinguished. These are the merchant wholesaler and the manufacturers’ agents. The
former are characterized by the fact that they take title to the goods they distribute. Manufacturer’s agents buy and
sell on behalf of the manufacturer and nowhere in the exchange process take title to goods. Merchant wholesalers
may be of several types for example commission merchants, selling agent, buying agents cash and carry wholesalers
etc. Retailers: Retailers are all the establishments engaged in selling merchandise for personal or household
consumption. They are distinguished from wholesalers by the fact that they sell primarily for ultimate use. Although
wholesalers may also sell to ultimate consumers, this selling activity does not form the bulk of their operation. A
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variety of types of retail establishments exist in the Indian market today ranging from sophisticated departmental
stores and supermarkets to limited time stores catering to a few customers and carrying limited merchandise.
Financial Institutions: Financial institutions provide the essential finances needed to finance primary participants of
the channel system. A very significant financing need relates to the provision of capital for inventories, which must
be financed at many levels as inventories move from production to consumption.
Public warehouses: The public warehouses rent space to owners of inventory thereby eliminating the need to invest
in storage facilities. For agricultural products the both government owned or privately owned warehouses are
extensively used. Public carriers or transport carriers: Transportation forms a cost center in distribution
management. To a large extent distributive effort is dependent upon the services of public carriers like transporters
and railways to affect the transfer of physical possession of goods. The efficiency of the transportation system
influences the size of inventories which must be maintained channel system. If a reliable transport system is readily
available, products can flow through the channel at a constant rate, thus minimizing the need for maintaining large
inventories.
Advertising agencies: These facilitating agencies help in facilitating negotiation, by creating awareness of products
and stimulating demand. They function at each level of the channel for producers, wholesalers and retailers. Without
the kind of information given through these agencies at various levels, seeking and selecting product sources would
become a tedious task for buyers. Advertising agencies, therefore, help in the search process.
A company wants a distribution channel that not only meets customers’ needs but also provides an edge on
competition. Some firms gain a differential advantage with their channels. Marketers should keep in mind the
following points while designing distribution channels.
A channel strategy should be designed within the context of the entire marketing mix. First the firm’s marketing
objectives are reviewed. Next the roles assigned regarding product, price, and promotion are specified. Each element
may have a distinct role, or two elements may share an assignment. A company must decide whether distribution
will be used defensively or offensively. Under a defensive approach, a firm will strive for distribution that is as good
as, but not necessarily better than, other firms’ distribution. With an offensive strategy, a firm uses distribution to
gain an advantage over competitors.
The next decision relates to intensity of distribution, or the number of middlemen used at the wholesale and retail
levels in a particular territory. The target market’s buying behaviour and the product’s nature have a direct bearing
on this decision.
The last decision is selecting specific firms to distribute the product. When selecting specific firms to be part of a
channel, a producer should assess factors related to the market, the product, its own company, and middlemen. Two
additional factors are whether the middleman sells to the market that the manufacturer wants to reach and whether
the middleman’s product mix, pricing structure, promotion, and customer service are all compatible with the
manufacturer’s needs.
Marketing channel decisions are among the most crucial decisions company has to take. The company’s chosen
channels intimately affect all the other marketing decisions. The company’s pricing depends whether it uses
extensive distribution or selective distribution. Likewise sales force and advertising decisions depends on how much
training and motivation the intermediaries need. Effective channel decision means that- management must take into
consideration a number of constraints to determine how they are likely to influence various channels structure. It is
seen that each manufacturer selects its intermediaries in the context of constraints stemming from market, product,
customer, company, etc.
The Market: Customer buying habits is one of the most important aspects of the marketing process. If a customer is
used to buying a particular thing from a particular place, it is difficult to change his mindset. It is seen that the
market size and location play an important role in distribution strategy of the company. If the buyers are
concentrated in a particular area, then distribution can be achieved with few middlemen, but if buyers are scattered,
then many middlemen are needed to cover up the area.
The Product: Product characteristics are important elements which should be taken into consideration for selection
of intermediaries among few important characteristics of a product, its nature, value, degree of differentiation from
competitive products. The products which physically deteriorate fast and those which experience rapid fashion
obsolescence are considered to be highly perishable and require more direct marketing because of the possibilities of
delay and repeated handling of the product, which may lead to its deterioration. In case of non-perishable products,
company may go in for indirect channel. It is seen that higher the cost per unit of the product larger the investment to
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keep the inventories in the market. In this case manufacturers may go in for intermediaries to share the responsibility
of marketing the product to ultimate user. In case of low unit value products, companies choose indirect channels,
unless value is high enough involving high profit margin to support direct channels. For marketing highly technical
products, companies employ technically qualified sales and service personnel for product demonstration, pre-
purchase persuasion and post-purchase sales service. Brand loyalty is highest in speciality goods and lowest in
convenience goods. In case of low brand loyalty products, substitutability is very easy, and company has to employ
intensive distribution. In order to provide support for such products, the company offers more than normal margins
to its intermediaries. Some companies even use selective or exclusive distribution system to provide necessary
channel support. Customer service is an important ingredient of the physical distribution system. It can be used to
differentiate the products, and may influence the pricing policy of the market, if customers are willing to pay more
for better service. Product information means company’s ability to provide different types of information to the
customers. Customers are willing to know about the status, confirmation of the orders or substitution of the order, or
any other relevant information regarding products. The company should provide these product related information to
the customer. The ability of channel member to cooperate in this regard is also a factor in channel design. It refers to
the time required from placement of orders to the receipt of the same by the customer and the ability of the supplier
to meet consistently the targeted order cycle time. It is seen that most customers generally prefer consistent service
to fast service, because in the former case it allows them to plan inventory levels to a much greater extent than is
possible with a fast and highly variable order cycle.
