Sales, Distribution and Supply Chain Management

MK 0001 Sales, Distribution and Supply Chain Management Contents Unit 1 Personal Selling and Sales Management Overview Unit 2 Organizing the Sales Department Unit 3 Sales Force Management Unit 4 Directing and Controlling Sales Efforts Unit 5 Logistics of Distribution Unit 6 Channel Management Unit 7 Recent Trends in Channel Management Unit 8 Introduction to Supply Chain Management Unit 9 Planning and Designing Supply Chain Unit 10 Co-ordination in Supply Chain Unit 11 Issues Regarding Information Technology and Supply Chain References

1 18 28 67 78 99 127 135 152 164

177 197

Edition: Fall 2007 th

BKID – B0773 8 Nov. 2007

Brig. (Dr). R. S. Grewal VSM (Retd.) Pro Vice Chancellor Sikkim Manipal University of Health, Medical & Technological Sciences Board of Studies Mr. Rajen Padukone Member – Academic Senate, Sikkim Manipal University Ms. Vimala Parthasarathy Prof. K. V. Varambally HOD Director Convener Manipal Institute of Management Department of Management & Commerce Manipal Directorate of Distance Education Sikkim Manipal University Prof. Raj Dorai Industry Consultant and Visiting Faculty, IBA, IFIM and BIM, Bangalore

Mr. Jagadeesh Assistant Professor Department of Management & Commerce, Directorate of Distance Education, Sikkim Manipal University

Mr. Umesh Maiya Assistant Professor Department of Management & Commerce Directorate of Distance Education Sikkim Manipal University

Mr. R. Ravindra Rao Senior Faculty Manipal Institute of Management Manipal

Content preparation Team Content Writing and Compilation Dr. Tribhuvan J. Professor, Garden City College Bangalore Format Editing Mr. Umesh Maiya Assistant Professor Department of Management & Commerce Directorate of Distance Education Sikkim Manipal University

Language Editing Mr. Sridhar Bhatt Lecturer in English Government College, Udupi

Edition: Fall 2007 This book is a distance education module comprising of written and compiled learning material for our students. All rights reserved. No part of this work may be reproduced in any form by any means without permission in writing from Sikkim Manipal University of Health, Medical and Technological Sciences, Gangtok, Sikkim. Printed and Published on behalf of Sikkim Manipal University of Health, Medical and Technological Sciences, Gangtok, Sikkim by Mr. Rajkumar Mascreen, GM, Manipal Universal Learning Pvt. Ltd., Manipal – 576 104. Printed at Manipal Press Limited, Manipal.

SUBJECT INTRODUCTION The focus of management has changed over time. Business thinking in the 70s was driven by strategic planning and product portfolio approach. Success was dependent upon the ability of an organization to meet the demand at the lowest cost, leading to economies of scale approach. The 80s exposed the weakness of this approach and saw an upsurge in quality consciousness, leading to an increased emphasis on TQM, product reliability and customer satisfaction. Flexibility and responsiveness have become key business drivers for the 21st century, forcing businesses to orient themselves along processes instead of functions. Selling products to the customers has become a challenging task amidst tough competition. In case of financial services and commercial banking, any position that deals in sales management, commercial and industrial sales will prove to be very challenging. It is in this regard that good sales personnel must be regarded as an asset to any organization. A sales executive requires the ability to successfully prospect for new sales opportunities in the mid-market sector across various vertical markets. Additionally, one must be competent in developing and executing a winning sales strategy. Businesses must be willing to change their attitudes, routines and their ideas of how things need to run. Supply chains can be tremendous assets to companies and their vendors. A supply chain consists of all of the entities necessary to transform ideas into delivered products and services. Supply chain management directs and transforms a firm's resources in order to design, purchase, produce, and deliver high-quality goods and services. This courseware has been carefully designed to incorporate all essential aspects of sales management and supply chain management. This book comprises 11 units: Unit 1: Personal Selling and Sales Management Overview Deals with the meaning and objectives of personal selling. Also discusses methods to design new sales and marketing process.

Unit 2: Organizing the Sales Department Discusses the essential duties and responsibilities of a sales executive. Also deals with sales department relations and distributive network relations. Unit 3: Sales Force Management Focusses on recruitment, selection and training of sales personnel. Unit 4: Directing and Controlling Sales Efforts Deals with the sales budget, sales territories, sales control and cost analysis. Unit 5: Logistics of Distribution Deals with the meaning, functions and the process of logistics. Unit 6: Channel Management Deals with the policies of marketing channels, designing channels, assessing channel performance and managing channel relationships. Unit 7: Recent Trends in Channel Management Discusses wholesaling and retailing, while dealing with the ethical and social issues in sales and distribution management. Unit 8: Introduction to Supply Chain Management Deals with the meaning and definition of supply chain as well as the objectives and the process of supply chain management. Unit 9: Planning and Designing Supply Chain Throws light on supply chain integration, forecasting in supply chain and managing demand and supply. Unit 10: Co-ordination in Supply Chain Discusses the obstacles in supply chain co-ordination. Also deals with managerial leverages to achieve co-ordination while discussing the need for outsourcing in supply chain management. Unit 11: Issues Regarding Information Technology and Supply Chain Deals with the use of Information Technology in supply chain management while throwing light on e-business and supply chain.

Sales, Distribution and Supply Chain Management

Unit 1

Unit 1

Personal Selling and Sales Management Overview

Structure: 1.1

Introduction Objectives

1.2

Sales Management, Personal Selling and Salesmanship Self Assessment Questions I

1.3

Setting Personal Selling Objectives

1.4

Determining Sales-related Marketing Policies 1.4.1

Sales and Marketing Company Policy: Case Study

1.4.2 Methods to Design New Sales and Marketing Process 1.4.3 Control of Sales and Marketing Policy and Procedures Self Assessment Questions II 1.5

Formulating Personal Selling Strategy Self Assessment Questions III

1.6

Summary

1.7

Terminal Questions

1.8

Answers to SAQs and TQs

1.1 Introduction When it comes to various positions in sales management, it is possible to get them in various companies and organizations including service-oriented institutions such as insurance, consulting agencies, banking and financial services, and even government institutions. In case of financial services and commercial banking, any position that deals in sales management, commercial and industrial sales will prove to be very challenging and at the same time a very rewarding experience, as there are wide opportunities such as technical training, broad management practices and system selling. Sikkim Manipal University

Page No. 1


Unit 1

Due to the varied market requirements and market opportunities, the engaged sales personnel will be in need of newer and sophisticated techniques and that too at constant intervals to match the market trends. The sales force will be required to be imparted with the latest interpersonal training techniques by duly taking into account their interests, background, academic training, technical skills, and enthusiasm in accepting newer roles or responsibilities. In any kind of sales and sales management training programs, situation will be different and one cannot have a standard set for time, format, length, etc. When it comes to the career path in sales, different companies will have different career paths and it is better to look into each and every system of the company individually. Sales management and the business enterprise: Sales management by itself is a very broad portfolio and it includes all levels and positions such as new business selling, technical selling, trade sales, and missionary sales. In new business selling the personnel responsible for sales will not be assigned any specific location or area and there is also no designated account. The sales force formed for the technical selling will have areas or specific geographical locations assigned for them and specific accounts will also be designated. In trade sales, the sales representatives are responsible for selling the manufactured goods to the wholesale dealers as well as retail traders to fulfill the manufacturer’s target or the company’s target. Missionary salespersons represent the manufacturing companies and their responsibilities include contacting retail sellers and decision makers of other companies and making them to understand about the product and convince them to buy. The job of any missionary sales representative will be in the

Sikkim Manipal University

Page No. 2


Unit 1

form of training or preparing personnel to take on actual sales work later on and there is no need for the representative to sell or close the deal. Persons holding sales management positions are required to show a very strong and favourable performance and track record within a year or two, and such a target-oriented approach will see them climbing the corporate ladder fast. It is a fact and as realized by many persons engaged in sales line, sales management is the most wonderful and challenging option for climbing up the ladder of success and at the same time very rewarding one. The team that is engaged in sales management will have the direct opportunity to deal with the market and the personnel can make use of their expertise and experiences to deal with the human factor for clinching the deal in their favor, as other marketers hardly or rarely meet or interact with customers for winning over. The opportunities such as direct interaction with a variety of customers including their own colleagues can make the sales management people very confident and give them a sense of achievement and they can do a high quality work by understanding the feel of the market and make use of the information for increasing the sales. There are various employment opportunities and many sales management positions can be clinched or grasped from various companies and when it comes to companies, there are categories such as profit-oriented companies, non-profit organizations, and service-oriented industries such as insurance, financial and banking services, consulting, and even government agencies. The training that is being imparted to the sales management people will be very expanse in nature and as such people are bound to know all details about the product they sell so as to have and maintain a competitive edge over others in the market. Any detailed knowledge about the product that Sikkim Manipal University

Page No. 3


Unit 1

they sell can certainly assist sales people in clarifying the doubts and explaining things to the prospective buyers and thereby show an increase in sales. At the first instance, the personnel who sell the products should believe in the products they sell and without this understanding it will be a difficult task for them to sell. Few of other important factors that directly impact the sales figures are the motivation levels, initiatives shown by the sales team and effective supervision by the managerial group of the organization. Further, a good analytical mind possessed by the sales people can help in understanding the market situations correctly in its real perspective and take corrective actions or use alternate decisions to boost sales. Objectives: After studying this unit, you will be able to: 

Explain personal selling.



State the five objectives of promotion that are met through personal selling



Explain how the objectives of personal selling are set.



Explain direct marketing.

1.2 Sales Management, Personal Selling and Salesmanship Personal Selling: Personal selling has a vital role in service, because of the large number of service businesses which involve personal interaction between the service provider and the customer, the service being provided by a person not a machine and ‘people’ becoming part of the service product. Many customers of service firms have a close and on-going relationship with the service providers. Under these circumstances, selling has a pivotal role Sikkim Manipal University

Page No. 4


Unit 1

in the communication mix. In certain services, selling is the preeminent element in the communication mix. Selling of services include prospect identification, sales call planning, preparation of presentations, handling objectives and closing a sale. George, Kelly and Marshall suggest seven guidelines for selling services. They are: a. Orchestration of the service purchase encounter b. Facilitation of a quality assessment by customer c. Making the service tangible d. Emphasis on organization’s image e. Use of reference from external sources f.

Recognition of importance of customer contact personnel, and

g. Recognition of customer involvement during the service design process Lack of training and resistance to selling are two commonly faced problems in many services businesses. A sales management structure supported by a programme of sales training will help to improve the capacity of the sales personnel. Market orientation development programmes are helpful to overcome the problem of resistance to selling. Sales Promotion: Sales promotion includes any marketing activity designed to sell a product or service. It involves many marketing tactics like price deals, bonus offers, additional services and gifts. Traditionally, sales promotion was used mainly in consumer’s goods market. Now many service firms also adopt sales promotion programmers to a large extent. Sales promotion tools can be aimed at three groups: 1. Customers: Free offers, sample demonstrations, coupons cash refunds, prizes, contests and warranties. Sikkim Manipal University

Page No. 5


Unit 1

2. Intermediaries: Free goods, discounts, advertising allowances, cooperative advertising, distribution contents and awards. 3. Sales Force: Bonuses, awards, contests and prizes for best performer. Sales promotions are not always co-ordinated well with marketing objectives and other components of the communications mix. In order to help to develop, implement and test a promotions programme, the following steps should be taken: 1. Decide the objectives of sales promotion and how they will support other communications and marketing mix elements. 2. Determine the balance of promotions activity between customer’s intermediaries and sales force. 3. Decide the sales promotion tools to be used. 4. For each element of sales promotions programme,  Determine the amount of the incentive;  Establish conditions for involvement;  Decide on the length of the promotions;  Choose the distribution method for promotions; and schedule the promotion time-table. 5. Decide on the sales promotion budget. 6. Pre–test the sales promotion budget. 7. Launch the sales promotion programme. 8. Evaluate the sales promotion programme. Public Relations: The institute of public relations of England defines public relations practice as “The planned and sustained effort to establish and maintain goodwill and mutual understanding between an organization and its publics.” ‘Publics’ include all the groups of people and organizations which have an interest in Sikkim Manipal University

Page No. 6


Unit 1

the service company. So the employees also can be included. As publics are more diverse, public relations is essential to communicate with them. Public relations is concerned with many marketing tasks like – a. Building and maintaining image. b. Handling problems and issues smoothly, c. Reinforcing positioning, d. Influencing the public to a position favourable to the marketer and e. Preparing the public favorably while launching new services. A service organization’s image is made up of the collective experiences, views, attitudes and beliefs held about it. Public relations can use a range of communication approaches to improve or maintain the image of a service organisation. Overall objective with image is to ensure that an organisation is viewed more favourably, and is more familiar than competitors in the market segments it serves. A wide range of tools can be used in the design of a public relation programme. These include publications, including press releases, annual reports, brochures, posters, articles and employee reports, Events, including press conferences, seminars, speeches, and conferences. Investor relations aimed at gaining support of investors and analysts’ stories which create media coverage exhibitions including exhibits, displays, sponsorship of charitable causes and community projects. Word-of-Mouth: One of the most distinctive features of promotion in service businesses is the greater importance of referral and word-of-mouth communications. It highlights the importance of the people factor in service promotions. Customers utilizing a service, talk to other potential customers about their experiences. Such an endorsement has more reliability and impact than an advertisement or other mass or personal communications mix elements. Sikkim Manipal University

Page No. 7


Unit 1

The multiplier effect from word-of-mouth is not uniform to all products. It varies from industry to industry and situation to situation. But a service marketer should be careful about negative referrals as they tend to have a greater impact than positive experiences. Dissatisfied customers are likely to talk about their experiences to more people and this can significantly reduce the effectiveness of advertising and other elements of the communications mix. Direct Marketing: Direct marketing is recognized as a low cost and effective method for communicating with corporate customers due to increasing cost in direct sales force. Developments in electronic media, telecommunications, internet etc. provide great opportunities for developing integrated programmers for direct marketing activities. Consequently, many service firms have begun to take advantage of the benefits of a co-ordinated direct marketing program. Self Assessment Questions I State whether the following statements are True or False: 1. The multiplier effect from word-of-mouth is uniform to all products.. 2. Direct marketing is recognized as a low cost and effective method for communicating with corporate customers. 3. Sales promotions are always co-ordinated well with marketing objectives and other components of the communications mix.

1.3 Setting the Objectives of Personal Selling Personal selling is used to meet the five objectives of promotion in the following ways: 

Building Product Awareness – A common task of salespeople, especially when selling in business markets, is to educate customers on new product offerings. But building awareness using personal selling is


Page No. 8


Unit 1

also important in consumer markets. As we will discuss, the advent of controlled word-of-mouth marketing is leading to personal selling becoming a useful mechanism for introducing consumers to new products. 

Creating Interest – The fact that personal selling involves person-toperson communication makes it a natural method for getting customers to experience a product for the first time. In fact, creating interest goes hand-in-hand with building product awareness as sales professionals can often accomplish both objectives during the first encounter with a potential customer.



Providing Information – When salespeople engage customers a large part of the conversation focuses on product information. Marketing organizations provide their sales staff with large amount of sales support including brochures, research reports, computer programs and many other forms of informational material.



Stimulating Demand – By far, the most important objective of personal selling is to convince customers to make a purchase. In our next tutorial, we will see how salespeople accomplish this when we offer detailed coverage of the selling process used to gain customer orders.



Reinforcing the Brand – Most personal selling is intended to build longterm relationships with customers. A strong relationship can only be built over time and requires regular communication with a customer. Meeting with customers on a regular basis allows salespeople to repeatedly discuss their company’s products and by doing so, help strengthen customers’ knowledge of what the company has to offer.

