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Channels of Distribution

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CHANNELS OF DISTRIBUTION

Learning Objectives

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Functions of a retailer in channel

Supply Chain Efficiency

A Typical Channel of Distribution

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Manufacturer Retailer Final Wholesaler Consumer
Manufacturer
Retailer
Final
Wholesaler
Consumer
Channel of Distribution 3 Manufacturer Retailer Final Wholesaler Consumer Channels of Distribution 07/16/2012

The Retailer’s Role in the Sorting Process

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Channels of Distribution
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Functions of Retailing

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Sorting

Breaking bulk

Holding stock

Channel of communication

Transport

Additional services

Distribution Models in India

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Distribution models in India vary by number of layers in the channel, the intermediaries used, and the number of channel partners.

Every model requires manufacturers to trade-off between degree of control and their reach.

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Typical Flows of Goods and Promotion in FMCG Retailing

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Typical Flows of Goods and Promotion in FMCG Retailing 7 Channels of Distribution 07/16/2012

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Distribution Channels in India

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The Indian supply chain is more

dependent on middlemen rather than on the

retailers unlike their counterparts in modern economies.

This over-dependence can be attributed to the lack of power of retailers in the channel.

Retailers should have more involvement in supply chain management, whereas, in practice, Indian retailers have nothing to do with supply chain management.

The promotional effort to reach the retailers will have to come through at least three middlemen. This means that retailers are unreachable for direct promotion by the manufacturers.

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What is a Supply Chain?

What is a Supply Chain? Transportation Warehousing Information flows 9 Transportation Factory Retailers / customers
Transportation Warehousing Information flows
Transportation
Warehousing
Information
flows
Chain? Transportation Warehousing Information flows 9 Transportation Factory Retailers / customers

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Chain? Transportation Warehousing Information flows 9 Transportation Factory Retailers / customers Transportation

Transportation

Factory
Factory

Retailers / customers

Transportation

Transportation Factory Retailers / customers Transportation Warehousing Transportation Vendors/plants/ports Channels of
Warehousing
Warehousing
Factory Retailers / customers Transportation Warehousing Transportation Vendors/plants/ports Channels of Distribution

Transportation

Retailers / customers Transportation Warehousing Transportation Vendors/plants/ports Channels of Distribution 07/16/2012

Vendors/plants/ports

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The Marketing Functions

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A channel must perform eight marketing functions:

Buying, Selling, Storing, Transporting Sorting, Financing, Information gathering, Risk taking

A marketing function does not have to be shifted in its entirety to another institution or to the consumer but can

be divided among several entities.

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Global Optimization

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Retail is the last point in the value chain.

Retailers provide assortments, hence deal with a large number of suppliers.

The supply chain of big retailers is a complex network of facilities dispersed over large geography

Different facilities in the supply chain frequently have different, conflicting objectives

The supply chain is a dynamic system that evolves over time

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Channel Width

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Intensive distribution

Means that all possible retailers are used in a trade area.

Selective distribution Means that a moderate number of retailers are used in a trade area.

Exclusive distribution

Means only one retailer is used to cover a trading area.

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Comparing Distribution Types

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Comparing Distribution Types 13 Channels of Distribution 07/16/2012

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Role of Retailer in Marketing Channel

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Enjoy Substantial Channel Power

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Retailer
Retailer

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16 Retailers Act as Buying Agents for Customers Rather than as Selling Agents for Suppliers Channels

Retailers Act as Buying Agents for Customers Rather than as Selling Agents for Suppliers

Act as Buying Agents for Customers Rather than as Selling Agents for Suppliers Channels of Distribution

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17 Retailers Often Operate on Low Price / Low Margin Model Channels of Distribution 07/16/2012

Retailers Often Operate on Low Price / Low Margin Model

17 Retailers Often Operate on Low Price / Low Margin Model Channels of Distribution 07/16/2012

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18 Retailers Operate in Saturated Markets and Fight for Market Share Channels of Distribution 07/16/2012

Retailers Operate in

Saturated Markets and Fight for Market Share

18 Retailers Operate in Saturated Markets and Fight for Market Share Channels of Distribution 07/16/2012

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Hence, The Need to Reduce Distribution Costs

Distribution Costs
Distribution
Costs

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Distribution Costs Often Account for a Significant Percentage of the Final Price of Products

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a Significant Percentage of the Final Price of Products 20 Sometimes Distribution Costs are Higher than

Sometimes Distribution Costs are Higher than the Manufacturing Cost or the Costs of Raw Materials and Component Parts