Company’s Characteristics: Company’s characteristics are the important element affecting channel selection
decisions. It is generally seen that the size of company plays an important role in deciding the size of the market,
thereby evolving a desired channel of distribution. Often it is stated that the greater the financial resources available
to company, the lower is its dependence on intermediaries. Though it is not a hard and fast rule, but in some cases
like industrial and electronic products the company generally employs its own sales and support services. Even small
firms with limited market coverage also sell the products directly.
Environmental Characteristics: When the environmental characteristics such as economic conditions are in
depressed form, manufacturers want that their product should move to the market in the most economical way. In
other words, economic environment has direct effect on channel selection. In this case the company has to choose
shorter channel to avoid extra cost to be incurred on marketing the product. Since the functionality of the
intermediaries is influenced by the performance of non-member participants, the company should analyze the impact
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of economic, competitive, technical and legal environmental factors especially since each of them is dynamic in
nature.
One of the most significant recent channel developments consists of vertical marketing system, which has emerged
to challenge conventional marketing channels. A conventional marketing channel comprises an independent
producer, wholesalers, and retailers. Each is a separate business entity seeking to maximize its own profits, even if it
reduces for the system as a whole. No channel member has complete or substantial control over the other members.
Conventional channels are highly fragmented networks in which loosely aligned manufacturers, wholesalers, and
retailers bargain with each other at arm’s length, negotiate aggressively over terms of sale, and otherwise behaved
autonomously.
A vertical marketing system (VMS), by contrast, comprises the producer, wholesalers, and retailers acting as a
unified system. Any one channel member owns the others or franchises them or has so much power that they all
cooperate. The vertical marketing system can be dominated by the producer, the wholesaler, or the retailer. VMSs
are professionally managed and centrally programmed networks, pre-engineered to achieve operating economies and
maximum market impact. VMSs came into being to control channel behaviour and eliminate the conflict that results
when independent channel members pursue their own objectives. They achieve economies through their size,
bargaining power, and elimination of duplicated services. Vertical marketing systems are of three types, namely
corporate, administered and contractual. These are briefly described below:
(i) Corporate Vertical Marketing System (VMS): In the corporate vertical marketing system, successive stages from
production to distribution are under single ownership of any of the channel members. Vertical integration is achieved
through forward or backward integration. For example, Bata and Woodlands own their shoe shops across the country
while also manufacturing footwear. Likewise, Raymonds owns some retail stores across the country while also
producing textiles and woolens. (ii) Administered VMS: Unlike the corporate VMS, administered VMS seeks to
control successive stages from production to distribution not through ownership but through the size and power of
one of the channel members. Brand leaders or firms that are market leaders are able to obtain trade cooperation.
Firms like Hindustan Lever, Lipton, Proctor and Gamble, Nestle, TELCO, Maruti and others are able to get shelf
space, promotional support and also support for price policies from the trade, mainly because their brands are market
leaders.
(iii) Contractual VMS: This consists of independent firms at different levels of production and distribution
integrating their programmes on a contractual basis to obtain larger economies of scale and, or sales impact than they
could achieve alone. Some are wholesaler sponsored voluntary chains like the ones in vegetable and food markets,
others, retailer sponsored like Apna Bazaar in Mumbai (retail cooperatives) and still others are franchises like Pepsi
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or Coke franchising a firm to produce and market their range of soft drinks in different areas. This form of VMS has
a great future as synergies are possible.
CONFLICT MANAGEMENT
No matter how well channels are designed and managed, there will be some conflict for no other reason than the
interests of independent business entities do not always coincide. To manage channel conflict marketer must
understand- the type; nature or the cause; and magnitude of the conflict. He should also appreciate that conflict
cannot be totally eliminated. It can only be minimized.
In any channel arrangement there can be three types of conflict— vertical level conflict; Horizontal level conflict;
and Multi-channel level conflict.
(i) The Vertical Level Conflict: Vertical level conflict occurs when the channel member at one level is in conflict
with another member at the next higher or lower level. For example, a conflict between the wholesaler and the
manufacturer is a vertical level conflict or the major retailers in the town conflicting with the distributor over
entitlements.
(ii) Horizontal Level Conflict: Conflict at the same level between channel members is called horizontal level conflict.
Hence, inter stockiest conflict or conflict at the retail level among retailers on issues like pricing and territory
jumping are examples of horizontal level conflict.
(iii) Multichannel Level Conflict: Sometimes the middlemen come in conflict with the manufacturer, using both
direct and indirect means of distribution. Such a conflict is called multichannel level conflict. For example, the firm
may have its own franchise outlet or its own shop in an area, where, it may also be distributing the product through
established middlemen. The former is direct distribution while the latter is indirect distribution. The conflict may
occur when the franchise prices its products lower than the middlemen, wholesaler or dealer, or when the firm retails
a larger range of products through its own outlet than the wholesaler or stockiest. Likewise conflict occurs when an
order has been obtained with the joint efforts of the company’s sales force and dealer.