1.4 Determining Sales-related Marketing Policies If you are an organization spending $500,000 or more on marketing expenses (e.g. advertising, trade shows, print materials, direct mail, etc.) Sikkim Manipal University

Page No. 9


Unit 1

then STOP! We found it again. Do you ask why…? Because marketing has the greatest potential of being very unproductive. In fact, many marketing programs struggle to break even, and actually frequently lose money. So, if we increase the overall effectiveness, then we can eliminate 50% or more of your wasted marketing efforts, which translates into $250,000 in cash. So now, let’s see how this actually works in a real-life scenario. 1.4.1 Sales and Marketing Company Policy: Case Study An organization with $500,000 in marketing expenses needed assistance. We examined their sales and marketing process to understand and quantify the lead flow, follow-up, and demand forecasting issues. Then we designed and implemented a process to improve their sales cycle efficiency and tie it closer to their customer’s buying cycles. After the marketing reductions, we then reinvested $100,000 back into new processes for public relations and Customer Relationship Management (CRM), both of which were suffering badly. The metrics we developed reduced their marketing expenses by 60% overall and increased their sales cycle efficiency from 40% to 60% within 6 months of implementing the new procedures. With these new processes and reports, the company now tracks sales cycle efficiency and life-time value rather than just sales quota achievement, as the measure of their sales & marketing effectiveness. The result: an extra $300,000 in cash plus a 50% increase in process capability (capacity). As we have seen time and time again, time can be our best friend, if only we let it. 1.4.2 Methods to Design the New Sales and Marketing Process 

Improve Follow-up: Only about two percent (2%) of sales occur on the first contact. Eighty percent (80%) of sales will require five to eight


Page No. 10


Unit 1

contacts before the sale closes. This means that if you are contacting the prospect less than five times or more than eight times, then you could have a problem with follow up. 

Sales Cycle Efficiency: Time kills deals. The speed at which a prospect is converted into a customer and the number of prospects required to make that conversion determines your sales cycle efficiency. So ask yourself, are you taking the right steps to measure and reduce lost sales?



Life-time Value: How profitable a given customer is over time defines your LTV or Life-time Value. Companies spend ten times more to acquire a customer than to keep a customer. However, existing customers are more likely to purchase again, spend more money, and therefore become more profitable. If you don’t know your LTV, then how do you know how much money to spend and on which customer segment?



Demand Forecasting: Every customer buys on a cycle. So this means that you should track cycle times and variance to increase the accuracy of your forecasting and the loyalty of the customer. Do you know when your customers need to reorder?



Improve Lead Quality: Do you have methods in place to measure the conversion potential of each lead? Lead generation activities (i.e. forms) should pre-qualify every new lead so that you can take the right follow up actions for the marketing offer. Strong leads produce strong sales.



Increase Awareness: To keep the sales pipeline full of good quality leads, you must continuously increase the awareness of your company and the solutions that it provides. Public relations is more efficient at building awareness than advertising, yet many companies spend wildly


Page No. 11


Unit 1

on advertising and trade shows while neglecting to fund public relations efforts much at all. Increase your name recognition, not your budget. 

Reduce Discounting: Discounts represent deficiencies in the sales and marketing processes, which means that you should use them sparingly. Instead, determine the root cause and then fix the process that’s causing the need to discount. Show customers the added value, and they won’t focus on price.



Train Personnel: Provide your sales and marketing personnel regular formal training. This will arm them with better product knowledge as well as presentation, negotiating and selling skills that will improve effectiveness. This will boost both employee morale and the bottom line – a win-win.

1.4.3 Control of Sales and Marketing Policy and Procedures Improve your sales cycle efficiency. Reduce your marketing expenses. Tie it closer to your customer’s buying cycles. And take control of your sales and marketing program to let it work for you. Improvement with Well-defined Policies and Procedures: With well-defined processes and procedures in place, you will increase efficiency by reducing ineffective sales and marketing programs. And, again, we make such improvements to create more cash on hand – all toward that million dollar goal and to cross the finish line. Self Assessment Questions II State whether the following statements are True or False: 1. Discounts represent deficiencies in the sales and marketing processes. 2. Many marketing programs struggle to break even, and actually frequently lose money. 3. Well-defined processes and procedures in place will increase efficiency by reducing ineffective sales and marketing programs. Sikkim Manipal University

Page No. 12


Unit 1

1.5 Formulating Personal Selling Strategy A personal selling strategy works best for a complex, technical, unique, customized product with a poorly informed client. Such products are so complex and technical that you need a trained, informed person to explain them to their highly specialized customers. It is likely to have to be customized for each individual sale, and its client doesn't have the time to read up on all the different ones on the market and why yours is better (and is thus uninformed). To address all of these unique needs, you have to design your personal selling strategy to have three key elements: a knowledgeable salesperson or sales team, an understanding of your client, and a sales structure designed to give the salesperson enough power to make an irregular sale but still get rewarded for it. The Salesperson The salesperson is the key to your personal sales strategy. So when you're recruiting salespeople, you should be willing to recruit the best and expect to pay them a premium. There are two routes you can follow: You can hire someone with a good sales background and teach them about the science (or product); or you can hire someone with a good scientific background and teach them about sales. Usually, the choice you make will depend on how complicated your product is and who your customers are. An electronic imaging product is likely to be pretty technical, and your customer will likely be a doctor or a scientist, so you'll want a scientist to be your salesperson, both for credibility reasons and to give the customer what he is looking for. If the person buying your product is a hospital administrator, you might think about hiring someone with sales experience instead, because the administrator will be used to buying from non-technical people and will likely be more bottom-line oriented. Sikkim Manipal University

Page No. 13


Unit 1

The salesperson is your only link to the client. This means that they need to know the product inside and out, so that when the customer has a question or an issue with the product, it can be addressed immediately and not shuffled off to another staff person. They also need to know the competitors' products, so they can give accurate representations of why your imaging technology is better. So to allow the salesperson to do their job well, you need to give them lots of information. You also need to give your sales force considerable power. Power to make a deal. Power to say "yes" to needed product customizations. And, of course, the power to say "no" to a deal that won't make the company money. Remember, also, that the salesperson is more than just a sales agent: They're a research and development tool. Their interactions with customers give you more information about what modifications need to be done to your product than any other source. They're market intelligence (because they know what other products are being sold, and why) as well as a way of making your own product more customer-oriented. The Client Throughout the marketing section, we've used the phrase "Know your client." It is just as important here as anywhere else. By understanding what your client needs in a product, you can better give the salesperson the tools they can use to fulfill that need. By understanding what a customer wants in a salesperson, you can tune your sales team to be just that. Do they want a half-hour presentation or just a 12-second pitch? A customized product they help to design or a ready-to-use product, in their lab, tomorrow? Or maybe the purchaser isn't the user at all: A hospital administrator makes the purchase decision, and a doctor uses the machine. Understanding this will help keep you from wasting salesperson’s time on selling the machine to the doctor, who's not authorized to buy it anyway. Sikkim Manipal University

Page No. 14


Unit 1

The Sales Structure Remember: In a personal selling strategy, your salesperson is your best friend. But, depending on the system you've set up for them, that person can also be your worst enemy. Determining an appropriate incentive system for a sales force can be the most difficult job you'll have as a business person. The key is to keep your sales force motivated, without any loopholes that they can use to take advantage of the system. For example: By giving quarterly sales quota-based bonuses but also giving the salesperson the authority to make big discounts, chances are, you're going to get a lot of sales late in the quarter (as the salesperson desperately tries to make their quota). But you'll also see a cost to those sales: Chances are, they'll be discounted quite significantly, affecting your company's profits. Determining a good incentive system for your sales force is very difficult and depends very much on what you're trying to do and the product you're trying to sell. You can reward the sales team based on short-term sales goals, long-term sales, repeat sales, customer support, number of new prospects, under-budgeted expense reports, or a whole lot of other things, but chances are, you'll have to fine-tune this structure as your business evolves, to emphasize what you want your sales force to do. Above all else, remember that your sales force isn't stupid and that they spend about as much time thinking about their paycheck as they do trying to sell your product, so the incentive structure you design will determine the behavior of your customer.

Self Assessment Questions III 1. In a personal selling strategy, _____________ is one’s best friend. 2. A ___________ works best for a complex, technical, unique, customized product with a poorly informed client. 3. The salesperson is one’s only link to _______.


Page No. 15


Unit 1

1.6 Summary 

The sales management is the process of selling and buying goods and services to the public with proper techniques.



Personal selling has a vital role in service, because of the large number of service businesses which involve personal interaction between the service provider and the customer.



Selling of services include prospect identification, sales call planning, preparation of presentations, handling objectives and closing a sale.



Sales promotion includes any marketing activity designed to sell a product or service. Sales promotions are not always co-ordinated well with

marketing

objectives

and

other

components

of

the

communications mix. 

A service organization’s image is made up of the collective experiences, views, attitudes and beliefs held about it.



Direct marketing is recognized as a low cost and effective method for communicating with corporate customers due to increasing cost in direct sales force.



A personal selling strategy works best for a complex, technical, unique, customized product with a poorly informed client.

1.7 Terminal Questions 1. What is sales management? Explain. 2. Explain how a personal selling strategy can be formulated? 3. What is ‘direct marketing’? 4. State the five objectives of promotion that are met through personal selling.


Page No. 16


Unit 1

1.8 Answers to SAQs and TQs SAQs I 1. False

2. True

3. False

2. True

3. True

SAQs II 1. True SAQs III 1. Salesperson 2. Personal selling strategy 3. The client Answers to TQs: 1. Refer to 1.2 2. Refer to 1.5 3. Refer to 1.2 4. Refer to 1.3


Page No. 17


Unit 2

Unit 2

Organizing the Sales Department

Structure: 2.1


2.2

Essential Duties and Responsibilities of a Sales Executive

2.3

The Sales Organization 2.3.1 Nine Steps to Building a Winning Sales Organization Self Assessment Questions I

2.4

Sales Department Relations

2.5

Distributive Network Relations Self Assessment Questions II

2.6

Summary

2.7

Terminal Questions

2.8


2.1 Introduction A sales executive requires the ability to successfully prospect for new sales opportunities in the mid-market sector across various vertical markets. Additionally, one must be competent in developing and executing a winning sales strategy. This includes developing new prospect opportunities. The successful candidate should be able to use consultative selling skills to clearly understand customers’ business requirements. The steps to building a winning sales organization have been described briefly in this unit. Objectives: After studying this unit, you will be able to: 

State the essential job duties and responsibilities of a sales executive.



Explain the steps involved in building a winning sales organization.


Page No. 18


Unit 2

2.2 Essential Duties and Responsibilities of a Sales Executive 

Conducts cold calls, prospects and qualifies account opportunities;



Develops

pipeline

of

new

opportunities

while

closing

existing

opportunities; 

Identifies and creates business needs with senior executive decision makers;



Creates and communicates the value of Kronos’ solution with prospects and clients;



Builds relationships at all levels within organizations;



Develops a detailed territory plan;



Develops individual account strategies to effectively penetrate accounts;



Develops thorough understanding of each account's industry and business;



Acts as a resource for multiple industries;

Uses understanding of internal processes and resources to effectively execute the sale. Essential Knowledge, Skills and Abilities: Communication: 

For all levels (executive, management, and operational),



Able to clearly present information through the spoken or written word;



Read and interpret complex information;



Probe customers to uncover hidden information;



Listen well.

Influence & Persuasion: 

Able to convince others in both positive or negative circumstances;



Use tact when expressing ideas or opinions;



Present new ideas to decision makers;


Page No. 19




Unit 2

Adapt presentations to suit a particular audience; respond to objections successfully.

Initiative: 

Able to bring about great results from ordinary circumstances;



Prepare for problems or opportunities in advance;



Transform leads into productive business outcomes;



Undertake additional responsibilities and respond to situations as they arise without supervision.

Negotiating: 

Able to obtain agreement from multiple parties throughout all stages of the sales cycle;



Earn trust;



Use good timing and carefully calculated strategies when bargaining;



Communicate high value of services over the competition;



Identify hidden agendas that might interfere with resolution of terms.

Planning, Prioritizing, and Goal Setting: 

Able to prepare for emerging customer needs;



Manage and close existing deals while cultivating new opportunities;



Determine project urgency in a meaningful and practical way;



Use goals to guide actions and create and execute detailed action plans.

Reading the System/Political Advantage: 

Able to identify key people to bring about change;



Understand underlying political dynamics;



Develop a network of contacts and target specific influential people to reach goals;



Be aware of significant contributing factors to manage change.


Page No. 20


Unit 2

Benefits: Competitive compensation and full benefit package, including executive, incentive trip for high achievers that possess the drive and ambition to surpass yearly quotas. Requirements: Education and Experience: 

Bachelor’s degree or equivalent preferred.



Experience with Power Base Selling Methodology or similar program desired.



5-7 years with proven experience selling software solutions at the C level in the mid-market space.



Experience of selling HR and Payroll application-oriented software or systems strongly preferred.



Consistently exceeded a $1 Million + quota.

2.3 The Sales Organization 2.3.1 Nine Steps to Build a Winning Sales Organization Is your sales team performing far below potential? Step 1: Do nothing Do nothing. When you first arrive on the scene of a sales office in distress, don't do anything. Take the time to understand your organization's situation, gather information about the people involved, and…. Step 2: Analyze your problem(s) Analyze your problems. The example you set for your people is not enough, because many salespeople emulate the actions of their peers. Since many salespeople play "follow the leader," you've got to ask yourself which salespeople your less experienced salespeople look up to. And, what kind of example are these "leaders" setting? You can get peak performance out of Sikkim Manipal University

Page No. 21


Unit 2

average producers if you can get average producers to emulate the success habits demonstrated by a leading salesperson. Step 3: Find your success role model In sports, when a player assumes more of a leadership role on a team, it's called "stepping up." Hopefully, you already have a few players capable of stepping up. If so, talk to them. Help them see the importance of their success example, and ask them to share more of their knowledge and experience with less experienced salespeople. Step 4: Don't tolerate mediocre sales performance You've got to decide – you won't tolerate mediocre sales performance. Far too often, poorly performing salespeople are allowed to continue their lackluster ways. A manager may not want to face the hassle of recruiting a replacement, or the manager may want to avoid confrontation. This is a big mistake. A successful sales manager doesn't tie the ship to a poor performer's anchor. Instead, successful managers take a "hands-on" role with more performers by providing the coaching and training the poor performer needs to improve performance. Your objective is to bring those that are lagging behind to "the intersection of choice." i.e. poor performers must make a decision themselves to either a) recommit themselves to perform the necessary behaviours and activities, or b) leave the company immediately. There is a saying, "There's only one thing worse than somebody who quits and leaves – and that's somebody who quits and stays." The key question is this: if you knew then what you know now, is there anybody on your team you would not have hired? If so, get "hands-on" and escort that individual to his or her intersection of choice.


Page No. 22


Unit 2

Step 5: Install performance standards Install

performance

standards.

You've

got

to

communicate

your

expectations. So raise the BAR on everybody with standards that consist of Behavior, Activity and Results. A behavior standard, for example, could be to arrive in the office every morning before 8 a.m. An activity standard could be to make a minimum of 25 telephone prospecting calls every day. A result standard could be that a sales rep with seven to nine months’ sales experience must sell a minimum of $50,000 per month. On results standards, set two standards. One, a lower "keep your job" standard. Salespeople who fall below the minimum standard for a three-month period are placed on probation. If sales don't pick up in the next quarter, that person must be "desired." Another standard performance is of course, a higher sales quota. Step 6: Desire those below minimum standards Desire those below minimum standards. Your salespeople will be wondering, "Do you really mean it?" The first person you desire will send a loud and clear message – performance standards will be enforced. If you don't enforce them, your standards are meaningless. Step 7: Coach, coach, and coach some more Coach, coach, and coach some more. Don't be a "desk jockey". Get out and work with your salespeople. If the only way to grow your people and your business. Step 8: Cultivate a better "quality of life" Cultivate a better "Quality of Life." Have more fun. Step 9: Know what each salesperson wants Know what each salesperson wants. Every person has his or her own personal motivators. Your job is to find out what they are and help the Sikkim Manipal University

Page No. 23


Unit 2

salesperson toward achievement. Sit down with each salesperson one-onone. Try to learn something about each of them: what are their goals with your company and beyond? What is their past like? How can you help them be, having, and do more?

