INTRODUCTION TO DISTRIBUTION MANAGEMENT, MBA,BBA,BCOM
What Is Distribution Management?
Distribution management refers to the process of overseeing the movement of goods from supplier or manufacturer to point of sale. It is an overarching term that refers to numerous activities and processes such as packaging, inventory, warehousing, supply chain, and logistics.
Distribution management is an important part of the business cycle for distributors and wholesalers. The profit margins of businesses depend on how quickly they can turn over their goods. The more they sell, the more they earn, which means a better future for the business. Having a successful distribution management system is also important for businesses to remain competitive and to keep customers happy.
Understanding Distribution Management
Distribution management is critical to a company's ability to successfully attract customers and operate profitably. Executing it successfully requires effective management of the entire distribution process. The larger a corporation, or the greater the number of supply points a company has, the more it will need to rely on automation to effectively manage the distribution process.
Modern distribution management encompasses more than just moving products from point A to point B. It also involves gathering and sharing relevant information that can be used to identify key opportunities for growth and competitiveness in the market. Most progressive companies now use their distribution forces to obtain market intelligence which is vital in assessing their competitive position.
There are basically two types of distribution: commercial distribution (commonly known as sales distribution) and physical distribution (better known as logistics). Distribution involves diverse functions such as customer service, shipping, warehousing, inventory control, private trucking-fleet operations, packaging, receiving, materials handling, along with plant, warehouse, store location planning, and the integration of information.
The goal is to achieve ultimate efficiency in delivering raw materials and parts, both partially and completely finished products to the right place and time in the proper condition. Physical distribution planning should align with the overall channel strategy.
Advantages of a Distribution Management Strategy
Aside from keeping profits up, there are many reasons a company may want to use a distribution management strategy. First, it keeps things organized. If there was no proper management system in place, retailers would be forced to hold stock in their own locations—a bad idea, especially if the seller lacks proper storage space.
A distribution management system also makes things easier for the consumer. It allows them to visit one location for a variety of different products. If the system didn't exist, consumers would have to visit multiple locations just to get what they need.
Putting a proper distribution management system in place also alleviates any potential for errors in delivery, as well as the times products need to be delivered.
Businesses can adopt distribution management strategies through electronic platforms, which can help simplify the process and boost product sales.
Distribution Management as a Marketing Function
The fundamental idea of distribution management as a marketing function is that the management of distribution happens in an ecosystem that also involves the consideration of the following:
Product: Not always a tangible object, product can also refer to an idea, music, or information.
Price: This refers to the value of a good or service for both the seller and the buyer, which can involve both tangible and intangible factors, such as list price, discounts, financing, and likely response of customers and competitors.
Promotion: This is any communication used by a seller to inform, persuade, and/or remind buyers and potential buyers about the seller’s goods, services, image, ideas, and the impact it has on society.
Placement: This refers to the process that ensures the availability, accessibility, and visibility of products to ultimate consumers or business users in the target channels or customers where they prefer to buy.
Effective distribution management involves selling your product while ensuring sufficient stocks in channels while managing promotions in those channels and their varying requirements. It also involves making sure a supply chain is efficient enough that distribution costs are low enough to allow a product to be sold at the right price, thus supporting your marketing strategy and maximizing profit.
What is physical distribution?
Physical distribution is defined as the process of physical movement of goods from the producer to the consumer. It is an important marketing function which describes marketing activities that involves flow of raw materials from the suppliers to the factories for production and also the movement of finished goods from production to the final user.
The activities that are included in the efficient movement of goods from producer to end user or consumer include transportation, inventory control, warehousing, material handling, forecasting, customer service, plant and warehouse location and order processing.
According to the eminent marketing guru Philip Kotler “Physical distribution involves planning, implementing and controlling the physical flow of materials and final goods from the point of origin of use to meet consumer needs at a profit.”