Channel conflict occurs largely due to financial and non-financial reasons. These in turn may be traced to the
following causes:
(i) Goal incompatibility: A major factor causing conflict between manufacturers and wholesalers is the perceived
goal incompatibility between them. For example, while the manufacturer perceives his goals to be market share and
profit maximization in the long run, wholesalers perceive their goal to be sales maximization and thereby profit
maximization. The latter even prefer to work at higher margins and on short-term profitability. This makes the
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manufacturer accuse the wholesaler of being “fair weather partners” and the wholesaler accuses the manufacturer of
squeezing his margins. This is typically what happens with all large manufacturers and their channel members today.
(ii) Role ambiguity: Many a time conflict has occurred because of role ambiguity. This is a common cause of conflict
in multichannel conflict. For example, the role of the manufacturer’s sales force and dealer in selling products to
major accounts or institutional customers in the territory is often unclear in some companies. This often creates
conflict in these companies, relationship with the channel. A well-known automobiles component manufacturer had
such a conflict when one of its distributors started directly selling to retailers, through his mobile van bypassing large
wholesalers in the territory. The wholesalers revolted and started pushing the competitors’ products. Lack of role
clarity of any of the channel members can be a source of potential conflict.
(iii) Differences in Perceptions of the Market: Different perceptions of the market and economy may also create a
conflict between the manufacturer and middlemen. For example, a manufacturer may perceive an opportunity in the
booming Indian middle class market and, hence introduce new products, multiple brands and even appoint
wholesalers in distant areas. The existing dealers of this firm may not see the picture this way and may perceive the
appointment of multiple dealers and downsizing their (former dealers) territory as dilution of their control over the
market.
This refers to the seriousness of conflicts. At times the conflict may not be of a magnitude demanding the
manufacturer’s attention. For example, inter-dealer conflicts in the territory over prices or territory jumping. But
when the conflict assumes significant magnitude (this is often reflected by the impact the conflict has on the
manufacturer’s sales and market share in the territory), the manufacturer must take the initiative to resolve it. For,
ultimately it is the manufacturer who is the leader of the channel. Moreover, a serious conflict will affect his market
share in the territory.
To minimize the conflict, the manufacturer may take the following steps:
(i) Communication: An effective way to minimize channel conflict is to have regular communication between the
manufacturers and the channel members. Most Chief Executives today spend time with their channel members to
understand market dynamics and communicate brand’s positioning strategies. These meetings are also used to
resolvechannel member’s problems. While these are many a time informal meetings some companies have an in-
house newsletter which they send to all their major dealers. This newsletter informs channel members of happenings
in the market place and also the company’s perspective of the products and markets.
(ii) Dealer councils: Another way to resolve conflict is through formation of dealer councils. Such council can
resolve issues in horizontal level conflicts and even vertical conflicts. The manufacturer continues to play the key
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role in these councils. Often the criticism or fear voiced in this regard is that such councils can provide a platform for
dealers to jointly voice their grievance against the manufacturer. These councils unite dealers. But, if the
manufacturer can keep the councils focused on market leadership and maximization of returns on investment, and is
also willing to accept constructive suggestion, the dealer council can become an effective tool for intervening in the
market place.
(iii) Superordinate goals: Another way to resolve channel conflict is to evolve superordinate goal of maximizing
customer satisfaction. If the channel members can be motivated to perceive customer satisfaction as the ultimate goal
of all members in the channel and this in turn leading to profit maximization of all concerned, then much of the
conflict can be resolved. Often superordinate goals development is easier only when the threat from the other firms
is high.
(iv) Arbitration and mediation: Often, the conflict among channel members may be resolved only through arbitration
and mediation. Generally in the intra-middlemen conflict-horizontal or vertical (wholesaler vs retailers)- the
manufacturer may arbitrate or mediate. But, when it is between the manufacturer and dealers, arbitration or
mediation may be done by independent individuals or institutions like a court or government agency like the drug
controller mediating between pharmaceutical companies and their stockiest.
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outlets contributes 75% of your total sales, in that case weighted distribution would be 75%. Numeric distribution
gives you an idea of the reach of distribution whilst weighted gives you an idea of the quality of distribution.
Weighted Distribution is an additional measure of product presence in stores that gives an opportunity to understand
the quality of distribution (or distribution efficiency). It is a percentage of stores that sell (stock*) a certain product
from the total number of stores, but (unlike Numeric Distribution) taking into account the weight of outlets.
Usually the Weighted Distribution is an additional measure of product presence in stores that gives an
opportunity to understand the quality of distribution (or distribution efficiency). It is a percentage of stores that
sell(stock*) a certain product from the total number of stores, but (unlike Numeric Distribution) taking into account
the weight of outlets.
Usually the weight is based on sales volume of the category (Standard Weighted Distribution), however can also be
based on the volume of specific segment (Product Group Weighted Distribution) or All Commodity Value (ACV
Weighted Distribution).
Standard Weighted Distribution formula:
Weighted distribution = Sales volume of the category in stores which sell(stock*) a product ÷ Total Sales
Volume of the category in all stores
Example of difference between Numeric and Weighted Distribution:
Store #1 1 10
Store #2 1 20
Store #3 0 10
Store #4 0 50
Store #5 1 20
Total 3 110
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A retailer sells toys after buying from wholesaler who in turn buys from manufacturer. Wholesaler gets 20% on its
selling price, retailer gets 40% markup on costs. The manufacturer sells the toy at Rs. 50 to wholesaler. What is the
price at which consumer gets the toy?