Sidebar: The five biggest mistakes a sales manager can make 1. Too focused on closing deals instead of developing salespeople. 2. Focused salespeople on "more calls" instead of "better calls." 3. Spend too much time sequestered in their office, instead of working and interacting with salespeople. 4. Assume that because someone has been trained, they know how to sell. No common "language" of selling for diagnosing opportunities.

2.4 Sales Department Relations 

Providing professional and personalized support to customers.



Providing accurate and complete information such as quotations, invoices and reports to customers and to the management.



Creative and effective communication skills to establish presentation opportunities.



Creating, updating and maintaining our Customers’ Database System.

2.5 Distributive Network Relations-A case Study For instance, in the health group company the Distributive Network Relations are stated.


Page No. 24


Unit 2

Description United Health Group is an innovative leader in the health and well-being industry, serving more than 55 million Americans. The industry has outstanding clinical insight with consumer-friendly services and advanced technology to help people achieve optimal health. Secure Horizons is a division of Ovations, the segment within United Health Group exclusively focused on health and well-being for individuals age 50+. Secure Horizons provides a portfolio of health care products and services to individuals eligible for Medicare. Secure Horizons is the largest and longest tenured Medicare Advantage business in the United States, with 2006 membership of 1.4 million and revenues exceeding $14 Billion. Secure Horizons is comprised of over 2500 employees located across the U.S. who pledge to help every senior Live Secure & Be Secure. This key position within Ovations is responsible for leading the organization's Network Relations function. Ovations is a complex enterprise serving nearly 1.5 million Medicare and Medicaid-eligible customers through a variety of products, programs and services that depend on supportive and high performing networks of healthcare providers. Working closely with the Ovations Network Operations Group, and counterparts throughout United Health Group, the Director of Network Relations and his team will: •

Direct Ovations Provider Relations activity, in conjunction with Provider Customer Service areas.

•

Collaborate with United Healthcare’s emerging Provider Experience agenda.

•

Co-ordinate Legacy Provider Relations/United Health Networks team activity, including capitation and gain-share related support where appropriate.

•

Drive national Ovations provider engagement standards.


Page No. 25


•

Unit 2

Support Ovations’ annual event planning calendar with Provider-oriented materials, information, and education.

•

Ensure regulatory and contractual provider notification requirements are met.

•

Drive improved UHG service channel use and quality metrics.

The success of this role will be determined by a well-organized and thoughtfully executed network relations engagement plan, data-driven evidence of favorable provider response to interactions with Ovations customers, and progressively streamlined and effective internal processes dedicated to serving network providers in their transactions with Ovations administrative and service capabilities. Self Assessment Questions I State whether the following statements are True or False: 1. Poor performers must make a decision themselves either to recommit themselves to perform the necessary behaviours and activities, or to leave the company immediately. 2. In sports, when a player assumes more of a leadership role on a team, it's called "stepping up."

2.6 Summary The sales executives play a major role in selling goods and services to the consumers. They are the direct sellers of the products of the company to the consumers. The network relations are very important to them. The sales department has a larger role in retaining the sales volume of the products. The steps to building a winning sales organization have been described briefly in this unit.


Page No. 26


Unit 2

2.7 Terminal Questions 1. Explain in detail the duties of sales executives. 2. The network relations are very important for a company. Explain. 3. Write a short note on sales department relations. 4. State the nine steps involved in building a winning sales organization.

2.8 Answers to SAQs and TQs SAQs I 1. True 2. True Answers to TQs: 1. Refer to 2.2 2. Refer to 2.5 3. Refer to 2.4 4. Refer to 2.3


Page No. 27


Unit 3

Unit 3

Sales Force Management

Structure: 3.1


3.2

Principles of Personal Management

3.3

Recruiting Sales Personnel Self Assessment Questions I

3.4

Selecting Sales Personnel

3.5

Sales Personnel Training Programs

3.6

Motivating Sales Personnel Self Assessment Questions II

3.7

Compensating Sales Personnel

3.8

Managing Sales Expenses Self Assessment Questions III

3.9

Sales Meeting and Sales Contests 3.9.1 Sales Contest Psychology 3.9.2 Ten Sales Psychology Factors Self Assessment Questions IV

3.10 Summary 3.11 Terminal Questions 3.12


3.1 Introduction Providing knowledgeable and responsive customer service is a priority of every organisation. Hence selection and training of sales personnel towards achievement of this goal gains a lot of importance in any organization. Time management is an essential skill for personal management. The essence of time management is to organize and execute around priorities. This unit Sikkim Manipal University

Page No. 28


Unit 3

focuses on this aspect while dealing with recruitment, selection and training of sales personnel, in detail. Objectives: After studying this unit, you will be able to: 

Explain the meaning of personal management.



Explain how to recruit sales personnel.



Explain various sales personnel training programs.



State why sales personnel need to be motivated.



Explain the need for sales meeting and sales contests.

3.2 Principles of Personal Management Put First Things First Habit 1 – I am the Programmer. Habit 2 – Write the Program. Habit 3 – Execute the Program. Habit 3 is Personal Management, the exercise of independent will to create a life congruent with your values, goals and mission. The fourth human endowment, Independent Will, is the ability to make decisions and choices and act upon them. Integrity is our ability to make and keep commitments to ourselves. Management involves developing the specific application of the ideas. We should lead from the right brain (creatively) and manage from the left brain (analytically). In order to subordinate the feelings, impulses and moods to your values, you must have a burning "YES!" inside, making it possible to say "No" to other things. The "Yes" is our purpose, passion, clear sense of direction and value.


Page No. 29


Unit 3

Personal Management Time management is an essential skill for personal management. The essence of time management is to organize and execute around priorities. Methods of time management have developed in these stages: 1) notes and checklists - recognizing multiple demands on our time; 2) calendars and appointment books - scheduling events and activities; 3) prioritizing, clarifying values - integrating our daily planning with goal setting (The downside of this approach is increasing efficiency can reduce the spontaneity and relationships of life.); 4) managing ourselves rather than managing time - focusing in preserving and enhancing relationships and accomplishing results, thus maintaining the P/PC balance (production versus building production capacity). A matrix can be made of the characteristics of activities, classifying them as urgent or not urgent, important or not important. List the activities screaming for action as "Urgent." List the activities contributing to your mission, value or high priority goals as "Important." Quadrant I activities are urgent and important - called problems or crises. Focusing on Quadrant I results in it getting bigger and bigger until it dominates you. Quadrant III activities are urgent and not important, and often misclassified as Quadrant I. Quadrant IV is the escape Quadrant - activities that are not urgent and not important. Effective people stay out of Quadrants III and IV because they aren't important. They shrink Quadrant I down to size by spending more time in Quadrant II.


Page No. 30


Unit 3

Quadrant II activities are important, but not urgent. Working on this Quadrant is the heart of personal time management. These are PC activities. Quadrant II activities are high impact - activities that when done regularly would make a tremendous difference in your life. (Including implementing the Seven Habits.) Initially, the time for Quadrant II activities must come from Quadrants III and IV. Quadrant I can't be ignored, but should eventually shrink with attention to Quadrant II. 1) Prioritize

2) Organize around Priorities

3) Discipline yourself

Self-discipline isn't enough. Without a principle center and a personal mission statement, we don't have the necessary foundation to sustain our efforts. Covey has developed a Quadrant II organizer meeting six criteria: 1. Coherence – Integrates roles, goals, and priorities. 2. Balance – Keeps various roles before you so they're not neglected. 3. Quadrant II Focus – Weekly - the key is not to prioritize what's in your schedule, but to schedule your priorities. 4. A People Dimension – Think of efficiency when dealing with things, but effectiveness when dealing with people. The first person to consider in terms of effectiveness is yourself. Schedules are subordinated to people. 5. Flexibility – The organizer is your servant, not your master. 6. Portability There are four key activities in Quadrant II organizing, focusing on what you want to accomplish for the next 7 days: 1) Identify Roles 2) Select Goals – two or three items to accomplish for each role for the next week, including Sikkim Manipal University

Page No. 31


Unit 3

some of your longer term goals and personal mission statement 3) Scheduling/Delegating – including the freedom and flexibility to handle unanticipated events and the ability to be spontaneous 4) Daily Adapting – each day respond to unanticipated events, relationships and experiences in a meaningful way. Here are five advantages of this organizer: 1) It is principle-centered – it enables you to see your time in the context of what's important and what's effective. 2) It is conscience-directed – it enables you to organize your life around your deepest values. 3) It defines your unique mission, including values and long-term goals. 4) It helps you balance your life by identifying roles. 5) It gives greater perspective through weekly organizing. The practical thread is a primary focus on relationships and a secondary focus on time, because people are more important than things. The second critical skill for personal management is delegation. Effectively delegating to others is perhaps the single most powerful high-leverage activity there is. Delegation enables you to devote your energies to high level activities in addition to enabling personal growth for individuals and organizations. Using delegation enables the managers to leverage the results of their efforts as compared to functioning as a "producer." There are two types of delegation: Gofer Delegation and Supervision of Efforts (Stewardship). Using Gofer Delegation requires dictating not only what to do, but how to do it. The supervisor then must function as a "boss," micromanaging the progress of the "subordinate." The supervisor thus loses a lot of the leveraging benefits of delegation because of the demands on his time for follow up. An adversarial relationship may also develop between the supervisors and subordinate.


Page No. 32


Unit 3

More effective managers use Stewardship Delegation, which focuses on results instead of methods. People are able to choose the method to achieve the results. It takes more time up front, but has greater benefits. Stewardship Delegation depends on trust, but it takes time and patience. The people may need training and development to acquire the competence to rise to the level of that trust. Stewardship Delegation requires a clear, up-front mutual understanding of and commitment to expectations in five areas: 1. Desired Results – Have the person see it, describe it, make a quality statement of what the results will look like and by when they will be accomplished. 2. Guidelines – Identify the parameters within which the individual should operate, and what potential "failure paths" might be. Keep the responsibility for results with the person delegated to. 3. Resources – Identify the resources available to accomplish the required results. 4. Accountability – Set standards of performance to be used in evaluating the results and specific times when reporting and evaluation will take place. 5. Consequences – Specify what will happen as a result of the evaluation, including psychic or financial rewards and penalties. Using Stewardship Delegation, we are developing a goose (to produce golden eggs) based on internal commitment. We must avoid Gofer Delegation to get the golden egg or we kill the goose - the worker reverts to the gofer's credo: "Just tell me what to do and I'll do it." This approach is a new paradigm of delegation. The steward becomes his own boss governed by his own conscience, including the commitment to agreed upon desired results. It also releases his creative energies toward Sikkim Manipal University

Page No. 33


Unit 3

doing whatever is necessary in harmony with correct principles to achieve those desired results. Immature people can handle fewer results and need more guidelines and more accountability interviews. Mature people can handle more challenging desired results with fewer guidelines and accountability interviews.

3.4 Selecting Sales Personnel Store Operations & Human Resources A retail jewellery sale normally requires face-to-face interaction between the customer and the sales associate, during which the items being considered for purchase are removed from the display cases and presented one at a time with their respective qualities explained to the customer. Consumer surveys indicate that a key factor in the retail purchase of jewellery is the customer’s confidence in the sales associate. Customer Satisfaction A customer satisfaction index covering 12 criteria was introduced during 2005/06 in certain trial stores and was expanded to all stores during 2006/07. Each store is benchmarked against others in its district, region and across the division based on customer feedback. The scores are reported on a monthly basis, highlighting areas of good performance and those for improvement.


Page No. 34


Unit 3

Training Providing knowledgeable and responsive customer service is a priority, and is regarded by management as a key point of differentiation. It is believed that highly trained store sales staff, with the necessary product knowledge to communicate the quality, attributes and competitive value of the merchandise, is critical to the success of the business. The development of the customer satisfaction index has improved the division’s ability to design and implement its training programmes by identifying areas of strength and opportunity. The US division’s substantial training and incentive programmes, for all levels of store staff, are designed to play an important role in recruiting, educating and retaining qualified store staff. The preferred practice is to promote managers at all levels from within the business in order to maintain continuity and familiarity with the division’s procedures. Retail sales personnel are encouraged to become certified demonologists by graduating from comprehensive demonologists by graduating from a comprehensive correspondence course provided by the Diamond Council of America. Over 50% of the division’s full time sales staff who have completed their probationary period are certified demonologists or are training to become certified. All store managers are required to be thus qualified. The number of certified demonologists employed by the US division increased by 9% in 2006/07. Employees often continue their professional development through completion of further courses on gemstones. Goals and Incentives All store employees are set daily performance standards and commit to goals. Sales contests and incentive programs also reward the achievement of specific targets with travel or additional cash awards. In addition to salesbased incentives, bonuses are paid to store managers based on store Sikkim Manipal University

Page No. 35


Unit 3

contribution and to district managers based on the achievement of key performance objectives. In 2006/07 approximately 23% (2005/06: 24%) of store personnel remuneration was commission and incentive-based. US head office bonuses are based on the performance of the division against predetermined annual profit targets. Promotion and salary decisions for principally

non-management

head

office

personnel

are

based

on

performance against service level and production goals; for managers they are based on annual objectives and performance against individual job requirements. Store Manager Each store is led by a store manager who is responsible for various store level operations including overall store sales and branch level variable costs; certain personnel matters such as recruitment and training; and customer

service.

Administrative

matters,

including

purchasing,

merchandising, payroll, preparation of training materials, credit operations and divisional operating procedures are consolidated at divisional level. This allows the store manager to focus on those tasks that can be best executed at a store level, while enabling the business to benefit from economies of scale in administration and to help ensure consistency of execution across all the stores. Recruitment, Retention and Promotion Although staff recruitment is primarily the responsibility of store and district managers, a central recruitment function supplies field recruiters from its US head office in Akron, Ohio. Methods such as internet recruitment are used to provide stores with a larger number of better-qualified candidates from which to select new staff. Management believes that the retention and recruitment of highly-qualified and well-trained staff in the US head office is essential to support the stores. Sikkim Manipal University

Page No. 36


Unit 3

A comprehensive in-house curriculum supplements specific job training and emphasizes the importance of the working partnership between stores and the head office. A key motivator for all staff, and in particular for store based employees, is the division’s practice of internal promotion. All District Managers and Vice Presidents of Regional Operations have been a Store Manager within the division. UK Training Management regards customer service as an essential element in the success of its business. The Signet Jewellery Academy, a multi-year programme and framework for training and measuring standards of capability, is operated for all store staff. As part of this programme, 1,000 sales associates and 1,100 store managers and assistant store managers (representing 81% of store management) have now passed the Jewellery Education & Training Level 1 qualification accredited by the National Association of Goldsmiths. Upon completion of each of the four levels, staff are better able to deal with customer requirements. The programme was enhanced during 2006/07 to improve basic product knowledge and jewellery repair skills and further developments are planned for 2007/08.