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Some Examples

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Autos Software Apparels Electronics Packaged Foods
Autos
Software
Apparels
Electronics
Packaged Foods
25%
25%
28%
28%
30%
30%
41%
41%

15%

65%
65%
19%
19%
30%
30%
33%
33%

40%

10%
10%
53%
53%
40%
40%
26%
26%

45%

Distribution
Distribution

Manufacturing

53% 40% 26% 45% Distribution Manufacturing Raw Materials and Components Channels of Distribution

Raw Materials and Components

53% 40% 26% 45% Distribution Manufacturing Raw Materials and Components Channels of Distribution 07/16/2012

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Retail Supply Chain
Retail Supply Chain
The biggest and the best
The biggest and the best

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Wal-Mart US Cross-dock distribution center
Wal-Mart US Cross-dock distribution center

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 Situated at Bentonville, Arkansas
 Situated at Bentonville, Arkansas
 1.2 million-square feet  On one side- Wal-Mart trailer trucks drop off boxes of
1.2 million-square feet
 On one side- Wal-Mart trailer trucks drop off boxes of merchandize from
thousands of suppliers

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Contd…
Contd…

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 An electric eye reads the bar codes / RFID tags on each carton 
An electric eye reads the bar codes / RFID tags on each carton
 Electric arms at each stream reach out and guide the boxes to the outbound
streams – as per the particular store’s orders
 Waiting Wal-Mart trucks rush these to the respective stores across US where they will
 Waiting Wal-Mart trucks rush these to the respective stores across US
where they will be put on shelf

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What is cross docking ???

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Cross-docking is a practice in logistics of unloading materials from an incoming semi-trailer truck or railroad car and loading these materials directly into outbound trucks, trailers, or rail cars, with little or no storage in between. This may be done to change type of conveyance, to sort material intended for different destinations, or to combine material from different origins into transport vehicles (or containers) with the same, or similar destination.

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Advantages of cross docking in retail

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Streamlines the supply chain from point of origin to point of sale

Reduces handling costs, operating costs, and the storage of inventory

Products get to the distributor and consequently to the customer faster

Reduces, or eliminates warehousing costs

May increase available retail sales space.

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Factors affecting the use of cross-docking in Retail

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Cross-docking is dependent on continuous communication between suppliers, distribution centers, and all points of sale.

Customer and supplier geographyparticularly when a single corporate customer has many multiple branches or using points

Freight costs for the commodities being transported

Cost of inventory in transit

Complexity of loads

Handling methods

Logistics software integration between supplier(s), vendor, and shipper

Tracking of inventory in transit

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Supply integration
Supply integration

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 A consumer lifts a product, the cashier scans it and a signal will go
 A consumer lifts a product, the cashier scans it and a signal will go out
across Wal-Mart global network to the supplier.
 This will prompt him to make or pack another one of that item and
 This will prompt him to make or pack another one of that item and ship it
into the Wal-Mart supply chain
It is like an orchestra – the Wal-Mart symphony with no finale.
 Non-stop delivery, sorting, packing, distribution, buying, manufacturing, reordering, delivery, sorting, packing ….
 Non-stop delivery, sorting, packing, distribution, buying, manufacturing,
reordering, delivery, sorting, packing ….

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Scale of operations
Scale of operations

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 One company – HP sells more than 400,000 computers through 4500 Wal- Mart stores
 One company – HP sells more than 400,000 computers through 4500 Wal-
Mart stores in one day during Christmas season
 2.5 billion general merchandize cartons move every year through their SC
 2.5 billion general merchandize cartons move every year through their SC
 Wal-Mart does not make a single thing. All it ‘makes’ is a hyper-efficient Supply
 Wal-Mart does not make a single thing. All it ‘makes’ is a hyper-efficient
Supply Chain
 Delivers material across the globe – involving multitude of suppliers, port operators, custom brokers,
 Delivers material across the globe – involving multitude of suppliers, port
operators, custom brokers, forwarders, and carriers – very, very hard to
duplicate

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Simple mathematics
Simple mathematics

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 To sell cheap, they had to buy cheaper  Only option, buy direct from
To sell cheap, they had to buy cheaper
Only option, buy direct from manufacturers
Manufacturers were not ready to ship to multiple Wal-Mart stores
 Wal-Mart got their own trucks. Cost was roughly 3% more for own
distribution and logistics
 Purchasing cost was 5% less. Wal-Mart could cut costs by 3% and scale-up the
 Purchasing cost was 5% less. Wal-Mart could cut costs by 3% and scale-up
the volumes.

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