KEYWORDS
Channel of distribution: The complete sequence of marketing organizations involved in bringing a product from
the manufacturer to the ultimate consumer.
Merchant intermediary: An intermediary who takes the title of the product such as wholesaler or retailer.
Agent intermediary: An intermediary who does not owns a title. He only brings together the sellers and buyers.
Vertical marketing system: A network of vertically aligned organizations that are professionally managed and all
the activities of all the intermediaries move in the same direction.
Franchise: It is a type of contractual agreement between an original manufacturer and a franchise by which the
franchisee distributes the franchisor’s product.
Channel conflict: When there is a kind of dispute between distribution channel members.
SELF ASSESSMENT QUESTIONS:
1. What do you mean by marketing channel? Discuss in brief the functions and flows in marketing channel.
2. Discuss in brief the concept of ‘Vertical Marketing System’ wit suitable examples.
3. Write in brief the causes of channel conflict, its type and methods to minimize it. 4. Write a detailed not on the
reasons for emergence of channels of distribution. 5. “You can eliminate middlemen, but you cannot eliminate
essential distribution activities”. Elaborate.
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Module – III
DEFINITION OF LOGISTICS
According to the Council of Logistics Management (CLM) “Logistics is the process of planning, implementing and
controlling the efficient and effective flow of goods, services and related information from point of origin to point of
consumption in order to meet customer requirements”.
1. Rapid Response: Rapid response is concerned with a firm’s ability to satisfy customer’s requirement in a
timely manner. Instead of stocking the goods and supplying on demand, orders are executed on shipment-to-
shipment basis. Here IT helps to postpone the logistical operations to the latest possible time and then
execute rapid delivery as when needed by customer.
2. Minimum Variance: Variance is any unexpected event that disrupts system. Logistical operations are
disrupted by events like delays in order receipt, disruption in manufacturing, goods damaged at customer’s
location and delivery to an incorrect location etc. Traditional solution to deal with variance was to keep
safety stock or use high cost transportation. Such practices were expensive and risky and thus have been
replaced by information technology to achieve positive logistics control.
3. Minimum Inventory: The objective of minimum inventory involves asset commitment and inventory
turnover. Asset commitment is the financial value of inventory developed throughout the logical system and
inventory turnover is the rate of inventory usage over time. The objective is to reduce the inventory without
sacrificing customer satisfaction.
4. Movement Consolidation: One of the most significant logistical costs is transportation. Transportation cost
depends on type of product, size of shipment and distance. Movement consolidation means grouping small
shipments together in order to reduce transportation cost.
5. Quality Improvement: Logistics is a prime part of developing and maintaining continuous TQM
improvement. If the quality of product fails, logistics will have to ship the product out of customer’s
premises and repeat the logistical function again. This adds to cost and customer dissatisfaction.
6. Life-Cycle Support: Life cycle support is also called cradle-to-cradle logistical support. It means going
beyond reverse logistics and recycling to include the possibility of after sale services, product recalls and
product disposal. This means that firms must consider how to make a product and its package (cradle) and
the how to remake and reuse them (to cradle). E.g. Cold drink industries use their glass bottle again and
again whereas the cans are reused in making pf paper dishes.
TYPES OF LOGISTICS
1. Reverse Logistics
Reverse logistics is also known as Product Recall. It may be defined as a process of moving goods from their place
of use, back to their place of manufacture for re-processing, refilling, repair, and recycling or waste disposal.
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1. Rigid quality standards- it is critical in case of contaminated products, which can cause environmental
hazard.
2. Rigid laws prohibiting unscientific disposal of items
3. Rigid laws making recycling mandatory
4. Transit damage – e.g. leaking containers containing hazardous material.
5. Product expiration.
6. Erroneous order processing by supplier
7. Exchange of new product for the old ones.
8. Return for repair or refill.
2. Inbound Logistics
All the activities related to the material movement till the dispatch of the products out of the factory gate are
called as inbound logistics activities.
Creation of value in the products depends upon availability of inputs on time. Making available these inputs
on time at minimum cost is the essence of Inbound Logistics.
Activities of a procurement performance cycle come under the scope of Inbound Logistics. They are
transportation during procurement operation, storage, handling and overall management of inventory of
inputs.
3. Outbound Logistics
All the activities in which the value added goods are to be made available in the market for customers are
called as outbound logistics activities.
Success of the firm depends upon the supply of products to the customer on time. Supplying the products of
firm at marketplace at minimum cost is the essence of Outbound Logistics.
Activities of distribution performance cycle come under the scope of Outbound Logistics. They are order
management, transportation, warehousing, packaging, handling etc.
In order to keep the costs of inbound and outbound logistics activities under control, an outside agency appointed to
perform these logistics functions is called “Third Party Logistics”.
Forth Party Logistics is a complete outsourcing of manufacturing and logistics functions including selection of Third
Party service provider.
Material Requirement Planning is an integrated approach to the inventory management, taking into the account
purchase and production programme. This is software that converts the Master Schedule to the requirement of raw
material, components, subassemblies, etc.