Page No. 37


Unit 3

ACE, an improved customer service and training programme was introduced in 2006/07 and will be developed further in 2007/08. ACE is a flexible programme consisting of six elements that better enable store staff to meet the needs of customers. In conjunction with the Signet Jewellery Academy, training in management skills for all tiers of store operations management was developed further last year to support the enhanced store associate training programme and to build general management skills. All store personnel have daily performance targets. They are given training and weekly feedback on their performance from store and field management to help them achieve these targets. Recruitment and retention Recruitment procedures, including online facilities, continue to improve the suitability of new store personnel, helping to ensure that they meet key basic requirements and are motivated to work within a jewellery store environment. Field and human resources management are responsible for the recruitment, review, training and development of sales staff, thereby ensuring consistency in operating standards and procedures throughout the business. All new store staff receive a structured induction programme that covers all aspects of store operations, product knowledge and customer service. A financial reward is received upon completion. The division-wide commission-based remuneration programme was in operation for the whole year in 2006/07 for the first time. The level of commission paid is dependent on a combination of store and individual performance. To continue to improve the recruitment and retention of top quality staff, a three year programme to enhance the employee benefits package was begun in 2006/07.


Page No. 38


Unit 3

Promotion The division’s preferred policy is to promote store management from within the business; approximately 80% of store management appointed in 2006/07 was so promoted. Each chain always has a number of sales staff who is qualified to advance to store management level, thus assuring the availability of newly trained managers familiar with the division’s operating standards and procedures. Store support In order to increase staff selling time and to improve efficiency, operating procedures are routinely reviewed to identify opportunities to enhance customer service and reduce in-store administrative tasks. The Signet intranet provides a computer-based platform for improved communication between stores and head office, with sales floor and back office administrative functions being simplified and standardized through this medium. Opportunities for better store procedures and employment practices were identified through a staff opinion survey. It is believed that the results provide a basis for further improvement in the motivation and retention of staff. Head Office Management believes that successful recruitment, training and retention of head office staff are important. Accordingly, structured recruitment, training and performance management systems are in place. Internal career advancement is encouraged and is supported by succession planning. Teamwork and service to the stores are encouraged through a performance bonus plan for head office staff, which is based on the division’s results. In the first quarter of 2006/07 part of the divisional head office function was


Page No. 39


Unit 3

relocated in order to enhance efficiency. The implementation of a three year programme to improve training in head office will commence in 2007/08. Self Assessment Questions I State whether the following statements are True or False: 1. Teamwork and service to the stores are encouraged through a performance bonus plan. 2. Opportunities for better store procedures and employment practices are identified through a staff opinion survey. 3. All store personnel have daily performance targets.

3.5 Sales Personnel Training Programs System provides clients with extraordinary information about their customers, competition, sales representatives, other front-line personnel and sales managers. By "extraordinary information" we

mean

information you can't get any other way, along with tools you need to use it productively. We bring together skills from a number of different disciplines and focus them, single-mindedly, on the goal of improving your company's sales performance. System has helped companies to: 

Increase sales;



Reduce turnover of personnel ;



Expand more efficiently ;



Develop people faster and with less down time;



Reduce training and development costs;



Generate a significant return on investment ;



Improve selection of sales people and sales managers;


Page No. 40


Unit 3

Client Testimonials System’s clients are continuously growing and reaping the benefits of the System® on Track® system: "This System program is really helping and working for me by putting my priorities in order. My New Year’s resolution was to focus on my team and this personal development program is helping me fulfill this commitment." "I am more aware of things I need to work on.” "This process has helped focus my own development activity.” "The program has basically called my attention to the necessary detail required to be successful as a leader of sales reps." "I like the participant materials I received, particularly the Action Planner and Resources booklets.” – Since our corporate personal development plans are due soon this is going to help me greatly. It would be good for the District Sales Managers to get profiled as well!” Regional Pharmaceutical Sales Manager going through Systema® onTrack "After being profiled and getting my plan and goals set on Systema® CoachLink, and working with my accountability coach I have seen incredible results. I have met with 2 new satellite managed care centers to take our product on formulary and I've been coaching my reps which has increased their motivation to sell more product!" Attendees at Systema Advanced Sales Management Workshop (part of Systema® onTrack): "Love the fact that all material is specific and definite and written down for future reference." "Great discussion because it leverages all the experience in the room." "Excellent models illustrated." Sikkim Manipal University

Page No. 41


Unit 3

3.6 Motivating Sales Personnel Motivating Sales People to Sell, What makes a good sales person tick? What combination of rewards and incentives will bring out their best performance? What can companies effectively do to motivate their sales people to sell, while avoiding the peaks and valleys that so often accompany sales achievement? Every sales organization asks these kinds of questions – and when production levels are down, revisits these issues over and over again. We re-examine what we're doing, and try to fine tune our "systems" to extract a little more horsepower. By the time we're finished tweaking and tinkering, we often end up right back where we began! What's wrong with this picture? To find out I spoke with some of Gallatin Valley Montanas' most progressive companies, and asked them to share with us their formulae for success. Some of their answers may surprise you. But first, I looked within my own organization, and asked my client services manager, Rich Powell, for some words of wisdom. Rich joined my staff in April, after a successful career in sales and business management in the highly competitive environments of Seattle and Honolulu. While Rich isn't opposed to commissions and profit shares, he made an important point. In the long run, professional sales people are far more motivated by their "belief" in the work they do, than in any particular combination of bonuses, commissions and other incentives. Ultimately, sales people sell because they love to sell - and love what they sell. They see themselves as part of a dynamic, upward process. They identify strongly with their customer, and with the product or service they provide. They believe in the importance of what they are doing, and see their jobs as having value and purpose. Sikkim Manipal University

Page No. 42


Unit 3

A now-retired sales consultant for a daily newspaper trips to mind. Fred was a delight to work with – a real "pro". He instilled in his customers, the confidence that he truly cared about their interests, and would go the extra mile to serve their needs. No hype. No pressure. Just excellent service, built around integrity and credibility. In my opinion, he was the consummate professional sales person. And guess what? Fred earned no commissions; we worked on a salary basis only. What motivated Fred was not "turning that next deal" or adding more commissions to his monthly tally. He was driven by his professional attitude, his love for his work, and an intense desire to serve his customers well. Commissions: The good, the bad, the ugly This is not an argument against paying sales commissions, but it is an acknowledgement that for most forms of sales, commissions are an option, not a necessity. The bottom line: if the employee you hired is not a true salesperson, no amount of commissions will make them into one. Techniques can be trained, but basic personality factors are essentially unalterable. These personality traits are the single strongest prediction of one's likelihood of success in the field of sales. What makes commissions and performance bonuses so tricky, are the unintended consequences associated with poorly thought out policies. One of the biggest pitfalls is the tendency of individual sales commissions to create negative competition within a sales organization, leading to resentment, secrecy and plummeting morale. These side effects are even more pronounced when contests are added to the equation. Employers want to foster teamwork and open communication. Instead, they may end up with sales people who are disgruntled and de-motivated, fighting over customers and devising subtle methods of cheating the system.


Page No. 43


Unit 3

Some creative ways successful companies do it Successful companies have found creative ways to harness the competitive, incentive-driven nature of good sales people, with a minimum of negative backfires. For Mary Brown, Director of Western Region Sales Operations for Right Now Technologies, this includes ingenious approaches that reward individual performance while building camaraderie and teamwork. For example, the company will sometimes sponsor raffles for trips or special merchandise. The more a sales person achieves, the more "chances" they get in the raffle – yet everyone who produces has a shot at winning. Often, Mary provides non-monetary incentives that are fun for employees and their families. A video camera. A mountain bike. A week-end at Big Sky (a local resort). Or she may provide extra days off if sales quotas are met - to be used at the employee’s discretion. The point is, great companies like Right now use innovation and creativity to stay ahead of the employee motivation curve. By developing incentive programs that are exciting and unifying, the company and the employees both win. What can a small business do? To the century-old Owen House Hardware (an institution in downtown Bozeman, Montana, a different creative approach is taken. As manager Larry Bowman explains, the key to retailing is to serve with excellence, every customer who walks through the door – whether they are buying a riding lawn mower or a package of thumb tacks. Commissions and bonuses based on individual sales numbers tend to counteract the Owen House philosophy, and prompt sales personnel to "push" large ticket items and compete over customers. Larry has tried a number of things over the years, but is convinced that for his type of business, incentives should be provided to all personnel (both full and part time), based on store-wide performance parameters. Currently, the Sikkim Manipal University

Page No. 44


Unit 3

company is giving to each employee, credit toward in-store purchases based on monthly improvement in average ticket sales. The credit is computed daily, and entered on a calendar where everyone can see their collective progress. As with most incentive programs, it's difficult to objectively measure its success. Larry isn't sure how many employees are knowingly motivated to boost average sales, but at the very least, the program focuses everyone's attention on the worthy goal. Another Approach Alan "Fish" Fishburn, manager of the Mini-Nickel, has his own philosophy about employee incentives. Fish strives to build a sense of family among his staff, recognizing that "there's more to a job than a paycheck." Failure isn't part of Fish's vocabulary, and when the office has a poor month, there's no finger pointing or blame-taking. But in the good months, he likes to reward the whole staff, by taking them and their families out to dinner, bowling on Saturday night or some other enjoyable, bonding activity. Individual rewards are certainly part of Fish's program, too. But very often these bonuses are given spontaneously, when the person least expects it, rather than being a routine and predictable thing. He also believes that sales people respond better to targets that frequently change, rather than settling in on a regular system of rewards and bonuses that become a standard part of their pay. Most importantly, Fish believes in the concept of mutual trust. He doesn't sweat the little things or keep his sales force on a time clock. He's strictly results-oriented, building maximum flexibility into his company policies from minding kids (and occasional pets) at the office, to cheerfully giving time off when it's needed. In the end, it's not about money, says Fish (although he pays significantly higher than most others in his industry). "If you need to continually bribe a person to sell, you've probably hired the Sikkim Manipal University

Page No. 45


Unit 3

wrong person. What motivates the true sales person the most is pride in their work and the positive feedback they get from their customers. And feeling empowered and valued by the company for which they work." The last word on motivating sales people Obviously, employee incentive programs are not a ‘one-size fits all’ proposition.

As these successful

companies

demonstrate,

different

approaches work best in differing situations. But the conclusion is that "motivating sales people" is a contradiction in terms. Sales people - if they ARE sales people – are already motivated. The challenge employers face is channeling that motivation, and maintaining it at peak levels, week in and week out. Creative, well-conceived commission programs and bonus plans can certainly help in this regard. But ultimately, the most important factor lies within the heart and soul of your business itself. If a sales person identifies with the culture and mission of your company, and feels a sense of ownership in your company's future, then you will most likely have a loyal, motivated employee whose consistent performance levels will help you reach for the top. Self Assessment Questions II State whether the following statements are True or False: 1. Employee incentive programs are a ‘one-size fits all’ proposition. 2. If you need to continually bribe a person to sell, you've probably hired the wrong person. 3. By "extraordinary information" we mean information one can't get any other way.


Page No. 46


Unit 3

3.7 Compensating Sales Personnel Sales Compensation and the E-world With more customers ordering goods and services from the Web, questions are being raised regarding sales commissions, account ownership and quota allocation. Will sales compensation become an e-relic of the 20th century? With the rise of e-commerce, the sales department looks slated for decommissioning. Why employ a salesperson when customers can use a mouse to point and click their way to purchases? While the volume of business that is sold through the Internet will soar to almost incomprehensible levels, the death of the sales department is a premature assumption. Even dot.com companies are finding they need to hire salespeople to help promote their products. In fact, one of the fastest growing sales employment segments is advertising sales representatives for Web-portal companies. These companies have learned that when choice is available, uncertainty is present and risk is inherent, a salesperson can help guide customer decision making. Thus, the two criteria for sales compensation use are customer contact and customer persuasion. Therefore, selling will continue into the 21st century, as well as the use of sales compensation. However, employers need to be prepared for major challenges to sales pay programs. Consider these issues: 

Should the salesperson receive sales credit and thus incentive payment for orders put through the Web?



Who owns the customer – the salesperson or the Webmaster?



Should salespeople encourage their customers to use the Web to order products?



What sales compensation practices should be avoided in a Webenabled environment?


Page No. 47


Unit 3

These questions currently are being debated within sales departments. Compensation managers can expect to have some of these issues land on their desks. What follows are key concepts and suggested perspectives to assist the sales team in sorting through these issues. The Mysterious World of Sales Management Subsystems: As a pay program, sales compensation is connected to several – and sometimes mysterious – sales management subsystems such as account assignment, sales crediting and quota allocation. Evaluation of the sales compensation program cannot proceed without concurrent examination of these complimentary supporting systems. While most of us are very familiar with the typical features of a sales compensation plan – target compensation, mix, leverage and incentive formula – it is the operation of these sub-systems that dramatically affects payouts. The rise of ecommerce, generically known as a sales channel, will require significant revisions to these subsystems. Make these changes correctly and the sales compensation pay system will continue to operate successfully; make a mistake and the pay plan will fail.

A Web Site Held Hostage: Point and Click Meets Brick and Mortar The president of a major furniture retailer explained her predicament. “Look, I know the Web site can give me access to new customers, but 20 percent of my customers account for 80 percent of my revenue. And, my in-store decorating sales counselors own those relationships.” She added: “If I don't give them sales credit from Web sales, my best sales producers will quit.”


Should salespeople get sales credit for Web sales for out-of-region sales? What about sales from first-time customers? Should salespeople get full credit for these non-store new Web customers? How can the Web support itself, if it must bear the burden of commission credits back to the sales counselors?

Page No. 48


The president was adamant. She will not risk the ire of her best salespeople. “Unless, I give the credit for sales over the Web, they will complain that I am taking money out of their pockets.” Yet, still unresolved are the following questions:

Unit 3

These and many related questions need immediate attention. Ultimately, she will have to decide if the Web site is a sales counselor tool, or a separate sales channel. Perhaps she needs two separate Web locations: one for value-added services provided by sales counselors and a second Web site for unassisted purchases.

Which salespeople get what Web credit?

Start with the Role of the Salesperson To investigate all of these issues, begin with a reconfirmation of the seller’s role. Answer this question: What is the salesperson expected to do? 

Get new customers.



Sell new products to existing customers.



Keep existing customers happy with their on-going purchases.



Provide customer support and order fulfillment help.

What about the salespeople? Are they expected to do one, some or all of these activities? Sales compensation plan design is related directly to the content of the sales job. For sales jobs with more individual initiative and persuasion, more at-risk/high upside variable pay should be used. Conversely, jobs that focus on more reactive duties such as customer service and order fulfillment should have less variable pay. A Simple Rule: Pay for the Point of Persuasion In sales compensation design, the rule of thumb is “pay for the point of persuasion.” In other words, pay a salesperson for the job of persuading the customer to act. This is where sales compensation fits. Not following this rule gets many sales compensation plans into trouble. Such sales compensation plans have too many performance measures, incorrect measures, or provide rewards or punishment for results outside the Sikkim Manipal University

Page No. 49


Unit 3

influencing scope of the salesperson. Finally, many sales compensation plans simply become obsolete over the passage of time. For example, in a start-up company where the selling role is 100 percent persuasion, the pay system features a high risk/high reward design. As time passes and the sales rep develops a large embedded base of business, the pay program needs to migrate to an account management model with a higher base salary component. The mistake is to leave the high risk/high reward pay plan in place – an all too common occurrence. How will E-commerce affect the Sales Force? The primary role of the salesperson is to persuade. If other resources such as the Web site can handle re-orders, then a salesperson should not be distracted by these duties. If a customer already knows what he or she wants to buy (a standard product with little uncertainty), then there is no need to involve and reward a salesperson. In such cases, it is appropriate for the customer to order the product via the Web, without the involvement and reward of a salesperson. Now comes the challenge: How should account ownership, sales crediting and quota allocation be handled? Making Adjustments to the Sales Management Subsystems: As noted above, the sales compensation program is more than just a payout formula, it depends on the effective application of critical subsystems such as account assignment, sales crediting and quota allocation. Note how sales management must augment these subsystems under the following ecommerce conditions: 

E-commerce is primarily for order fulfillment of products sold by the salesperson. In such cases, the salesperson is acting as the persuading

influence;

therefore,

the

account

“belongs”

to

the

salesperson, and all sales placed through the e-commerce site are Sikkim Manipal University

Page No. 50


Unit 3

credited to the salesperson for compensation purposes. Quota objectives include all sales volume placed through the Web and contribute to quota performance accomplishment. 

