Place: Distribution Channels, Logistics and Supply Chains

A biscuit maker in Indore cannot open a shop in every town, and a kirana store cannot buy from fifty factories one by one. Firms in between solve this, and choosing them is among the hardest decisions a producer makes.

A channel transfers ownership from the point of production to the point of consumption. It is also called a marketing or trade channel. Channels form part of a wider value network: the partnerships and alliances a firm creates to source, augment and deliver its offerings.

Why intermediaries save effort. Take an illustration: 5 biscuit makers each selling to 100 kirana stores need 5 × 100 = 500 separate contacts. Through one distributor, they need 5 + 100 = 105.

Channel functions. Channel members gather information about customers and competitors, spread persuasive communications, and negotiate price and terms. They also place orders, finance inventories and bear the risks of channel work. Finally, they store and move products, arrange payment through banks, and oversee the transfer of ownership. Together these save the producer money, time and effort.

Don't confuse channel levels with distribution intensity. Levels count the intermediaries in the chain, its length. Intensity counts the outlets at the end of it, its breadth. A two-level channel can be intensive (biscuits) or selective (refrigerators). Also, merchants take title to the goods; agents do not.

Where it breaks. Each intermediary takes a margin, and the producer loses some control and direct contact with buyers. Selling online has removed some levels, but marketplaces and delivery firms have become new intermediaries.

For exams. Expect a path matched to its level, a product matched to its intensity, and merchants, agents and facilitators told apart by title and negotiation.

Direct or through intermediaries; intensive, selective or exclusive.

A paint maker's dealers want bigger margins, its distributors want faster payment, and each squeezes the others. When channel members pull apart like this, the customer pays for it in price or service.

In a conventional channel, producer, wholesaler and retailer are separate businesses, each maximising its own profit, often at the others' expense. That breeds conflict. A VMS removes it by ownership, contract or power.

Franchises take three forms: manufacturer-sponsored retailer franchises (car dealers), manufacturer-sponsored wholesaler franchises (soft-drink bottlers licensed to bottle and distribute) and service-firm-sponsored retailer franchises (fast-food chains).

A VMS resembles vertical integration, in which a firm takes over the next link in the chain: forward toward customers or backward toward suppliers.

A horizontal marketing system joins two or more unrelated companies at the same level of the channel to exploit an opportunity. They pool capital, skills or marketing resources, often through a joint venture or alliance, temporary or permanent.

Multichannel (hybrid) marketing reaches customer segments through two or more channels at once: stores, websites, catalogues, direct mail, email and mobile.

A new snack brand might push, with extra margin and display money for kirana owners, since shoppers pick snacks at the counter. A phone brand pulls, with advertising, since buyers decide before they reach the shop. Most firms mix the two.

Reverse-flow channels move goods back from users to reuse products or containers, refurbish them for resale, recycle them, or dispose of products and packaging. They work through redemption centres, community groups, recycling centres and brokers. Service channels keep multiplying too: banks, insurers and travel firms serve customers through branches, phones and the internet. Performers and politicians reach their audiences through mass media, rallies, social networks and their own websites.

Don't confuse a horizontal marketing system with a merger. It is sometimes called a merger, but it is cooperation, and the firms usually stay separate. And keep the three franchise forms apart: most short accounts mention only the second, the bottler kind.

Where it breaks. An administered system lasts only as long as the leader's power. Multichannel selling brings conflict when a maker's own website undercuts its dealers. Pull needs heavy advertising that small firms cannot afford.

Conventional, vertical, horizontal, multichannel; push through the trade or pull through consumers.

A shopper in Nagpur finds her usual detergent missing for a week, while the maker's warehouse in Mumbai is full of it. The product exists; logistics failed to put it where she buys.

It is also called physical distribution or marketing logistics. Peter Drucker called distribution “the economy's dark continent” (1962) for the savings it hid. By some estimates, market logistics can amount to 30 to 40 per cent of a product's cost. So many experts call it ‘the last frontier for cost economies’: lower logistics costs allow lower prices, higher margins, or both.

Inbound logistics deals with supply; outbound logistics fulfils demand, usually through a warehouse management system. Reverse logistics is often handled as part of inbound.

The flow of market logistics. A sales forecast sets the schedules for distribution, production and inventory. Production plans tell purchasing what to order. Materials arrive by inbound transport, are stored, and are made into finished goods. Finished-goods inventory links customer orders to manufacturing. The goods then pass through packaging, warehousing, shipping, outbound transport, field warehousing and delivery.