Structure of MRP
1. Master Schedule – This is made up from sales forecast by marketing department and the actual orders
already received by the company. It indicates which product is required to be delivered to the customer and
when.
– The MRP software processes the data and releases the output for ready use of the management in the following
way:
1. For purchase components it releases Purchase Request, Purchase Order etc in the form of soft copy
Benefits of MRP
All the documents like purchase order, production order get ready as per required time.
1. All information is ready on the screen at any time, which is duly updated.
2. Making changes manually in Master Schedule is difficult task; this is done by MRP easily and accurately.
3. It prepares the reports related to inventory status, production outputs, latest sales figures.
4. MRP calculates and maintains an optimum-manufacturing plan, which will reduce cash flow and increase
profitability.
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5. Reduced inventory levels
DRP
Distribution Resource Planning is concerned with the distribution of material, warehouses, and transport
arrangements. It is logically evolved from MRP and hence it is more recent concept. DRP needs demand forecasts
for each warehouse and their current inventory level. MRP is concerned with inbound logistics whereas DRP is
concerned with outbound logistics activities.
Benefits of DRP
MRP DRP
Coordinates scheduling and integration of materials Coordinates demand between outlets and supply sources
into finished goods
Controls inventory until manufacturing and Controls inventory after manufacturing and assembly of
assembly is complete. finished goods
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CUSTOMER SERVICE (CS)
Definition: Customer Service is defined as a process of providing significant value added benefits to the supply
chain in a cost-effective way.
A] Availability: Availability is the capacity to have inventory when it is desired by a customer. The most common
practice to achieve availability is to stock inventory in anticipation of customer order. Availability is based on
following three performance measures:
1. Stockout Frequency: Stockout frequency is a measure of how many times demands for a product exceed its
availability. The aggregation of stock outs of all products indicates how well a firm is able to provide basic
service commitments.
2. Fill Rate: Fill rate measures the magnitude of stockouts over time. E.g. if a customer orders 50 units and
only 47 units are available, the order fill rate is 94 % (47/50). Just because a product is out of stock does not
mean that a customer requirement is going unsatisfied. Before a stockout affects service performance it is
necessary to forecast customer requirements then to identify the product unavailability and to determine how
many units customer wanted. Stockout frequency and fill rate are inversely related through order quantity.
i.e. if a firm places larger order the stockout frequency will be less and the expected fill rate will be higher.
3. Orders Shipped Complete: It is a measure of time when a firm received the entire inventory ordered by a
customer. It indicates the potential times that customers will receive perfect orders.
B] Operational Performance
1. Operational Speed: Performance speed is the interval between placement of order and shipment arrival.
Depending upon the logistical system design, the speed can be as short as a few hours or as long as several
weeks. In critical situation service can be performed in a few hours by special delivery or on overnight basis.
But every customer does not need maximum speed if it results in increase in logistics cost.
2. Operational Consistency: Consistency refers to a firm’s ability to perform at the expected delivery time.
When a form fails to be consistent it forces customers to carry extra safety stock to protect against possible
late delivery.
3. Operational Flexibility: Flexibility refers to a firm’s ability to handle extraordinary customer service
requests. The events that requires flexibility are:
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C] Reliability
Reliability refers to logistics quality i.e. ability of firm to comply with levels of planned inventory availability and
operational performance. Reliability also includes firm’s capability to provide accurate customer information
regarding logistical operations and order status.
INTRODUCTION
Transportation is an essential and major sub function of logistics that creates time and place utility in goods.
Transportation management covers the area of Shipment Scheduling / Routing, Frei1ht Cost, Carrier Selection,
Shipment Tracking and Parcel Management. It helps us to make the best use of available resources and keeps
informed on all transportation process.
COST STRUCTURE
Basically there are two cost contents involved in transportation process: (Diagram 79)
1. Fixed Cost
Fixed cost is the expenses related to the procedural part like cost of documents, salaries of personnel, rent of the
office etc. As per the product needs and the environments, loading and unloading charges are included in fixed cost.
1. Variable Cost
Among all logistic factors variable cost consumes main expenses. It concentrates on the product related and market
related aspects:
– Size / Shape – Transportation cost per unit weight decreases with the size of the consignment.
– Space filling capacity – e.g. space-filling capacity of iron flat is more than that of chairs or tables.
– Difficulties in handling – e.g. product like electronic items like TV are difficult to handle since they are easily get
damaged.
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ii) Market related aspects are:
– Distance to be traveled to customer – The cost decreases with increase in the distance.
– Intra-mode / Inter-mode
– Freight Traffic
– Season Effect
FUNCTIONS OF TRANSPORTATION
1. Product Movement: Transportation facilitates the movement of raw material, semi-finished items, WIP,
finished goods, packaging material, rejected material.
2. Product Storage: Transportation provides temporary storage in stationary vehicles or Vehicles kept moving
on a circuitous route. Though the product storage is expensive in a transport vehicle, but this is adopted in
case of:
In selection of a transportation mode, the transportation managers consider the following criteria.
1. Cost: It includes freight charges, warehousing, buffer stick, broker fees, custom charges octroy etc.
Generally cost per mile is considered which is should be economical.
2. Transit Time: It is the time from the shipment of goods to the receipt of goods at the destination. It should
be as less as possible.
3. Speed: Methods of working for the delivery of goods to the customers place should ensure the on time
delivery.