E-commerce is used primarily by buyers who do not need sales advice. These accounts should not belong to the salesperson, nor should such volume contribute to retiring quota and, of course, no compensation credit is given for such sales.



E-commerce is the primary sales link with the customer, but customers must be convinced to “sign-up.” This is known as “matriculation selling” and the compensation program needs to reward sales representatives for getting customers to use the Web site. These accounts belong to the company and the salesperson receives an incentive for “signing up” a new customer. In such cases, management defines the quota by the number of new accounts matriculated on the Web. Additionally, a compensation value is often placed on the amount of sales volume the new customer places through the Web. Larger volumes mean higher payouts. However, this adjustment has a time limit. Therefore, after this pre-defined period, no additional revenue is credited to the salesperson thus encouraging him/her to find and matriculate new customers – the salesperson’s primary role.

As with all sales compensation design issues, look for the point of persuasion. Reward those efforts where the salesperson can successfully affect customers’ buying decisions. What to Avoid? The following are noted sales compensation design errors. Be on the lookout for the following two most common errors: 

Landlording: A common, but mistaken, philosophy that promotes the view that the “salesperson owns everything in their territory” and should


Page No. 51


Unit 3

receive sales credit for all sales in a territory whether or not they affect the sale. Not true. Such a mistaken perspective creates high payouts without corresponding effort or contribution. And, unfortunately, the sales person spends excessive time auditing sales credit reports from various sales channels. Now, the persuasion resource has become an accountant! This is a very ineffective use of the sales personnel’s time. 

Appeasement pay: Many sales leaders believe that they must credit all sales generated through the Web site to the salesperson to ensure their co-operation. Known as “appeasement pay,” such a practice avoids the inevitable. While some token reward system may be necessary to provide initial positive support for the Web site, the double cost of such a practice will prove prohibitive over time. Finally, employers should be prepared to help the sales management team make changes to these critical subsystems to ensure continued effective use of the sales compensation plan.

3.8 Managing Sales Expenses Forced to do more with less? Wondering if you've made the right trade-offs? You're not alone. Many senior managers need to increase earnings with the same sales resources. How should executives manage expenses and, when necessary, justify increasing the sales expense in an uncertain economy? Surprisingly, Mercer's research suggests that few organizations routinely use basic analytical tools to manage their sales force investment. All too often, management and the board focus on revenue and the overall selling, general, and administrative (SG&A) budget. Many organizations appear to be forgoing the use of ratio analyses, such as revenue per FTE and cost of sales compensation per dollar of revenue. The implication: organizations are managing line item budget performance in a vacuum (and probably only in Sikkim Manipal University

Page No. 52


Unit 3

the context of budgeting or re-forecasting) rather than managing sales effectiveness in a holistic way. Managing simply to line item variances ignores the impact that sales resources have on delivering value to the organization. The consequence could be double trouble: sales operations may not be structured to meet customer needs in a dynamic market, while the competition – armed with better information – may be effectively responding to the market and outperforming you. The Research Last year, Mercer surveyed 160 sales organizations to understand how they are making decisions during the most difficult economy in decades. Our research focused on how organizations manage their sales talent, use compensation and incentives to attract and retain sales talent, and evaluate key sales force investments. Our findings include: 

Many organizations use multiple, lower-cost sales channels to support their sales effort. Across all respondents, 94% said they use a direct sales channel. Use of secondary or tertiary sales channels is evenly

distributed

across

telephone,

Internet,

value-added

resellers/distributors, and third-party partnerships and alliances. 

Multiple approaches are taken to balance cost management with motivation and retention of top talent. The most common tactic used across industries is changing the pay mix. A current practice is for companies to increase commission opportunities by freezing salaries and lowering sales goals, thus ensuring that pay is tied to both performance and the variable portion of the cost structure. In addition, one quarter of the firms surveyed used discretionary or special bonuses for top performers, to head off unwanted turnover.


Page No. 53




Unit 3

Sixty-eight percent of the participants reported they were not having problems attracting sales talent and were more likely to resize their sales organization, change their pay mix, or adjust sales goals than to open their wallets. Conversely, the remaining 32% of participating organizations that reported difficulties attracting talent said they tend to more frequently use discretionary awards, put increased focus on commissions, and offer more-than-expected special bonuses. (See Exhibit 1.)

Exhibit 1 Actions taken to manage sales force investments by ability to attract qualified sales talent Companies not having difficulty in attracting qualified sales talent

Companies having difficulty in attracting qualified sales talent

Reduced sales force

27%

16%

Change pay mix

25%

20%

Discretionary awards

24%

32%

Lowered sales goals

24%

12%

Increase focus on commissions

21%

26%

Offered more than expected SPIFFS

14%

28%

Reduced incentives

12%

10%

Stock in lieu of cash

8%

6%

Other

4%

8%

Reduce focus on commissions

1%

6%


Page No. 54




Unit 3

Most organizations proactively manage under-performance of sales professionals. Surprisingly, 80% of participants said they target specific levels of involuntary turnover. The recession has made it imperative to jettison poor performers quickly. This contrasts with conventional wisdom that sales managers do not regularly weed out low performers – choosing to carry these resources rather than make tough decisions.



A startling 76% of participants do not manage to a cost-of-compensation ratio, which is the total cash compensation divided by total revenue. The only common users of these ratios are the high technology (40%) and telecommunication (54%) sectors. Organizations not managing to this ratio say they manage sales compensation expense as part of their overall SG&A budget. (See Exhibit 2.) Exhibit 2 If not managing to a targeted ratio, how are sales compensation expenses managed in a down market? Compensation expense is budgeted for and managed to accrued dollar amount

47%

Overall SG&A is key ratio by which to manage expenses

19%

Do not closely manage sales compensation expense centrally

18%

Manage compensation expense by managing the FTEs in sales force

12%

Other

4%

The cost-of-compensation ratio allows management to talk a common language in managing the business. For example, if sales management wants to enter a new market, the response from leadership is often "it's not in the budget." Using this ratio, the answer could be "let's enter the market, but make sure we keep our cost of compensation in line." This means that sales management will have to balance the headcount targeting this new Sikkim Manipal University

Page No. 55


Unit 3

market and the level of compensation offered relative to the revenue expected, as the business ramps up over a defined period of time. In sum, companies are using multiple sales channels and a variety of tools to manage the sales function during this difficult economy. Although our survey respondents are using pay mechanics strategically, they continue to view the cost of the sales effort one-dimensionally, which can hinder their management capability. Therefore, when faced with a question of whether to enter, expand, or exit a market, senior managers have inadequate data with which to make decisions such as whether the projected sales force investment is sufficient to achieve the go-to-market strategy. Using key sales force ratios to manage the business In our experience, companies that don't manage their sales force by using several well-understood ratios (such as cost of compensation) run the risk of over- or under-investing in this highly dynamic market. Today, a company needs the following four indicators considered together, managed centrally, monitored frequently, and reinforced consistently – to decide how the sales force should be positioned, day in and day out, in the competitive market. 

Revenue per full-time equivalent (FTE): Sales or revenue dollars divided by number of sales professionals across all sales roles. This simple, straightforward ratio enables companies to determine the average productivity of individual sales contributors.



Compensation cost as a percentage of revenue: Total cash compensation cost divided by total revenue per incumbent, per sales team, per business unit, per channel, and globally.



Turnover percentage: Number of FTE terminations divided by total number of FTE at the beginning of the performance period. While not all organizations regularly track this ratio, our research suggests that most organizations actively manage and eliminate low performers. Effective


Page No. 56


Unit 3

management of overall turnover means that companies are minimizing turnover costs, minimizing the risk of customer turnover, and dealing with poor performance. 

Operating profit percentage: Gross margin less selling expense divided by total revenue. This percentage, and its improvement, measures the raw financial contribution of the sales effort. In effect, how well the other three indicators are managed drives operating profit.

Implementing sales force ratios What prevents more companies from using these ratios? Our research indicates the following: 

Habit: Companies are used to – and comfortable with – generating sales and managing to budget rather than measuring operational excellence relative to the competition.



Organizational barriers: Resources and systems may not be in place to track and analyze the key data elements.



Calibration: Companies struggle with setting goals with appropriate difficulty levels in the absence of competitor data.

Overcoming these barriers must start with a consensus that managing the sales investment effectively requires monitoring relative internal and external performance metrics. This may require educating not just the sales team, but critical members of management as well. An important next step is to form a partnership between the sales and finance functions to validate the benchmarks that will drive the sales management process. Frequently, IT must also be involved to identify how the four internal indicators can be tracked to provide timely and accurate data. A custom survey or industry association forum may be necessary to secure relevant external data for relative performance measurement.


Page No. 57


Unit 3

In addition to building a support infrastructure, a big challenge is to make the metrics part of the organization's culture. Two critical aspects to achieving that goal are to understand all the components of an effective sales force – the sales strategy, sales management processes, and the infrastructure to motivate and enable the sales effort –

and work toward their

implementation. Self Assessment Questions III State whether the following statements are True or False: 1. Resources and systems should be in place to track and analyze the key data elements. 2. Companies struggle with setting goals with appropriate difficulty levels in the absence of competitor data. 3. The most common tactic used across industries is changing the pay mix.

3.9 Sales Meeting and Sales Contests Most companies offer their employees competitive salaries and benefits. In return, the vast majorities of these employees work hard and make a concerted effort to do a good job to justify their compensation package. But in this highly competitive world, a good job doesn’t necessarily do it anymore, especially when industry leaders are using every means available to motivate an extra level of performance from their sales reps. Managers are commonly using incentives as part of their company’s marketing mix to help accomplish a wide variety of business objectives. They have found that these programs are more likely to accomplish the objectives set for them when reps are motivated by positive, immediate and certain consequences. They have found that these programs – when properly designed and executed - pay dividends in added sales and profits and happier employees. Sikkim Manipal University

Page No. 58


Unit 3

According to Incentive Magazine, approximately two-thirds of American companies are currently using sales incentives. The key reasons that these contests are used are to boost sales, increase morale in the sales force, and/or meet another outstanding business need. We will discuss the answer to why sales incentives are important, what makes a contest successful, and what the psychology behind a sales contest is. Additionally, we will look at three sales channels to determine their similarities and differences on this topic. These channels include: Inside Sales, Field Sales, and Partner Sales. 3.9.1 Sales Contest Psychology In this section, we will focus on the answer to 2 very specific questions: 1. What makes sales incentive programs work? 2. How do incentive programs differ between the following sales channels? a. Inside sales b. Field sales c. Channel sales What Makes Sales Incentive Programs Work? Maslow’s Hierarchy of Needs: Maslow theorized that every human being has a specific set of needs, and each level of need must be realized before the next level of need is felt. In other words an individual must have food, clothing and shelter prior to feeling a need to have economic and physical security, and so on. Maslow outlined five levels of human needs: Thefirst two levels satisfy basic and monetary needs: •

Physical comfort is our number one priority – food, shelter and clothing.

•

The need for security is second. One must feel safe in both physical and economic security.


Page No. 59


•

Unit 3

Thenext three levels deal with our psychic income need – our need to learn and grow as individuals, and the development of our self-esteem.

•

The third level is Social Acceptance. As a member of a group, we have specific roles and responsibilities. We look for recognition from these groups.

•

Next comes the need for Personal Esteem. This level is a function of our achievements. Awards, job title and importance, and accomplishments are all examples of our personal growth.

•

At the very top of our needs is Self-Realization. This is the total fulfillment of our potential. If we are always changing and learning, theoretically we will never reach Self-Realization. BUT, we continue to aspire to greater levels of success and personal satisfaction.

How it relates: In a sales environment, the first two levels or monetary needs must be realized by existing compensation prior to considering a sales incentive program. Once monetary needs are realized, the next levels, or psychic income needs, can be realized with sales incentives. Additionally, cash as an incentive can be confusing because it can be used to fulfill one’s monetary needs. An incentive program should offer unique prizes that are appealing to the individual. These prizes will act as physical manifestations of success, and contribute toward the psychic income needs of social acceptance, personal esteem and self-realization. The Behavioural Model Behaviour can be dramatically impacted by positive reinforcement. Incentive programs are based upon the idea of giving positive results for positive behaviour that helps an organization to reach its goals. The rationale for conducting an incentive program is grounded in B.F. Skinner’s Behavioural Model. Sikkim Manipal University

Page No. 60


Antecedents

communicate

what

you

Unit 3

want

participants

to

do.

Make sure you define objectives clearly. Promote rules and awards. Createexcitement at program launch. Provide ongoing communications. Behaviour is what people do in a given situation. Consequences are the reinforcement of behavior and what determines whether it will be repeated. Provide a wide range of positive consequences and recognition by management and peers.Rewards that have value, choice and are easy to administer and right feedback encourage continuous improved

performance.

Provide

ongoing

measurement

and

feedback.Distributeconsistent and timely progress reports. How it relates: In order to change behaviour, sales reps must have a clear understanding of their objectives (antecedents) and the payoff (consequences). Sales incentive programs create a situation in which a short-term goal (antecedent) and its payoff (consequence) are defined. The behaviour will create success if the payoff is in line with the participant’s current needs and/or wants. Constant communication is essential for the success of a program. Provide feedback so that participants know where they stand in relation to the goal. Positive consequences can influence corporate goals. The Bell Curve The bell curve is a graphic depiction of the normal distribution of employee performance in an organization. The majority of employees areaverage performers. At either end are the top and bottom performers. Top performers (10%) will always be at the top. They have theskills and are self-motivated to consistently perform at a higher level.


Page No. 61


Unit 3

The lower-end performers (10%) will always be at the bottom. Thereis little anyone can do to move these people to perform at a higher level. How it relates: The objective on an incentive program will have the greatest impact if the focus is on the middle 80%. This will move the bell curve driving more individuals toward greater performance. 3.9.2 Ten Sales Psychology Factors There are ten primary psychological factors that influence the thinking and the performance of salespeople (Meredith & Fried). These factors are: 1. Personal Gain: Desire for personal gain is the sales professional’s stereotype. This is what drives the sales rep to work for his/her commission as well as any incentives. While compensation allows the rep to chase possessions, incentives are not quite as simple. They are, however, much more powerful. 2. Family Influence: Maritz Co. claimed that 85% of prize points redeemed from their catalog are for home and family items, rather than personal items. The family influence is multi-tiered. On one level, the family expects a certain level of income to maintain its lifestyle. This is realized through the salary and commissions. On another level, the family gets to take advantage of the incentive itself. Finally, the family and/or spouse can be considered highly effective “assistant sales managers” in many incentive programs – for example, travel programs. In an ideal world, the spouse should be invited to kick off programs, included in mailings of catalogs, brochures and other collateral, and invited to the final awards presentation, or on the trip. They should be made aware of the incentive objectives, and the expectation of their spouse.


