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Dynamics of Distribution & Logistics
Unit 08
Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
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Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
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3/23/2021
Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
For everyday use products (food, newspapers, basic
stationery items, etc.) it is usual to use intensive
distribution. The vendors' objectives are to offer
convenient (local and easily obtainable) availability
because the pattern of purchasing is typically short-
term with end user maintaining low (or nil) inventories.
Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
Exclusive distribution is often a partnership in
which an intermediary operates a franchised territory.
The partnership requires mutual support in
developing sales and supporting end users with
planned maintenance and emergency servicing
requirements. Exclusive distribution is found for
consumer product groups for which large inventories
are required to offer consumers a wide selection.
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Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
Selective distribution usually involves a restricted
number of intermediaries within a limited market area.
Usually the market is sufficiently large to support a
number of resellers and the decision is influenced by
the need to provide after sales service and service to
maintain good customer relationships.
Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
Outlet selection varies in complexity. For
convenience-type products, where the investment in
inventories is minimal and fixed capital investment is
not a consideration, the criteria for selecting outlets
are minimal. Furthermore, because the primary
requirement is to obtain 'broadcast distribution', the
emphasis is on density rather than on being selective.
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Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
The usual approach to control within channels is for
suppliers to identify critical success factors without
which the channel partnership structure is unlikely to
operate.
Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Criteria for selecting channel partners
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Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
The distributor's view of the channel strategy
Many large distributors and multiple retailers have quite stringent expectations of suppliers. The basis of
criteria they use is cost. Any activity that could or should be done by suppliers that has an impact on retailers'
cost profiles is used as a selection criterion.
The distributor's view: important criteria when selecting suppliers
Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
The value of a product is important. The higher the
value of the product, the larger the investment in
working capital in the supply chain. Value and rate of
sale usually correlate, and therefore the stockholding
and cash flow implications of maintaining inventory
levels which will meet customers' service
expectations often determine the need for
intermediaries. It also influences the type and number
of distributors
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Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
The technology of a product may influence
distributor selection. Complex products require an
investment in support equipment and a service parts
inventory. Those considerations are in addition to the
cost of inventory of sale products.
Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
Consumer acceptance or brand awareness/loyalty
determine the extent of sales effort required to sell
the product. Range additions to a well-known brand
require less effort, and typically the intermediary will
be enthusiastic to handle the brand. By contrast, new
brands or new products within lesser-known brands
may have difficulty in making volume sales. Often the
solutions are either to 'bonus' the distributors, or for
the supplier to undertake trade promotions and
'missionary selling' with distributors' sales people in
order to move the product through the channels.
textbooks
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Developing an Integrated Logistics Strategy:
The Role of Transaction Channels
Lets identify the importance of transaction channels in the overall
process of developing an integrated logistics strategy.
Many products are substitutes for competitive
products. This is particularly so for convenience
products with low brand loyalty and low purchase
prices. This places a premium on shelf space and
other point-of-sale displays in high customer traffic
areas.
Distribution Channel
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Distribution Channel
Distribution Channel
Channel alternatives: manufacturer-to-retail
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Distribution Channel
Channel alternatives: direct deliveries
* Mail order
* Factory direct to home
* Internet and shopping from home
A completely new channel development is that of computer-to-computer, as some products, such as music, software, films and books are distributed directly online.
* Factory to factory/business to business (B2B)
Channel alternatives: different structures
channel structures can differ very markedly from one company to another. The main differences
are:
* the types of intermediaries
* the number of levels of intermediaries (how many companies
handle the product before it reaches the final customer);
* the intensity of distribution at each level (are all types of
intermediary used at the different levels or just selective
intermediaries?).
Some small- and medium-sized companies may have fairly simple channel structures. Many companies,
however, have a number of different products and a number of different types of customer. Companies such as
these will therefore use several different channels to get their products to market.
How a Distributor Reduces the Number
of Channel Transactions
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How a Distributor Reduces the Number
of Channel Transactions
An approach to designing a channel
structure
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Role of Intermediaries
Greater efficiency in making goods available to
target markets
– reduce the number of transactions by creating assortments
– providing a variety of products in one location
– so that customers can conveniently buy many different items
from one seller at one time
Intermediaries provide
– Contacts
– Experience
– Specialization
– Scale of operation
Match supply and demand
Difference b/w Variety and Assortment
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Distributor Role
Different distributors’ role command different compensation models
Exercise/ Discussion 2
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Functions of Distribution Channel
Transportation and Storage (Physical Distribution)
The transportation and storage of goods is another type of physical
distribution function. Retailers and other channel members move the
goods from the production site to other locations where they are
held until they are wanted by customers.