4. Safety: Safety of goods at every level from start to the end of delivery should be ensured. Proper packaging
should be done to avoid any damage to quality or quantity of goods.
5. Claims Record: Claims against damages, pilferage or theft of goods should be available. Though the
supplier gets money back but the customer remains unsatisfied in such cases.
6. Responsiveness: Transporter has to respond the changing needs of the supplier and he should be able to
handle various products.
7. Capability: Transporter should be in a position to deliver the goods at any remote areas. He should have
large number of geographic service points.
8. Accessibility: Transporter should be easily accessible by providing door-to-door pick up and delivery.
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9. Reliability: It is the meeting of schedule on time as per requirement of the customer. Faster the mode
reliability increases, but it has to be weighed against cost.
MODES OF TRANSPORTATION
1. Airlines
Air transport is mainly used for international transport and in emergency rather than in normal times.
Advantages:
4. It overcomes the hassle and cost of setting up depots and service centers overseas.
6. Makes test marketing easy – Products can be shipped directly from the factory
Disadvantages:
2. Water Transport
This mode of transportation is the link between countries separated by water. Water transport is classified into deep-
water transportation and inland water transportation on lakes, rivers or canals.
Advantages:
1. Water transport has low capital costs and low operating costs.
2. Heavy and bulk goods of large quantities are transported by this mode.
Disadvantages:
4. Deep-water ships designed for ocean and lakes are limited to shallow-water ports.
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5. Shallow water vessels like diesel-towed barges are flexible but are limited by their range of operations and
speed.
3. Railways
Advantages:
Disadvantages:
1. Unreliable mode – especially for high value goods and directly usable consumer goods.
4. Rail network needs a high capital investment due to right of way, switching yards, terminals.
4. Roadways
Advantages:
1. Higher operating costs – due to fuel requirement and higher labor requirement.
2. Occasional fuel shortages – leads to delay in delivery.
3. Strikes of carriers – due to disputes with government making the transportation idle.
4. Limited availability of trucks poses a constraint.
5. Octroi – posts are notorious for delays and harassment of carriers.
6. Restrictive permits for licenses – imposed by the government all over the country.
Pipeline
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Pipeline mode of transportation facilitates the movement of liquids like oils; crude petroleum products and water etc.
In India more than 5,000 km of pipeline exists for crude and petroleum products. Slurries, gases, vapors and solids in
powder form are also transported in pipelines.
Advantages:
1. Pipelines are reliable mode – pilferage and loss of product is not possible.
2. Pipelines have low energy consumption.
3. Pipelines being under ground, space occupation is minimal.
4. Pipelines operate all the time except when it is shut down for maintenance.
5. No need to bring back empty container or wagon.
Disadvantages
1. Highest fixed costs – due to lying of pipeline but lowest operating costs.
1. Pipelines are fixed – so the accessibility of product is limited on the rout.
2. Only liquid commodity can be transported.
FACILITIES LOCATION DECISIONS
1. Availability of Land
2. Manufacturing Facility
3. Taxation and Regional Concession
4. Access to Transport
5. Power, Fuel, Water
6. Climate
7. Availability of Workforce
8. Union Activities
9. Political Pressure
10. Bank and Finance Facilities
11. Raw Material
12. Safety and Social Security
13. Supporting Industries
14. Market Site
15. People Culture and Site
INVENTORY CONCEPT
DEFINITION OF INVENTORY
Inventory may be defined as ‘usable but idle resource. Inventory management is the job basically done for
maintaining the stock.
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NEEDS OF INVENTORY
1. Smoothing out irregularities in supply: Inventory of raw materials provide a buffer to overcome the
problems of uncertainties in supplies such as delayed deliveries and supply of short quantities by vendors.
2. Dealing with uncertainty of demand: The customer demand may increase suddenly, in such case an
inventory of finished goods will act as a buffer against the uncertainties in demand.
3. Buying or producing in batches: When the demand for a good does not require its continued production, it
is produced in batches. Thus during the period when the good is not being produced, demands are met from
the inventory which is accumulated from the batch production.
4. To meet seasonal demand: When the demand is seasonal it may become economical to have inventory
during period of low demand to ease the strain of peak period demand.
5. To take quantity discount: Inventories may also be built up take advantage of price discounts, as hedge
against anticipative price rise in the future.
7. Stock built up for Scale of economy: Inventories may also be maintained to get the economy of scale so that
total cost due to ordering, carrying and backlogging are minimized.
TYPES OF INVENTORY
Average RM
2. Work-in-Process Inventory
Average WIP
PIPELINE INVENTORY
In any manufacturing organization the material undergoes different stages of processing from the supplier place to
the buyer’s place. These stages are called pipeline. There is no problem when material moves from one department
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to another, but material waiting anywhere is not good. Indian industries have longer pipeline, as the organization is
more sophisticated. Longer the pipeline, longer the time material waits. The value is added on the material only at
stages where it is being processed, but no value is added where it waits. So it is referred as waste.
Storage of material at any stage, inspection of any kind, packing, rejection, rework and lead-time etc. are the
operations to be eliminated. That is exactly done in the process of JIT. These activities add to the cost of product and
not to the value of the product. The customer is not willing to pay for these.
1. Period in which the material is under the process on machine. Value addition activity.
2. Total period when material is kept in any form / place in the organization.
LEAD TIME
Lead Time is an interval between placement of order and delivery of material. It is a measure of logistical
performance. Logistic manager should ensure minimum lead-time so that the material arrived as soon as possible.