Page No. 62


Unit 3

3. Desire for Recognition: Need for recognition is a strong driving force in most sales professionals’ psyches. A sales rep can win a contest, but if his/her peers do not recognize it, it loses much of its motivational oomph. A manager can never send praise too loudly or too often. 4. Pride: A good sales contest can create a strong sense of pride in one’s work. As that is the case, if the sales rep is proud of the work s/he is doing, it will affect his/her ability to work more effectively. Additionally, when the rep is sitting in front of a customer, this pride is more likely (than perhaps in any other profession) to attribute to the success of winning the deal. Hence, the residual affect of the contest in this context is more sales, even after the contest is over. 5. Stimulation of Imagination: Sales is a routine job. An incentive program can help the sales rep to stimulate his/her imagination to find new ways of doing his/her job. The residual affect of this is the possibility to uncover new sales opportunities that may not have been noticed before, or finding a new way to approach a prospect that makes them stand up and take notice when other attempts have previously failed. 6. Need to be Desired: Sometimes in the day-to-day sales grind, the sales rep can feel like a cog in a wheel. The incentive program gives management the opportunity to direct the sales force’s attention to the importance they play in the organization, and show appreciation for the part they play. 7. Fear: Both fear and competition bring out the hardest work in individuals. According to Meredith and Fried, “fear is the companion of a surprising number of sales professionals.” A successful incentive program can help to allay a rep’s fear by showing him/her the road to success, and driving him/her to get there.


Page No. 63


Unit 3

8. Competitive Instinct: Competition is also a driving force for most sales professionals. A successful sales contest can drive friendly competition between reps and/or sales offices, as well as create a need to outperform one’s personal best. 9. Boredom Avoidance: Similar to the pride factor, a good sales incentive program can add excitement to the job. This change of pace can drive energy into the sales rep, and sales force, and can create a spark in the way the sales rep handles his/her job. 10. Conscience: Contrary to the bad rap that sales carry, most sales professionals have a very high sense of conscience. If a sales rep is not doing well, not only does it play on their self-confidence, but also makes them feel guilty. Many times, they feel as though they are letting their manager down. A good incentive program can help to lift them back up again, creating an upward trend in their sales numbers and in their selfconfidence as well. Incentives for Different Sales Channels When examining sales channels in relationship to incentive contests, there are many similarities and also many differences. More specifically, the type of sale may be an even greater determining factor than the channel itself. A high end product can be sold over the phone, and have a longer sales cycle than some products sold in the field. For example, life insurance can be sold over the phone, and require several calls before someone buys a policy. On the other hand, food products are usually sold to the restaurant market in a one call close. In this case, the field rep would have similar expectations for incentives as a “typical” call center agent, and the insurance agent selling by phone, may have expectations more in line with a field sales rep. This example illustrates the point that regardless of the sales channel, a major issue is to know your audience prior to developing an incentive program. Sikkim Manipal University

Page No. 64


Unit 3

The following paragraphs will outline the similarities and differences between sales channels. Self Assessment Questions IV 1. _________ theorized that every human being has a specific set of needs, and each level of need must be realized before the next level of need is felt. 2. The rationale for conducting an incentive program is grounded in B.F. Skinner’s __________ Model. 3. Rewards that have value, choice and are easy to administer and right ___________ encourage continuous improved performance. 4. The __________ is a graphic depiction of the normal distribution of employee performance in an organization.

3.10 Summary The recruitment procedures in a company are very crucial when it comes to the matter of selecting the required staff. The personnel department takes care of selecting employees. The sales personnel training program is something which is an integral part of sales department. Sales is a routine job. An incentive program can help the sales rep to stimulate his/her imagination to find new ways of doing his/her job. A successful incentive program can help to allay a rep’s fear by showing him/her the road to success, and driving him/her to get there.

3.11 Terminal Questions 1. What are the recruitment procedures? Explain. 2. Write a short note on Personal Management. 3. Explain sales personnel training programs.


Page No. 65


Unit 3

4. How will a company manage sales expenses? 5. Write a short note on sales meeting and sales contests. 6. Explain the psychological factors that influence the thinking and the performance of salespeople.

3.12 Answers to SAQs and TQs SAQs I 1. True

2. True

3. True

2. True

3. True

2. True

3. True

SAQs II 1. False SAQs III 1. False SAQs IV 1. Maslow 2. Behavioural 3. Feedback 4. Bell curve Answers to TQs: 1. Refer to 3.3 2. Refer to 3.2 3. Refer to 3.5 4. Refer to 3.8 5. Refer to 3.9 6. Refer to 3.9


Page No. 66


Unit 4

Unit 4

Directing and Controlling Sales Efforts

Structure: 4.1


4.2

What is a Sales Budget?

4.3

The Quotas

4.4

Sales Territories

4.5

Sales Control and Cost Analysis Self Assessment Questions I

4.6

Summary

4.7

Terminal Questions

4.8


4.1 Introduction Preparation of a sales budget is the starting point in budgeting since sales volume influences nearly all other aspects. A sales budget is an operating plan for a period expressed in terms of sales volume and selling prices for each class of product or service. A sales budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material resources. Budgetary control is an important device for making the organization more efficient on all fronts. It is an important tool for controlling costs and achieving the overall objectives. This unit deals with sales budget, sales territories, sales control and cost analysis.


Page No. 67


Unit 4

Objectives: After studying this unit, you will be able to: 

Explain ‘sales budget’.



State the advantages of a sales budget.



Explain ‘sales territories’.



Describe how to select the Quotas.



Explain sales control and cost analysis

4.2 What is a Sales Budget? In a business organization, a budget represents an estimate of future costs and revenues. Budgets may be divided into two basic classes: Capital Budgets and Operating Budgets. Capital budgets are directed towards proposed expenditures for new projects and often require special financing. The operating budgets are directed towards achieving short-term operational goals of the organization, for instance, production or profit goals in a business firm. Operating budgets may be sub-divided into various departmental or functional budgets. The main characteristics of a budget are: 1. It is prepared in advance and is derived from the long-term strategy of the organization. 2. It relates to future period for which objectives or goals have already been laid down. It is expressed in quantitative form, physical or monetary units, or both. Different types of budgets are prepared for different purposes e.g. Sales Budget, Production Budget, Administrative Expense Budget, Raw Material Budget etc. All these sectional budgets are afterwards integrated into a master budget, which represents an overall plan of the organization. Sikkim Manipal University

Page No. 68


Unit 4

Advantages of Budgets: A budget helps us in the following ways: 1. It brings about efficiency and improvement in the working of the organization. 2. It is a way of communicating the plans to various units of the organization. By establishing the divisional, departmental, sectional budgets, exact responsibilities are assigned. It, thus, minimizes the possibilities of buck-passing if the budget figures are not met. 3. It is a way or motivating managers to achieve the goals set for the units. 4. It serves as a benchmark for controlling on-going operations. 5. It helps in developing a team spirit where participation in budgeting is encouraged. 6. It helps in reducing wastage and losses by revealing them in time for corrective action. 7. It serves as a basis for evaluating the performance of managers. 8. It serves as a means of educating the managers. Budgetary Control No system of planning can be successful without having an effective and efficient system of control. Budgeting is closely connected with control. The exercise of control in the organization with the help of budgets is known as budgetary control. The process of budgetary control includes: 1. Preparation of various budgets. 2. Continuous

comparison

of

actual

performance

with

budgetary

performance. 3. Revision of budgets in the light of changed circumstances. A system of budgetary control should not become rigid. There should be enough scope of flexibility to provide for individual initiative and drive. Sikkim Manipal University

Page No. 69


Unit 4

Making a forecast Consideration of alternative combination of forecasts: Alternative combinations of forecasts are considered with a view to contain the most efficient overall plan so as to maximize profits. When the optimum profit combination of forecasts is selected, the forecasts should be regarded as being finalized.

4.3 The Quotas From the perspective of the sales manager, the subject of sales quotas raises many potential questions and issues. Are they fair and equitable? Do they drive the desired sales behavior? Are they a strategic tool that can be utilized to achieve maximum business results? What types of data should be considered when setting them? Are they too high or too low? Does their attainment provide for the proper ratio of revenue to sales expense? Your success as a sales manager, among the many other responsibilities inherent in the position, may clearly be dependent on how well you address these important issues. The process of establishing normal and reasonable sales quotas can vary greatly as a function of the business, industry, type and size of the sales organization and product and/or service being sold. However, there can often be a great deal of commonality in your approach to this important sales-generating tool. Let us examine some of the more basic criteria that you may want to consider in order to ensure the effective establishment of sales quotas: 

Corporate revenue goals



Historical revenue performance



Current sales coverage model



Planned increases in sales headcount



Introduction of new products and services


Page No. 70

Sales, Distribution and Supply Chain Management 

Current market share



Stretch targets

Unit 4

Now let us explore each one of these important areas in detail. Corporate Revenue Goals: This seems to be the likely starting point for the establishment of sales quotas. Most often, the sum total or "roll-up" of your individual sales team member's quotas will either meet or exceed the corporate revenue goals for any given fiscal period. It is quite possible that under certain exceptional situations they may not. However, for our purposes let's assume that they will be on par. One of the challenges that you will face in this process is the fair and equitable distribution of the overall corporate revenue goals, including any year-over-year increases. Over- or under-weighting any individual sales quota could produce undesirable consequences such as sales attrition, underutilization of resources and income disparity. Therefore, as you begin planning your sales quotas, it is important to have a clear understanding of your company's revenue goals and the extent to which they will affect this process. A member of your executive team can provide you with all of the necessary data. Historical Revenue Performance: The historical performance of your individual sales team members versus quota, and the respective "roll-up" is also an important consideration to make when establishing sales goals. There will likely be a number of factors that can cause disparity including, but not limited to their territory configuration, sales experience, job tenure, competition and others. A close scrutiny of historical revenue performance data on individual sales territories will be a valuable tool for you to utilize. Not only does it afford you the opportunity to forecast future revenue trends, but it will also support the


Page No. 71


Unit 4

proposed methodology that you establish for the distribution of increases or decreases in individual and team quotas. Current Sales Coverage Model: As it relates to the quota setting process, it is important to review and understand your current coverage model on an individual sales territory basis, i.e., number of territories, geographic size and scope, historical revenue performance trends, business potential, competitive presence, tenure and experience of the sales rep, etc. These and other factors that may be unique to your business and industry will impact how you establish sales quotas. Due to these types of factors, it is often more desirable to create equitable quotas than equal ones. For example, it may not be realistic to expect a larger territory with greater business potential to produce revenue at the same levels and run rates as a smaller one with less potential. Likewise, a sales rep with less tenure and experience may not produce the same or better results than one who has been with your company for a number of years. Also, the logistics associated with managing a large, multi-state sales territory as compared to one that is principally in a large metropolitan, heavily populated area will impact both sales effectiveness and quota performance. Creating the proper balance between individual sales territories and their respective quotas by keeping these factors in mind will certainly be a key component of your success with this process.

4.4 Sales Territories Race horses project a rare combination of power and grace. The most valuable ones have agility and speed-they're the runners that win the trophies. Good sales representatives are like winning horses-they're in short supply, and the ones who know the systems integration industry are rarer. They have a rare ability to accept and absorb rejection without taking it Sikkim Manipal University

Page No. 72


Unit 4

personally. They have an uncommon gift for communication, knowing what to say and when to say it. Outstanding salespeople differ in at least one way from winning horseswinning salespeople choose their employers. To attract salespeople, you have to create the right environment, a company that meets their needs and allows them to prosper. If you fail to provide the right working environment, they will leave for the greener pastures of another firm, maybe even a competitor. Although compensation is important, there is more to maintain a winning sales team than providing the opportunity to make a good living. The most important step to building the right stable and the best sales talent is to create concrete territories. Company owners succumb to a number of myths regarding territories, including, the belief that territories make salespeople inefficient and lazy; if we keep our network wide open, everybody will be motivated to pursue every prospect. There are several problems with this myth, including loss of accountability (if an account is lost, no one is held responsible). Also, non-co-operation among sales reps is a possible result. There was a one-year period in my former company where we had two groups of sales reps calling on the same target market. The animosity created between the warring groups of salespeople was counter-productive. Some staff actually locked their desk drawers, the result of paranoia that other reps would steal their leads. Defining territories facilitates co-operation and creates a collaborative environment that improves productivity and enhances sales. Lastly, animosity among prospects may occur. Without territories, all of your reps will call on the same most promising prospects, creating distrust and animosity among potential clients. Another misconception involves the belief that if a sales rep has an outstanding month, and then assigns new prospects and hot leads to those Sikkim Manipal University

Page No. 73


Unit 4

who fell behind in their quotas, a process often referred to as planned earnings. If one of your racehorses wins too many races, you'll limit his opportunity to win in the future and put your money behind a horse that isn't doing well. Another myth involves the mentality that a business is too small for territories, and a market is so big that sales reps will never cross paths. This line of reasoning assumes a firm will never grow. Territories

are

important.

They

provide

accountability,

promote

entrepreneurial spirit and reduce turnover. Competition eats away at your accounts, and internal competition creates a hostile corporate environment. If you are trying to establish territories for the first time, you will experience two conflicting issues-the ease of administration of territories and the difficulty of making the change. Whether you are creating territories geographically or by industry SIC code, the successful establishment of territories follows several rules. Each territory must contain enough business prospects to allow a sales rep to earn a good living. Moreover, in any territory plan, the overriding rule to protect a rep's secured area is to make them responsible for any development within their defined territory. What do you do when a rep from another territory has an existing relationship with a decision maker or architect associated with a project in another rep's assigned territory? Maintain your territory plan, and suggest that the two reps work together on projects, splitting or sharing the commission. It's not a management mandate, but merely a suggestion. Most reps will prefer this route because they'll know that working with each other (and splitting commissions) is a two-way street. This informal policy builds co-operation among the reps and maintains the objectives of your territory plan-to assign responsibility and accountability.


Page No. 74


Unit 4

In developing a territory plan, the primary goal is to maximize sales and push accountability down to the sales rep's level. For many companies, using geography is the easiest way to implement a successful plan. The ideal geography-based plan should comply with a couple of conditions. The geographical area should be contiguous to make it easier for the rep to cover, translating into less travel time and more time with prospects and clients. If possible, reps should live in their assigned territories. Although not an absolute requirement, it makes sense. The more familiar they are with their territory, the better they will know it and the better the results. A territory plan based upon a specific industry is implemented when the requirements of an industry are so specialized that it makes sense to have one rep assigned to the niche on a full-time basis. An example is the federal government, which has unique purchasing needs and requires specialized sales skills. A company with multiple sites may be assigned as a territory to a specific sales rep. This makes sense when the account has multiple sites; decisions are centralized, and the client is willing to enter a buying agreement for future purchases. Outside of the sales compensation plan, the creation of secured territories (islands of responsibility, accountability and ownership) is the most important step to attract (and keep) the best sales talent. Territories are a first step; there are other sales management methods that need to be applied to create an efficient, highly-desirable sales environment. These will be discussed in a future issue of S&VC.

4.5 Sales Control and Cost Analysis The cost cutting techniques are not limited to the very large operations in their usefulness, and furthermore, that in some cases, simple procedures can rapidly be put in place without expensive investment. Sikkim Manipal University

Page No. 75


Unit 4

In addition to identifying and evaluating cost reduction possibilities, we can help with: 

Cost benefit analysis;



Overhead analysis;



Product line and distribution channel cost analysis;



Marketing and sales costs analysis;



Direct costs analysis, & appropriate allocation of overhead;



Make-vs.-buy analysis, lease-vs.buy analysis, & out-source analysis;



Materials and procurement costs & supplier negotiations;



Labor cost and efficiency analysis;



Equipment acquisitions;



Shipping, telecommunications, & travel costs;



On-going cost control, budgeting, and forecasting;



Key information identification and collection;



Physical inventory; and,



Trends, projections, benchmarks, & goal-setting.

Self Assessment Questions I State whether the following statements are True or False: 1. No system of planning can be successful without having an effective and efficient system of control. 2. Budgeting is closely connected with control. 3. A budget relates to bygone period for which objectives or goals had not been laid down. 4. Capital budgets are directed towards proposed expenditures for new projects. 5. The most important step to building the right, stable and the best sales talent is to create concrete territories. Sikkim Manipal University

Page No. 76


Unit 4

4.6 Summary The sales budget of a company provides a platform for keeping the exact budget for selling the products. A sales budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. The sales quota of the company keeps the actual quantity of the products.