Objectives of Physical Distribution
The following are the objectives of physical distribution
1. Consumer satisfaction
2. Profit Maximisation
3. To ensure the availability of right goods at the right quantity at the right time and the right place with the least cost for the service.
4.To achieve speedier transportation of goods and maintaining minimum inventory level.
5. To establish the correct price of products by effective management of physical activities of distribution.
6. To achieve competitive advantage over the competitors by providing the best customer service.
Components of Physical Distribution
Following are the components of physical distribution
1. Order Processing: Order processing is the first point or in other words, the starting point of the distribution activity. The functions involved in order processing are receiving order, handling the received order, granting of credit for the item ordered, generating invoice, dispatching of order and collecting the bills.
Businesses should be making an effort to reduce the order cycle time which is the time between placing an order by the customer and delivery of the goods at the customer’s place.
2. Storage and Warehousing: Storage deals with the storing of goods in proper condition till the time it is ordered by the customer. Goods that cannot be generally made available throughout the year need to be stored.
Warehouses act as centers of storage and by providing the functionality it helps businesses meet the demands of customers. Apart from being a source of storage, a warehouse also acts as centers for assembling the goods.
3. Inventory Control: Inventory control refers to the process of efficient control of goods that are stored in the warehouses. Businesses need to maintain adequate levels of inventory in order to ensure uninterrupted fulfillment of orders.
The level of inventory needs to be optimal, it should not be too less or too more, as less inventory results in out of stock goods, lost business and unhappy customers, while a high level of inventory requires huge investment.
4. Material Handling: Material handling refers to the activities that are associated with the movement of goods from the site of manufacturing till it is loaded to the transport.
Proper material handling results in minimising the wastage of goods during transport, reduces unnecessary movement of goods, facilitates quick order processing and efficient goods movement.
5. Transportation: Transportation is a very essential component of physical distribution which plays a crucial role in movement of the stored goods from warehouse to the customers. The process of transporting involves loading and unloading of goods and their movement from one place to another.
Choosing the right transportation mode is of utmost importance as it determines the retail price of the product. Proper choice of transportation results in smooth movement of goods in proper condition.
The modes of transportation that are adopted by the businesses are road, railways, airways, water transport and pipelines. The choice of the mode of transportation depends on the type of goods being transported, their availability, reliability and the level of safety offered by the mode.
What is Distribution Planning?
Distribution Planning is a systematic approach to ensure that the process encompassing the delivery of goods to different distribution centres is done properly keeping in mind which goods are to be supplied in what quantity at what location in the desired time. It is done keeping in mind the demand trends over the years accounting for seasonal variations and also the anticipated demand according to this year’s prediction. If distribution planning is done correctly, it increases efficiency. All goods shortages are minimized as demand is accounted for during the time of distribution and costs of ordering, transporting and holding goods is also reduced considerably. If correct distribution is done, the major advantage is that inventory can also be kept under control in the desired level.
For example: Distribution planning of Frooti should be done properly keeping in mind the demand for the product throughout the year, both peak season and off season and also knowing which regions are the major consumers of the product as distribution frequency in those regions need to be more.
Meaning Of International Distribution Channels:
The sole objective of production of any commodity is to help the goods reach the ultimate consumers. In the era of modem large scale production and specialization it is not possible for the producer to fulfill this work in all circumstances. The size of the market has become quite large. Therefore, the producer has to face numerous difficulties if he undertakes the distribution works himself.
Besides, in the age of specialization it is not justified on the part of a single person or organisation to entertain both production as well as distribution work. Thus the producer has to take help of many distribution channels to transfer the goods to the ultimate consumers. In other words, many different distribution channels are needed between producers and consumers for effective distribution of products.
Types of Distribution Channels:
There are different types of channels of distribution and a manufacturer may select any one of these channels.