Local supplier needs the shortest lead time while the out of town supplier requires much longer lead time. Lead-time
also varies from supplier to supplier and even same supplier will have different lead times for a given item at
different times. Variations in lead are one of the most difficult logistical problems.
ROL is that inventory level at which an order should be placed to replenish the inventory.
ROL = Lead Time x Average Usage
If safety stock is present then reorder level becomes:
ROL = Safety stock + lead time consumption
SAFETY STOCK
Safety Stock is a component of average inventory that takes care of short-term fluctuations in lead-time and
consumption.
Factors Affecting Level of Safety Stock:
1. Value of Item: Safety stock for high value items need be low.
2. Criticality of Item: Safety stock for critical items that affect the business need be high.
3. Lead Time: Longer the lead-time more is the chances of fluctuation and hence more is the requirement of
safety stock.
4. Number of Suppliers: If more number of suppliers is available for an item, there is no need to keep high
level of safety stock, as it can be procured from any alternate source.
5. Availability of substitutes: Lesser safety stock can be kept for items where substitutes are easily available.
6. Risk of Deterioration: It is better to have low safety stock where the cost of deterioration is more then the
cost of stock out.
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SELECTIVE INVENTORY CONTROL
Each item of inventory has its own criteria of importance, thus depending upon the type and importance of the
inventory there will be variations in the controls employed. This is the selective control of inventories.
1. ABC Analysis
2. VED Analysis
3. FSN Analysis
4. P&Q System
ABC ANALYSIS
Principle: The basic principle of ABC Analysis is “10 percent of items hold 70 percent of value”.
A category items account for 10% of item & 70% of the value.
B category items account for 20% of item & 20% of the value.
C category items account for 70% of item & 10% of the value.
VED ANALYSIS
Principle: VED Analysis classifies items into three categories depending upon the consequences of material stock
out when demanded.
Vital items are the most critical which can cause stoppage of the production, if not available, hence should
be available in stock at large.
Essential items are quite critical whose non-availability may not adversely affect production; hence a low
stock of essential items should be available.
Desirable items do not have very serious consequences if not available but can be stocked.
FSN ANALYSIS
Principle: FSN Analysis classify items into three categories depending upon the past consumption pattern. Inventory
policies and models for these three categories have to be different.
Fast moving items are those which drawn frequently from stores.
Slow moving items are those which drawn only once or twice a year from stores.
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Non-moving items are those which not at all drawn for the past two years from stores.
Here the quantity to be ordered is worked out as the EOQ and the minimum stock level is also worked out. When the
stock in hand reaches this level, an order is placed for q quantity equal to the EOQ.
Features of Q-System
3. Reordering is done when the stock in hand is equal to safety stock plus the lead-time consumption.
5. Maximum inventory will be equal to the safety stock plus order quantity.
6. This system is used for low value items where orders are placed infrequently.
EOQ is the technique, which solves the problem of the inventory management. It is the order size at which the total
cost; comprising ordering cost plus carrying cost, is the least.
The cost of carrying inventories is called “Inventory Carrying Cost” and the cost of purchasing and processing the
order is called “Ordering Cost”. One of the most important goals in materials department is to strike the most
economic balance between ICC and OC in determining order quantity.
The graph shows the relation of the ICC and OC. As the order quantity increases the ordering cost reduces. While
the ICC goes on increasing with increase in the order quantity. But at a certain stage it is equal to the OC. This is
shown by the crossing two lines, this is known as Economic Order Quantity (EOQ).
Formula
Q = Ö_2BA_
PC
Q = Order quantity
A = Annual consumption
B = Order Cost
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T = Total ordering cost
JUST IN TIME
JIT is an organized approach to introduce in manufacturing cycle timelines, quality, productivity, flexibility, and
work simplification and waste reduction. This is a technique from TQM activity. Basically this is waste control
method; it is not the inventory control technique.
1. Procurement Cost
2. Inventory Cost
3. Warehousing Cost
5. Packaging Cost
6. Transportation Cost
Activity based costing is based on the concept that the expenses need to be assigned to the value adding activities
rather than to budget unit. It suggests that business activities are made up of a series of activities that consumes
costs.
Advantages
1. It provides information about cost drivers and the relationship of these drivers with resource consumption.
2. It gives more accurate picture of the expenses and helps managers to make strategic decisions about costs.
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WAREHOUSES
DEFINITION OF WAREHOUSING
Warehouse is a location provided with adequate facilities, where bulk shipments are received from production
centers, which are then broken into small order size for shipment to the customers as per their requirement.
OBJECTIVES OF WAREHOUSING
WAREHOUSING DECISIONS
1. Type of Warehouses
2. Location of Warehouses
3. Size of Warehouses
4. Layout Warehouses
5. Number of Warehouses
TYPES OF WAREHOUSE
1. Private Warehouse
These are the warehouses owned by the company for their exclusive use of storing the goods manufactured or traded
by them for onward selling in the market.
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Advantages:
Disadvantages:
2. Public Warehouses
These are the warehouses hired from other agencies for storing the goods for a specific period of time by paying
agreed rent. E.g. Central Warehousing Corporation (CWC)
Advantages:
1. Generally located near ports and market place and thus has fixed periodic operating cost
3. No permanent liability.
Disadvantages:
3. Contract Warehouses
It is a specialised form of public warehouses managed by Third Party Logistics companies for providing total
warehousing services by paying the agreed charges.