Territories are important. They provide accountability,

promote entrepreneurial spirit and reduce turnover. The most important step to building the right stable and the best sales talent is to create concrete territories. In developing a territory plan, the primary goal is to maximize sales and push accountability down to the sales rep's level.

4.7 Terminal Questions 1. What is a sales budget? 2. What are the sales quotas? 3. How are the sales territories created? 4. Explain sales control and cost analysis.

4.8 Answers to SAQs and TQs SAQs I 1. True 2. True 3. False 4. True 5. True Answers to TQs: 1. Refer to 4.2 2. Refer to 4.3 3. Refer to 4.4 4. Refer to 4.5 Sikkim Manipal University

Page No. 77


Unit 5

Unit 5

Logistics of Distribution

Structure: 5.1


5.2

Communication and Logistics

5.3

Functions of Logistics Management Self Assessment Questions I

5.4

Customer Services, Data Mining/Data Warehousing

5.5

Elements of Logistics Self Assessment Questions II

5.6

Application of Technology in Logistics and Channel Information Systems

5.7

The Process of Logistics

5.8

Strategic Management in Logistics Self Assessment Questions III

5.9

Domestic and Global Challenges before Logistics

5.10 Summary 5.11 Terminal Questions 5.12 Answers to SAQs and TQs

5.1 Introduction The advantages of having a proper logistics management system in place were so immense that commercial organizations immediately jumped at the vast possibilities it offered. They also faced similar problems and situations as in a war and winning a customer or market share was equivalent to winning a war.


Page No. 78


Commercial organizations started

a

logistics department

Unit 5

with

the

responsibility of overseeing the journey of the finished product from its facilities to its retail outlets. The advantages were immediately realized. Almost all the commercial organizations jumped into the fray and soon logistics became a common buzz word in the commercial world as well. However, the focus was always more on outbound logistics, i.e. the flow of finished goods from the manufacturing unit to the distributors, to the retailers and finally to the customers. Inbound logistics, i.e. the flow of basic materials, components etc., into the organization was ignored. One of the reasons was that traditionally, purchasing had been an isolated function in an organization and hence rarely attracted the desired attention. Hence, inbound logistics never got the same treatment as outbound logistics. Also, the belief that profits came from the finished goods market and that the more finished goods sold, the thicker the bottom-line, made organizations concentrate on the so-called right side. But trying to look good externally with the internal systems not in proper shape had its own repercussions. This unit deals with the meaning, functions and the process of logistics. Objectives: After studying this unit, you will be able to: 

Explain logistics and its importance.



State the functions of logistics management.



Brief on demand forecasting, inventory management and materials handling.



Describe strategic management in logistics.



Discuss the domestic and global challenges before logistics.


Page No. 79


Unit 5

5.2 Communication and Logistics Logistics Management The logic of including raw materials, components, manufactured parts and packaging materials within an overall flow of materials, expanded the responsibilities of management into a broader logistics concept. The broader view of materials' flows within the business corresponded with a new emphasis of strategic decision-making. In this broader context, logistics can play a major role in determining the nature of the overall corporate response to exploit market opportunities. The exploration of any market opportunity commences with marketing forecasts, which identify the overall potential and market segment volumes available, the price/volume combinations, and the profiles of both the customers and resellers. From this analysis, a profile of the market can be made, which will identify the location and nature of demand, and the service requirements of customers and intermediaries. Such a profile will identify the infrastructure best suited to maximize the opportunities available. The inclusion of a logistic activity enables a broader view to be taken of how the opportunity might best be approached. If the economics of logistic activities across a range of throughput volumes are known, it is possible for management to review a number of production options that may include total manufacturing of all components, a predominantly assembly operation or a combination of manufacturing and assembly of components. The important characteristics of the decision usually concern the relationship between fixed and variable costs, both initially and throughout the product forecast life cycle. This requires a view of the market, its competitors and an assessment of market risk. For many markets (specifically those fashion-led), it is important for the business to ensure that Sikkim Manipal University

Page No. 80


Unit 5

it can achieve sufficient sales volume to exceed the breakeven point and generate profit. The implications for logistic decisions are for high levels of service in terms of availability and delivery reliability; failure to do so may result in loss of opportunity to establish a strong market position. The margin (as a percentage of sales) is also important. The larger the margins, the greater are the risk of competitors entering the market and of subsequent price competition. The point at which the company should cease production and distribution is another consideration.

5.3 Functions of logistics management Logistics plays a dominant role in SCM. Supply chain and the philosophies therein can create an opportunity while logistics management with its tools and processes, fulfils an opportunity. It is essential to provide the exact distinction between logistics and supply chain and thus define the exact role of logistics in the broad framework of SCM. Right Time: Customers have become very finicky and precise about time. Hence it is essential that they get what they want as and when they demand it. Supply chain with its tools and philosophies can schedule the production and get the product ready but it is logistics management that has to ensure that the product reaches the customer on time every time. Hence logistics management becomes a very critical activity. There can be several impediments to appropriate fulfillment. Transportation issues, traffic problems, strikes, regulations, etc. are some of the problems that regularly hamper the efficient functioning of logistics management. A good logistics management system is essential to encash the opportunity created by supply chain management. Right Price: Immense competition and rising customer expectations have put tremendous pressure on price. Companies have implemented supply chain philosophies and tools to ensure price competitiveness. They have Sikkim Manipal University

Page No. 81


Unit 5

also taken several measures to eliminate waste and hence cost bulge. And logistics being the major cost component (almost 30 per cent) it becomes critical. Hence, clearly if companies have to offer the right price to the customers, logistics has to be cost competitive. Right Quantity: How much does the customer want? SCM can identify how much quantity the customer requires to get satisfied, while it is logistics management that can ensure that the customer gets what he wants. Right Place: Driven by the demanding customers and competition, companies are going nearer and nearer to where the customer is. In this context, the right place has become very relevant and critical. Right place could be the retailers' end or the actual place where the customer is located. Usually manufacturing companies leave this to the retailers. Implementing 'free home delivery' and other concepts ensure that right place lies with this second last end of the supply chain. This also puts additional pressure of 'right time' on the supply chain as the distribution from wholesaler to the retailer has to be completed in such a way that there is adequate time for the last distribution from the retailer to the customer. Right Quality: Once again, supply chain can ensure quality of product at the company's end only. The responsibility of ensuring quality at the customers' end rests with logistics management. Accidents, material lying in godowns, posts, traffic jams can all hamper quality before they reach the customer. Hence companies have to implement very good logistics systems that will ensure quality at the customers' end also. Self Assessment Questions I State whether the following statements are True or False: 1. Supply chain can ensure quality of product at the company's end only. 2. The responsibility of ensuring quality at the customers' end rests with logistics management. Sikkim Manipal University

Page No. 82


Unit 5

3. Logistics management can identify how much quantity the customer requires to get satisfied, while it is SCM that can ensure that the customer gets what he wants.

5.4 Customer Services, Data Mining/Data Warehousing Services The logistics industry is in the midst of a transformation as the companies are increasing their dependence on the logistics providers and logistics providers on the other hand are relying on IT to optimize storage and movement of inventory on the one hand, while including managerial aspect and offering to undertake the whole logistics operation for the company, on the other hand. This paper looks into this transformation and identifies areas of immediate opportunity for software, hardware and services organizations targeting this segment. It also outlines the various activities performed by the logistics providers. Data Mining/Data Warehousing and Data Marts The explosion of data stored has caused a corresponding explosion in the need to analyze it. Traditionally, such data has been used only for the common queries as given by a user. However, with so much of it, there has been an increasing desire to mine it for more meaningful and useful information. Thankfully, along with the increasing amount of data, there has been a great increase in the computational power of computers (see the chapter on Data Mining and Warehousing for details). This has made techniques such as data mining, which might at one time have been too computationally expensive, quite plausible. The excitement being generated in this field can be explained by the tremendous potential benefits that could come about from the implementation of a successful system. Data mining results include: •

Associations, or when one event can be correlated to another event.


Page No. 83


•

Unit 5

Sequences, or one event leading to another later event (a rug purchase followed by a purchase of curtains).

•

Classification or the recognition of patterns and a resulting new organization of data (for example, profiles of customers who make purchases).

•

Clustering, or finding and visualizing groups of facts not previously known;

•

Forecasting, or simply discovering patterns in the data that can lead to predictions about the future.

The data warehouse concept is gaining acceptance in part because of the possibility of fruitful data mining. The data warehouse is designed to store and retrieve data. Data warehouses are built to contain enterprise-wide information collected from multiple operational sources. In using a data warehouse, businesses want to examine problems or possible problems and determine their causes. To do this they need data from multiple systems. For example, in order to determine whether or not a drop in sales was due to too many salespersons being on vacation, the data warehouse needs to contain information from both the product database and the personnel database. Technologies such as the internet and intranet, along with data mining tools need to be employed to ensure that all users can get the information they need and when they need it. A data warehouse typically has highly summarized views of the enterprisewide information along with the detailed information that are used by various levels of management. In contrast, a data mart contains department or division-wide information. They can be cheaper to deploy and operate than a data warehouse, but they can become isolated pools of data that are not consistent with the rest of the organization. Attempts to tie multiple data marts together to create a data warehouse can be expensive and complicated. Sikkim Manipal University

Page No. 84


Unit 5

Warehousing and Warehouse Management In outsourcing warehouse management activities, the business strategy is to reduce costs associated with distribution and warehousing operations. The value; in outsourcing warehousing activities results from reduction of fixed assets associated with the physical warehouse(s), increased capacity for executing transactional and tactical warehouse processes and overall operating cost reduction. In addition to capital and cost-related benefits, there are other reasons to consider outsourcing of warehousing activities, including access to leading practices, access to 'best of breed' warehouse management systems and incentive

or

performance-based

contracts

that

drive

continuous

improvement. These benefits should be balanced against potential weaknesses, including a tendency for "one size fits all" approach by logistics service providers and that efficiency gains may be limited to activities within a facility rather than on the entire supply chain or distribution network. Transition from internal management of warehousing operations to an external provider will require significant upfront involvement in providing initial data, industry or customer expertise and oversight during transfer of responsibilities.

5.5 Elements of Logistics Logistics consists of several elements that need to be considered and coordinated for successful results. Elements of logistics have been classified into two categories: one that is linked to operations and is responsible for undertaking the routine and regular responsibilities and the other that is linked to strategy and is responsible for policy making. Some of these strategic activities listed above might not be directly under the purview of logistics, but require inputs from logistics. Sikkim Manipal University

Page No. 85


Unit 5

Modes of Transportation in Logistics Rail, road, air, water and pipeline are the five modes of transportation used by logistics management to transport material from one place to another. Each of these modes has some advantages and some limitations. A logistics expert needs to understand these and based on priorities, product type, lead time, etc. decide the appropriate mode of transportation. AIR This mode of transportation is usually used for the delivery of goods from distant suppliers, usually the ones that are not connected by any other mode of transportation. This mode of transport is useful to deliver products with short lead times, fragile goods and products that are not bulky. Also the products that are in high demand and in short supply are also at times air freighted in order to meet customer demands. The bulk/value ratio will be a determining factor. Advantages •

Fast delivery, usually between 24 and 48 hours.

•

Faster fulfillment of customer orders.

•

Ideal for perishable and other products with short life.

•

Reduced lead time on supplier.

•

Lesser inventory.

•

Improved service levels.

Disadvantages •

Flight delays and/or cancellations especially when direct connections are not available.

•

Customs and excise formalities leading to delays.

High Cost Suppliers/customers are not always located near a rail freight depot and delivery to/from the depot can be costly and time consuming. Sikkim Manipal University

Page No. 86


Unit 5

SEA Sea transportation is used by businesses for the delivery of goods from distant suppliers. Most sea transportation is conducted in containers which vary in size. Goods can be grouped into a container (LCL) or fill a container (FCL). Sea tankers are used for bulk shipments of loose goods such as oil, grain and coal. Advantages •

Ideal for transporting heavy and bulky goods.

•

Suitable for products with long lead times.

Disadvantages •

Longer lead/delivery times.

•

Problems arising due to bad weather.

•

Difficult to monitor exact location of goods in transit.

•

Customs and excise restrictions.

•

High cost.

•

Suppliers/customers are not always located near a rail freight depot and delivery to/from the depot can be costly and time consuming.

RAIL Rail transportation is popular with businesses for the delivery of a wide range of goods including post, coal, steel and other heavy goods. Advantages •

Faster and quicker.

•

Ability to carry high capacity.

•

Cost effective.

•

Safe mode of transport.

•

Reliable.


Page No. 87


Unit 5

Disadvantages •

Subject to unforeseen delays and/or accidents.

•

Completely governed by timetable and schedule of railways.

•

Suppliers/customers are not always located near a rail freight depot and delivery to/from the depot can be costly and time consuming.

Road A very popular mode of transport used by suppliers and businesses to deliver orders. Many transport companies provide scheduled delivery days and next day delivery services, depending upon your needs. Goods can be packed/grouped in box vans or in containers which are also used for sea transportation. Advantages •

Cost effective.

•

Fast delivery.

•

Ideal for any short distances.

•

Refrigerated vans can be easily used for transporting perishables.

•

Easy to monitor location of goods.

•

Mass movement of goods.

•

Point-to-point service.

•

Easy to communicate with driver. Usually companies ask the driver to call the company every couple of hours.

Disadvantages •

Delays due to traffic jams, etc.

•

Problems due to vehicle breakdown, accidents, etc.

•

Goods susceptible to damage and losing quality.

•

Heavy dependability on weather.


Page No. 88


Unit 5

Pipeline Advantages •

Mass movement of liquids and gases.

•

Low operating costs.

Disadvantages •

Limited applicability.

•

Not widespread.

Self Assessment Questions II 1. _____________ is popular with businesses for the delivery of a wide range of goods including post, coal, steel and other heavy goods. 2. __________ is used by businesses for the delivery of goods from distant suppliers. 3. ______________ are used for bulk shipments of loose goods such as oil, grain and coal. 4. __________ mode is useful to deliver products with short lead times, fragile goods and products that are not bulky.

5.6 Application of Technology in Logistics and Channel Information Systems Information Technology in Logistics The application of IT can support logistics and help in resolving several problems. Over and above assisting in managerial tasks such as planning, deciding on the optimal route of transportation and allocation, distribution, etc. IT can play a vital role in logistics. Tracking goods in transit: One of the major problems in logistics has been lost and untracked parcels thereby affecting inventory policies, etc. Real time tracking of goods throughout the supply chain provides excellent opportunities for improving customer service. Real time information on Sikkim Manipal University

Page No. 89


Unit 5

delivery time supports just-in-time manufacture and retail, enabling organizations to make strategic decisions with full confidence in the availability of goods. Goods tracking are also important for direct endcustomer service. Several leading package delivery companies are offering parcel tracking via the Internet as a fundamental element of the service. There are many additional areas where accurate, real-time goods tracking can deliver significant improvements. For example, lost luggage is estimated to cost the airline industry in excess of $ 100 million annually. Any improvements in this area not only reduce the cost of compensation payments to customers but also significantly improve customer service. The standard way to identify and follow a product on its journey through factories and down the supply chain has long been the familiar bar code. However, bar codes have a lot of problems and the use of bar codes also requires a lot of labor. According to industry figures, as many as 60 per cent of the workers in warehouses spend time validating bar codes. Items have to be lined up individually for scanning, even in highly automated identification systems such as those at major package-handling firms. Companies the world over are trying smart tags, specifically, radio frequency identification (RFID) for tracking parcels and other goods.