Trade-offs. No system can both maximise service and minimise cost. Higher service needs more inventory and faster transport. Less inventory risks stockouts; cheaper packaging risks damage. Rail is cheaper than air but slower, which ties up working capital and delays payment. Because these costs pull in opposite directions, decisions must be made on a total-system basis. Start from what customers require and what competitors offer, and aim to maximise profit, not sales. Some firms offer less service at a lower price; others offer more service at a premium.

Planning. Kotler and Keller plan market logistics in four steps. First, decide the value proposition (delivery speed, accuracy, billing). Second, choose the channel design and network. Third, develop operational excellence in forecasting, warehousing, transport and materials. Fourth, implement with information systems, equipment, policies and continuous improvement. An integrated logistics system ties materials management, material flow and physical distribution together with point-of-sale data, barcodes, electronic data interchange (EDI), electronic funds transfer and satellite tracking.

Don't confuse physical distribution with supply chain management. Physical distribution starts at the factory gate: choosing stocking points and carriers. Supply chain management starts earlier, with buying the right inputs and converting them efficiently into finished products. Physical distribution has since grown into it.

Where it breaks. The 30 to 40 per cent figure is a broad estimate; the share differs widely between a bag of cement and a smartphone. Cutting one logistics cost often raises another, so a saving in one department can be a loss for the firm.

For exams. Expect Drucker's phrase, the three flows, and the total-system idea: no system both maximises service and minimises cost.

Right goods, right place, right time, lowest cost: trade-offs throughout.

A distributor of ceiling fans must decide when to reorder from the factory, and how many to order. Order too often and the paperwork and freight pile up; order too much and money sits in the godown.

The fan distributor, worked. Take illustrative figures: it sells 12,000 fans a year, about 40 a day over 300 working days. Each order costs ₹500 to place and receive, and holding one fan for a year costs ₹12.

So it orders 1,000 fans, 12 times a year. Check: ordering costs 12 × ₹500 = ₹6,000; carrying costs, on an average stock of 500 fans, 500 × ₹12 = ₹6,000. At the EOQ the two are equal.

With a 5-day lead time and 100 fans of safety stock, it reorders when stock falls to 300.

Don't confuse the reorder point with the order quantity. The reorder point says when to order (at 300 fans); the order quantity says how many (1,000). Also keep storage warehouses, which hold goods for long periods, apart from distribution warehouses, which move them out fast.

Where it breaks. The EOQ assumes steady demand and fixed costs. Seasonal peaks, such as fan sales before summer, break that assumption. Safety stock only covers the delays a firm expects.

For exams. Expect the four decisions, the two inventory questions (when and how much), the kinds of carrier, and an EOQ calculation.

Order processing, warehousing, inventory, transportation.

A phone brand runs out of its best seller during a Diwali sale because a chip supplier two steps back could not keep up. No single firm's logistics failed; the chain as a whole did.

Supply chain management (SCM) coordinates these activities, streamlining the supply side to maximise customer value and gain competitive advantage. Controlling manufacturing improves quality and reduces the risk of recalls and lawsuits. Controlling shipping avoids costly shortages and oversupply.

The Supply Chain Council's SCOR model names five core processes: plan, source, make, deliver and return. For an auto-parts plant in Pune: plan output against car makers' schedules; source steel and castings; make the parts; deliver them to assembly lines; and take back defective parts.

Responsive or efficient. Michael Hugos describes five drivers. Each can be set for responsiveness, serving changing demand fast, or for efficiency, serving it at low cost. A fashion retailer leans to the first; a cement maker to the second.

Good SCM improves quality and customer service, reduces risk, raises profitability, and helps suppliers and buyers innovate together. Green supply chain practices include route optimisation, consolidating shipments, recyclable packaging and cutting the carbon footprint.

Don't confuse supply chain management with logistics. Logistics moves and stores goods, mainly inside one firm. SCM coordinates every firm in the chain, from buying inputs to returns. Logistics is one part of it.

Where it breaks. No chain can be fully responsive and fully efficient at once; each driver trades one against the other. Tight coordination also means dependence: a single supplier's failure can stop the whole chain.

For exams. Expect SCOR's five processes in order, Hugos' five drivers, and the logistics–SCM comparison. Later versions of SCOR add a sixth process, enable, but the classic answer is the five.

Plan, source, make, deliver, return; responsive or efficient.