Advantages:
2. No permanent liability.
Disadvantages:
4. Co-operative Warehouses
These warehouses are owned, managed and controlled by co-operative societies. They provide warehousing facilities
at the most economical rates to member of society.
LOCATION OF WAREHOUSE
1. Cost – Warehouse may be located near production plant to reduce operating cost.
2. Customer Service – Warehouse may be located near market to serve the customer well.
8. Availability and cost of basic infrastructure i.e. power, water, gas, sewerage etc.
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1. Number and nature of activities to be performed
5. Statutory requirements
NUMBER OF WAREHOUSES
Material handling is a process of movements of raw materials, WIP and finished goods within a facility most
efficiently at the lowest possible cost.
OBJECTIVES OF MHS
SCOPES OF MHS
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1. Receipt of vehicle at nominated area
CLASSIFICATION OF MHS
1. Manual System
Manual handling of materials is done when the weight of materials is low and distance to be traveled is less. It is the
cheapest option for material handling.
2. Mechanical System
Mechanical handling of materials is done when the weight of materials is high and distance to be traveled is more. It
is the safest option for material handling.
1. 1. Forklift Trucks: They are lifting devices, can move loads both horizontally and vertically.
2. 2. Cranes: They are drag devices, either floor mounted or overhead mounted.
4. 4. Carousels: several bins on an oval track keep rotating. The operator can choose required bin to pick from.
The system saves space and reduces walking time and distances.
3. Automated System
Automated handling of materials is done when the weight of materials is very high and distance to be traveled is
more as well as the warehouse space is limited. It is the best and efficient option for material handling.
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Material Handling Equipments
1. Sortations: In Sortations, labels are read and the packages are delivered to right docks for onward dispatch
2. Robotics: It is a human like machine that can be programmed to perform one or series of activities.
3. Automated Storage and Retrieval System: It has following merits and demerits.
Merits ARS:
2. Increase in productivity
Demerits of ARS:
PACKAGING
Packaging though an integral part of logistics, also affect marketing and production function. Packaging helps in
promotion of products and size, shape, material of the package affects production labour efficiency.
1. Cube Minimization: Reducing the space occupied by the product to cut the freight charge. E.g. Round
containers, oval shaped containers and square shaped bottles, etc.
1. Weight minimization: Reducing the weight of the consignment to fully utilize the capacity of the truck. E.g.
Liquids are packed in plastic bottles rather than glass bottles.
2. Apportionment: Grouping goods into convenient unit for distribution. E.g. mangos in boxes, milk bags in crates.
3. Facilitating handling & using: fruit juices in tetra packs, handling and consumption by users
4. Convenience: Facilitating handling, storage & reuse. E.g. ink cartridges for printers, reusable corrugated boxes,
bottles and refill packs.
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5. Communication:
3. Handling Instructions: Fragile, This side up, temperature restrictions, environment concerns, potential dangers
etc
1. Consumer Oriented Packaging: Focuses on consumer convenience and appeal, marketing consideration and
display.
2. Logistics Oriented Packaging: Focuses on handling convenience and protection during transpiration,
material handling and storage.
1. Products Packaging: Packaging the products itself, e.g. soft drinks are packed in cans.
1. Master Cartons: Packaged products are packed in larger cartons to facilitate quantity handling.
2. Unit Load: Master cartons are consolidated into a single large unit to facilitate transportation, protection and
storage. It involves Unitisation or Palletisation.
Contenerisation
Containerization is a technique of distributing goods in unitized form and making convenient to establish an
intermodal transport system. Containers are of standard size i.e. 20 ft or 40 ft.
Benefits of Containerization:
1. It eliminates need for intermediate handling at terminals.
1. Standardized containers helps in saving on packaging materials and labour for packaging.
2. Less risk of damage and pilferage.
3. Facilitates intermodal transportation without intermediate reloading.
Types of Containers:
1. General Cargo Containers – for general cargo like garments metals etc.
2. Refrigerated Containers – for food items that require cold storage like fish, meat.
3. Insulated Containers – for items that require airtight space like fruits and vegetables.
4. Ventilated Containers – for items that require fresh air like coffee seeds, tea leaves.
5. Flat Containers – They have only flat base with no walls, used when cargo the cargo is of odd size or very
heavy like trucks.
6. Liquid Containers – They have main holes for loading and unloading of liquid cargo like milk, oil.
7. Gas Containers – They have fixtures to fill or empty liquefied gas. E.g. Liquid oxygen.
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Supply Chain Management (SCM)
Supply Chain Management (SCM) involves managing of goods and services. It includes different stages like storage
of goods, logistics and supply of goods to the customer after manufacturing.
It can also be referred as the combination of materials management and product distribution of an enterprise.
Advantages of SCM
Supply chain management increases the flexibility and efficiency for the logistics of a product. The following are the
advantages of supply chain management −
Thus, supply chain management has both advantages and disadvantages and both have to be considered for
implementation in an organization.
Questions for practice:
Q1. What do you mean by logistics management? What are its components?
Q2. What do you understand by logistics and reverse logistics?
Q3. What is the role of logistics planning? Elaborate your answer.
Q4. With help of example from online retail sector explain the role of SCM.
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