Ordering
Channel intermediaries also perform a number of facilitating
functions, functions that make the purchase process easier for
customers and manufacturers. Intermediaries often provide
customer services such as offering credit to buyers and accepting
customer returns.
Functions of Distribution Channel
Repair & Maintenance (After Sales)
Some wholesalers and retailers assist the manufacturer by providing
repair and maintenance service for products they handle.
Risk Taking
Channel members also perform a risk-taking function. If a retailer
buys a product from a manufacturer and it doesn’t sell, it is “stuck”
with the item and will lose money.
Communication & Transaction
Last, channel members perform a variety of communication and
transaction functions. Wholesalers buy products to make them
available for retailers and sell products to other channel members.
Retailers handle transactions with final consumers. Channel
members can provide two-way communication for manufacturers.
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Functions of Distribution Channel
Selling & Promotion
They may supply the sales force, advertising, and other marketing
communications necessary to inform consumers and persuade
them to buy.
Information
And the channel members can be invaluable sources of
information on consumer complaints, changing tastes, and new
competitors in the market.
Payment & Financing
Channel Level
Manufacturer
Wholesaler
Retailer
Consumer
Type
– Horizontal
– Vertical
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Channel Level
Channel Behaviour and Conflict
The channel will be most effective when:
– each member is assigned tasks it can do best.
– all members cooperate to attain overall channel goals
and satisfy the target market.
Focus on individual goals leads to conflict
– Horizontal Conflict occurs among firms at the same level
of the channel.
– Vertical Conflict occurs between different levels of the
same channel.
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Horizontal Conflict
A horizontal conflict refers to a disagreement among two
or more channel members at the same level.
For example, suppose a toy manufacturer has deals
with two wholesalers, each contracted to sell products to
retailers in different regions. If one wholesaler decides to
branch its operations into the other wholesaler’s region,
a conflict will result. If the toy manufacturer doesn't help
solve the problem, its business dealings with both the
wholesalers -- and the downstream retailers, as well --
might be in jeopardy.
Vertical Conflict
Vertical conflicts involve a disagreement between two
channel members on consecutive levels.
For example, if the toy manufacturer discovers its
products are arriving at retail stores later than scheduled,
a conflict might develop between the manufacturer and
the wholesaler responsible for shipping to retailers. At
the same time, the retail stores might be in conflict with
the wholesaler due to its inability to ship products on
time.
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Components of Customer Expectation
Cost trade-offs required within the
logistics system Customer service costs are the sales and
profit lost when the opportunity to meet an
order is missed due to lack of product
availability. While the costs of lost sales are
difficult to measure, there have been
successful approaches;
Order size costs are the costs that
are involved in the processing,
handling and progressing activities
required to service customer orders.
Typically, they remain much the
same regardless of size, and include
the cost of customer
communications, issuing the orders,
credit checks, picking
documentation and shipping
preparation. It may require some
production activities such as set-up,
manufacture, inspection and delivery
to a finished goods store prior to
shipment. Often there will be lost
capacity costs involved in the
production changeover. In most
cases an element of materials
handling is necessary and, possibly,
order progressing.
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Key Components of Distribution and
Logistics
Logistics Cost as Percentage of Sales
Turnover
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Logistics Cost as Percentage of Sales
Turnover
Logistics Management End to End
Cycle
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The Systems and Total Cost Approaches to
Logistics
Systems Approach
– Interdependence of company and logistics goals
– Interdependence of functional areas
• Stock-keeping units (SKUs)
a distinct item for sale, such as a product or
service, and all attributes associated with the item
that distinguish it from other items
– Interdependence of logistics activities or Intra-functional
logistics
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The Systems and Total Cost Approaches to
Logistics
Total Cost Approach
– Cost trade-offs: changes to one activity cause some
costs to increase and others to decrease
– Total Logistics Concept: to find the lowest total cost that
supports an organization’s customer service
requirements
Thank you
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