These channels may be broadly divided into two parts:
i. Distribution Channel of Consumer Goods:
The channels of distribution for consumer products may be as follows:
1. Manufacturer → Agent → Wholesaler → Retailer → Consumer:
In this method of distribution, the product reaches the agent from the manufacturers and from the agent to wholesaler and then to consumers through retailers. In India, most of the textile manufacturers adopt this method of distribution.
2. Manufacturer → Agent → Retailer → Consumer:
In this method of distribution, the wholesaler is eliminated and goods reach from manufacturer to agent and then consumers through retailers only. Manufacturers who want to reduce the cost of distribution adopt this method.
3. Manufacturer → Agent → Consumer:
As per this method of distribution channel, there is only one middleman that is the agent. In India, for the distribution of medicines and cosmetics, this channel of distribution is commonly adopted.
4. Manufacturer → Wholesaler → Retailer → Consumer:
A manufacturer may choose to distribute his goods with the help of two middlemen. These two middlemen may be wholesalers and retailers.
5. Manufacturers → Retailer → Consumer:
In this method of distribution channel, manufacturers sell their goods to retailers and retailers to consumers. In India, Gwalior Cloth Mills and Bombay Dyeing adopt this channel of distribution to sell textiles.
6. Manufacturers → Consumers:
A producer of consumer goods may distribute his products directly to consumers. The goods may be sold directly to consumers through vending machines, mail order business or from mill’s own shops.
ii. Distribution Channel of Industrial Products:
The channels for industrial products are generally short as retailers are not needed.
However, following methods may be adopted:
1. Manufacturer → Agent → Wholesaler → Industrial Consumer:
Under this method, product reaches from manufacturer to agent and then to industrial consumer through the wholesaler.
2. Manufacturer → Agent → Industrial Consumer:
Under this system, goods reach industrial consumers through the agent. Thus there is only one middleman.
3. Manufacturer → Wholesaler → Industrial Consumer:
This distribution channel is the same as above, the only difference is that in place of an agent, there is a wholesaler.
4. Manufacturer → Industrial Consumer:
Under this channel there is no middleman and goods are directly sold to industrial consumers. Railway engines, electric production equipment are sold by this system.
Direct channel is popular for selling industrial products since industrial users place orders with the manufacturers of industrial products directly.
To plan about an export distribution, knowledge on two different aspects are a must:
(i) The marketing channel that is available in the Foreign Market.
(ii) The most appropriate channel is to link the domestic operations to the overseas channels.
The principal forms of penetrating export markets are selling to local export houses or buying organisations for indirect exporting and appointing agents or distributors for direct exporting.
If these forms are combined with the domestic channel of distribution in the importing country, the export distribution channel can be identified as follows:
a. Direct Distribution Channel:
This figure is illustrative of the distribution of channels of consumer goods. In the case of industrial products, the channel will be shorter because there is no need for retailers. In fact, in many cases, there may not be any wholesaler.
Producer → Agent → Industrial buyer
b. Indirect Distribution Channel:
In indirect exporting, the firm delegates the task of selling products in a foreign country to an agent or export house.
This figure is illustrative of the distribution channel of goods. In the case of industrial products, the channel will be shorter because there is no need for retailers. In fact, in many cases, there may not be any wholesaler.
The channels of distribution may differ from country to country, market to market and product to product. So, the first task of the producer is to find out the possible distribution channel through which he wants to reach the consumers on the foreign market, keeping in view the characteristics of his product and the marketing strategy he wants to follow in the market.
While selecting a distribution channel for foreign markets, the management of the exporting company should consider the following aspects:
(i) Who are the consumers? Which are the available retail outlets to reach them?
(ii) Which type of market coverage is required, keeping in view the product and consumer characteristics?
(iii) Are there any internal constraints for the exporter like finance which will influence the decision regarding choice of the distribution channel?
(iv) What are the expectations from the channel members? Are there some specific expectations?
(v) What is the required support system to satisfy the expectations of the channel members?
It should be realised that the distribution channel is the mechanism through which the seller reaches the consumers and, therefore, the selected channel must be suitable to the company’s operations and marketing strategy.
Export Distribution Channels:
The distribution process for international marketing involves all those activities related to time, place and ownership utilities for industrial and end consumers. The selection, operation and motivation of effective channels of distribution often turn out to be important factors in a firm's differential advantage in international markets. The diverse cultural differences play an important role in formulation of distribution strategies for any exporter entering foreign markets.
International marketing distribution is similar to that in domestic marketing. Main difference is in environmental effects. The exporter, therefore, needs to understand how environmental factors affect the distribution policies. Using this knowledge the exporter must use the most appropriate channels on a country-to-country basis.
The distribution system available in a country is also influenced by the economic development of the country, the personal disposable income of consumers and as well as some other factors such as culture, physical environment and the legal/political system. Exporters, while developing a distribution strategy must focus on how the goods can be transported from the manufacturing locations to the consumer most effectively.
Although distribution can be totally handled by the manufacturer, often the goods are moved through middlemen such as wholesalers, distributors, retailers or agents. An understanding of the available distribution system in a particular county is extremely important in the development of a sound distribution strategy.
4. Different Approaches to Export Channel Strategy:
There are three different approaches to channel strategy. There are Pull approaches, Push approaches and Gravity approaches.
The details of these approaches are discussed as under:
1. Pull Approach:
The pull approach of channel strategy relies much upon the intensive promotional campaigns through advertising, personal selling and other promotional efforts and attempts to develop brand loyalty among consumers of the product in the market. The manufacturer is not much worried about the channel. Through advertising, publicity of the product and sales promotional activities, the manufacturer creates demand so that the consumers themselves create a pressure on the distribution outlets to carry and sell his product.
The channel members attempt to store the product in their outlets to serve the consumer best, because the consumer is sovereign. Thus, the manufacturer neither establishes his own set-up in the foreign market nor does he contact the middlemen to sell his product. The channel members are thus forced to contact the manufacturer. Due to this very nature this strategy is known as pull approach.
2. Push Approach:
Under this approach of distribution, the exporter should establish his own channel of distribution and assume full control over it to use it as a promotional instrument. The exporter, therefore, should make effective planning, establish organisation to implement it and have effective control over it. The exporter will function as the channel leader.
3. Gravity Approach:
The gravity approach of the distribution channel is essentially a passive approach. Under this approach, the seller or manufacturer exporter is in touch with intermediaries and sells his whole production to that intermediary. It is the intermediaries who look after the actual distribution work in the foreign markets.
The manufacturer should not worry at all for its distribution function. The consumers do not even know who the producer of the product they are using is. The manufacturer neither establishes his own sales organisation in foreign market nor takes it seriously and the distribution work is done by the middlemen.
Which strategy out of the above approaches should an exporter follow, is a very difficult question to answer. A number of factors influence the choice. As far as the gravity approach is concerned, it has a very limited role to play in distribution of goods in foreign markets. In the modern age an exporter cannot find a place in an export market passively.
The pull strategy requires substantial outlay of financial resources for intensive sales promotion campaigns to create the demand for the product and develop brand loyalty. The push strategy on the other hand does not involve such huge costs. But it does require a proper discount structure and other incentives to motivate the distribution channel members. In addition, the exporter must be prepared to plan and partially finance proper sales promotional campaigns.
For consumer products, both the strategies may be adopted in the foreign countries. Smaller companies generally follow a push strategy in distributing the goods as its success depends more upon personal selling rather than financial outlay. The big companies can employ a pull strategy for mass consumption items in developed countries.
Even in a developing country like India, large companies use this strategy. In case of industrial products, on the other hand, companies, irrespective of size, generally use the push strategy. The reason behind is that the number of buyers is small and the outlets to be contacted are also lower, which can be covered through a specialized sales force and does not require any mass advertising. Further, the channel members will have to be integrated with the total marketing system in order to ensure an after sale service system.