5.7 The Process of Logistics Logistics is responsible for all the movement that takes place within the organization. Whether it is the inbound logistics of incoming raw material or movement within the company or the physical distribution of finished goods, logistics encompasses all of these. Physical Supply: Physical supply means linking of suppliers with the internal operations. This is one of the most crucial elements of logistics as production cannot start unless material from the suppliers is available. Suppliers are scattered and have varying lead times, hence coordinating Sikkim Manipal University

Page No. 90


Unit 5

and synchronizing this activity becomes a tough job. Associated with this are the critical questions such as: From whom to order? How much to order? When to order? Which mode of transportation should be used? Where to store the material? etc. Companies prefer nearby suppliers unless the price/quality differential is too glaring for the reason that the physical supply quantity can be less and more frequent. The philosophy of JIT is based on the principle of less quantity in lesser interval resulting in more deliveries. This also means that companies have to carry less raw material inventory which also frees up the working capital. The problem with this is, of course, congestion on roads as trucks have to constantly ferry material to the manufacturing units from suppliers. More burden on logistics. For suppliers who are located at a distance and cannot send the material often, vendor-managed inventory (VMI) is the solution. Under VMI the supplier maintains a warehouse near the manufacturing facility and supplies as and when material is desired and required. In order to reduce the burden on logistics, some of the manufacturing companies send their own trucks to some suppliers who lie on a predefined route and get the material picked up themselves instead of the supplier doing it. The truck makes a round trip and will pick up material from 7-8 nearby suppliers. This way one truck does the job of otherwise 7-8 trucks reducing load on logistics. This is an innovative method used by several companies to reduce burden on logistics. "Physical supply also sometimes doubles as a cash carrying activity, i.e. after the raw material is delivered it collects cash for the quantity of raw material and takes it back to the supplier." This of course is difficult to implement in the event of JIT delivery. In such an ease usually the settlement is done over a period of time.


Page No. 91


Unit 5

Internal Operations: This means moving the material internally within the manufacturing facility. That is, raw material when it comes from the supplier is stored in the incoming warehouse; material from there has to be taken to the shop floor. In case of batch production, the WIP material has to be moved from one place to another. The finished product needs once again to be moved to another warehouse for packaging or for physical distribution. This also requires coordination between various activities and functions. However, being internal to the organization, the load on logistics is not much. Physical

Distribution:

This

encompasses

the

outbound

material

movement, which links the operations with the customer. This is a most crucial part of logistics and can make or mar the company's prospects in the eyes of the customers. This is responsible for achieving all the five rights discussed above. This part of logistics addresses

some of the critical

aspects such as expected level of customer service, cost associated With servicing the customer at the prescribed level, product to be stocked at each distribution facility, transportation modes and transportation services to be used. This type of logistics also has to perform some other vital activity – that of carrying information and in some cases even of carrying cash. The logistics providers or the truck driver needs to be properly trained to pick up information more than: what is provided. That is, he needs to understand whether he is welcome when he reaches the retailer, whether there is a stock-out situation when he delivers the material or whether adequate material is still available that could have lasted some more days, any customer response or reaction in case any sale transaction takes place in his presence, how and where the material is placed after he delivers, etc. All of this is extremely vital information, which needs to be read through. Some Sikkim Manipal University

Page No. 92


Unit 5

companies are exploring the idea of having a truck drivers training program where they would be trained to understand the body language of the retailer and also pick up other relevant information. Settling of bills and carrying cash is another activity sometimes performed by this part of logistics management.

5.8 Strategic Management in Logistics Strategic Decisions in Supply Chain One way of helping to ensure success is to ensure that strategic changes in the supply chain organisation are routed through a strategy. A strategy is a set of important decisions derived from a systematic decision-making process conducted at the highest levels of the organisation. The earliest work on manufacturing strategy is credited to Skinner (1969). Work on manufacturing strategy has been relatively recent in the history of the discipline of manufacturing with significant evolution evident between 1969 and 1988. Within the context of supply chain re-engineering, many of the best practices have been well documented elsewhere. Three areas core to the infrastructure of the supply chain, and which have come to the fore more recently in manufacturing strategy, are the 'make versus buy' decision, the sourcing decision and the organisation design which will be discussed in more detail. Strategic decisions basically have long-term implications and affect the organisation in a major way. The sources of uncertainty are more pronounced. The top management makes these decisions. Successful execution of these decisions would give a cutting edge to the organisation. The following are the broad areas where strategic decisions are required in managing the supply chain: •

Warehousing

•

Transportation


Page No. 93


Unit 5

•

Information Technology Solutions and Integration

•

Make versus Buy

Warehousing Warehousing can be defined as the segment of an enterprise logistics function for the storage and handling of inventories beginning with supplier receipt and ending at the point of consumption. The management of this process includes the maintenance of accurate and timely information relating to the inventory status, location and disbursement. The optimal warehouse decision should permit the firm to leverage inventory levels and transportation modes that effectively support marketing, sales, order processing and inventory planning in the quest for competitive advantage. Factors that influence warehouse decisions include the type of distribution industry, the firm's value, quantity and potential for obsolescence, strength of the competition and state of the economy. Warehousing performs many roles in the typical distribution organisation. The basic functions are material handling, storage and information transfer. Materials handling consists of receiving, storing and shipping. The objective of warehouse storage is to maximize on customer service by improving product and location positioning. Information transfer ensures timely and accurate information on inventory status, throughput levels, and space utilization, equipment and manpower

availability

and

transportation

capacities.

An

effective

methodology for developing a warehouse strategy consists of several steps: Document existing warehousing operations, determine and document the warehouse storage and throughput requirement over the specified planning horizon, identify and document deficiencies in existing warehouse operations, identify and document alternative warehouse plans, select alternative warehouse plans, select the recommended solution and finally update the warehouse strategic plan.


Page No. 94


Unit 5

Transportation Transportation is the movement of products from one node in the distribution channel to another. By providing for the swift and uninterrupted flow of products back and forth through the distribution channel, transportation permits wider and deeper penetration of new markets far from the point of production. In addition, by maximizing vehicle and material handling capacities and cargo requirements, effective transportation permits distributors to leverage economies of scale by lowering the per unit cost of transporting the product, Efficient transportation enables distributors to reduce the selling price by holding costs down, thereby providing for more competitive product positioning. Finally, transportation provides other business functions with essential information concerning products, marketplace and time utilities, and transit costs and capabilities necessary for effective enterprise planning and operational execution. The first step in the management process is to establish the cost effectiveness of private transportation fleets and the search for and selection of public carriers. The goal is to ensure the highest level of customer service at the lowest possible price. The selection of a carrier is normally a combination of the price of service, the carrier's financial stability, reliability, mode availability and subjective elements. The second step involves the ongoing choice of selecting the transport mode to meet daily shipment requirements. Modes should be chosen that will perform the service at a cost that will satisfy any special shipping needs required by the customer, exceed the rates and services offered by competing carriers and minimize the likelihood of loss, damage or delivery delay. Once the mode and carrier have been selected, shippers, as a third step, must work with carriers to establish an effective schedule and the proper vehicle routing to ensure timely customer delivery. The next step of the process is the preparation and completion of the necessary shipping Sikkim Manipal University

Page No. 95


documentation.

Finally,

managers

must

Unit 5

be

diligent

in

developing

transportation performance measurements that will provide them with quantifiable data necessary for increased productivity and competitive advantage. Self Assessment Questions III 1. A _____________ is a set of important decisions derived from a systematic decision-making process conducted at the highest levels of the organisation. 2. The earliest work on manufacturing strategy is credited to __________. 3. _____________ can be defined as the segment of an enterprise logistics function for the storage and handling of inventories.

5.9 Domestic and Global Challenges before Logistics Future Trends Logistics providers will soon become the lead logistics provider for the company and have the responsibility of playing an end-to-end role in the company's logistics function. Their role will, however, be much more broad based and will also include activities such as training of vendors in customer service, communication relating to shipping, enabling and training vendors with web-based tracking, etc. These training programmes are aimed at updating the vendors with the latest in shipping and logistics.

5.10 Summary Logistics plays a dominant role in SCM. Elements of logistics have been classified into two categories: one that is linked to operations and is responsible for undertaking the routine and regular responsibilities and the other that is linked to strategy and is responsible for policy making. Rail, road, air, water and pipeline are the five modes of transportation used by logistics management to transport material from one place to another. Sikkim Manipal University

Page No. 96


Unit 5

One of the major problems in logistics has been lost and untracked parcels thereby affecting inventory policies, etc. Real time tracking of goods throughout the supply chain provides excellent opportunities for improving customer service. The logistics industry is in the midst of a transformation as the companies are increasing their dependence on the logistics providers and logistics providers on the other hand are relying on IT to optimize storage and movement of inventory on the one hand, while including managerial aspect and offering to undertake the whole logistics operation for the company, on the other hand.

5.11 Terminal Questions 1. Write a short note on ‘Communication and logistics’. 2. What are functions of logistics management? 3. Explain in detail demand forecasting, inventory management and materials handling. 4. Write briefly about the application of technology in logistics and channel information systems. 5. What is strategic management in logistics? 6. Explain the domestic and global challenges before logistics.


2. True

3. False

SAQs II 1. Rail transportation 2. Sea transportation 3. Sea tankers 4. Air transportation Sikkim Manipal University

Page No. 97


Unit 5

SAQs III 1. Strategy 2. Skinner 3. Warehousing

Answers to TQs: 1. Refer to 5.2 2. Refer to 5.3 3. Refer to 5.4 4. Refer to 5.6 5. Refer to 5.8 6. Refer to 5.9


Page No. 98


Unit 6

Unit 6

Channel Management

Structure: 6.1


6.2

Policies of Marketing Channels

6.3

Designing Marketing Channels Self Assessment Questions I

6.4

Assessing Channel Performance

6.5

Marketing Channel Integration and Hybrid Channel Systems Self Assessment Questions II

6.6

Recruiting Channel Partners and Criteria

6.7

Motivating and Evaluating Channel Members

6.8

Managing Channel Relationships

6.9

Conflicts of Channel Management Self Assessment Questions III

6.10

Summary

6.11

Terminal Questions

6.12


6.1 Introduction A channel to market is the method of getting your product into the customer’s (the end user’s) hand. This can either be through direct sales, or through a reseller. Direct sales can occur in person, via the phone, the web or mail. Indirect, or channel sales typically refers to sales through a reseller. A reseller can order from you directly (one tier between you and the end user), or from a wholesale distributor

you would sell to a wholesale

distributor and they in turn would sell to multiple resellers (two tiers between you and the end user (hence the common term “two-tier” distribution). Sikkim Manipal University

Page No. 99


Unit 6

This unit deals with the policies of marketing channels, designing channels, assessing channel performance and managing channel relationships. Objectives: After studying this unit, you will be able to: 

Explain the meaning of channel marketing.



Explain the policies of marketing channels.



Describe how marketing channels are designed.



Describe how channel performance is assessed.



Explain how channel relationships are managed.

6.2 Policies of Marketing Channels Channel Marketing Some companies or divisions (for example, Motorola semiconductor, etc.) call the reseller the distributor (or distributory) this is correct, but not in the typical and more common two-tier distribution model. Hence, it is important to get the channel terminology down whenever talking about the channel to avoid confusion. Which Channel to Use? The first question to address is whether you should go direct or indirect. Often the answer is both -especially since the popularity of the Internet. The key, however is to avoid most of the channel conflict. Channel conflict occurs when the vendor (you) and the reseller, or different reseller types (retail, VAR, mail order, Internet) compete for the same business. It is appropriate to say “most” of the channel conflict, since it is fine to have some conflict resellers may compete, and there may be some of the business that you can take direct. For example, you might go direct with massive deals that are too big for a reseller to finance (such as a 1.3 billion deal overseas), or very small deals that don’t require any special Sikkim Manipal University

Page No. 100


training/installation/consulting

Unit 6

hence won’t provide margins for your

resellers who make money on their ‘value added’ services. To minimize conflict you could: 

Segment the products (different products are sold through different reseller types or channels).



Setup exclusive or limited territories.



Sell direct at a higher price than the average street price.



Setup different promotions for different resellers

rotating so they all

have advantages at different times. 

Provide MDF/Co-op and let the resellers choose to establish their own competitive advantage.



Setup reseller levels rewarding higher margins and support for higher authorization (the resellers choose whether they can be competitive).



Setup a process to determine if a customer has worked with a reseller prior to taking the business direct (so you don’t steal business they cultivated), etc.

There are multiple ways that you can reduce conflict – the key is to be aware that it could exist and of your ramifications (short and long-term), and that you do something about it to keep your reseller and revenue targets satisfied. One vendor long gone, Ashton Tate, had a terrible problem with channel conflict (they would sell direct and undercut a prospect the reseller had cultivated)

as a result, their resellers hated them. They still sold their

products since they were so popular (dBase), but were rooting for a competitor to take them out which happened. It is also a problem if you have no conflict, since it usually indicates that you don’t have enough sales coverage there could be parts of the market you Sikkim Manipal University

Page No. 101


Unit 6

are not covering (missing RFQ’s, not knowing about the opportunities, your product is not sold where the customers traffic, etc.). Direct or Indirect? The question to go direct, indirect or both is often determined by the following: 1. Ability to recruit resellers. If you cannot get your product into distribution, or find resellers, the answer is simple, you go direct. 2. Product type. If you are selling a product that requires a lot of training, installation and support, you may go direct until you get your resellers trained and certified or, if you have a large enough sales force, you may stay direct. However, if you have enough sales people to only cover the largest customers (10 sales people to cover top 100 telcos, but not enough to cover the middle 5,000 telcos), you may wish to use resellers to cover the middle market – then segment your product line, one for direct and one for resellers. 3. Market dynamics. As the market technology adoption changes and products that used to require support become easier to use, and customers know what they want – you may go direct (like Dell (it was actually a modest model in the early days, since most users needed more support but became effective 4. Price point. High-end premium quality consumer products (such as expensive cookware, the best vacuums, etc.) are sometimes sold direct (and usually person-to-person) since the benefits (which are real, but not always obvious) must be sold. However, this does not mean that highpriced products can’t be sold via the channel (boats, planes, million dollar SFA products, etc.). 5. Customer requirements. Some customers require mandate a direct relationship with the vendor to ensure their needs are met. In some Sikkim Manipal University

Page No. 102


Unit 6

cases, when an account insists on going direct, the reseller can still earn a bounty for delivering the qualified, pre-sold lead. 6. Ability to manage resellers. Much of the decision to go direct or indirect is also dependent on the company’s ability to understand how the channel functions, come up with a competitive program, and manage the reseller programs and relationships. The final decision on direct or indirect is based on your business model and how you address the questions above.

6.3 Designing Marketing Channels Channel Management Channel sale is the overall account liaison and is primarily responsible for selling product into distribution and the reseller channel (retail, VARs, system integrators). Channel marketing is responsible for ensuring that product in distributor and reseller locations gets sold out. In essence Channel sales ensures sell-in, Channel Marketing ensures channel sellthrough. A Channel Marketing Manager is typically responsible for the sell-through function. There are cases where a Channel Marketing Manager handles all sell-in and sell through via the channel, and the internal sales people concentrate on selling direct this may vary according to your organization. This section of Channel is primarily for the Channel Marketing Manager who works in partnership with the head of Channel Sales to: 1.

Establish a competitive reseller program (authorization, margins, levels, etc.)

2.

Help recruit resellers

3.

Prepare the proper reseller collateral


Page No. 103


4.

Unit 6

Create reseller kits (sell sheets, product slicks, catalogs, reseller pricing, NFR product, distribution part numbers, contact information, reviews, etc.),

5.

Manage reseller database and Partner Relationship Management (PRM) software

6.

Jointly invest the market development (MDF) and Co-op funds to increase channel sell-through.

7.

This sell-through is accomplished through managing store, VAR and distributor promotions (spiffs, contest, rebates, specials, training, promotions, etc.),

8.

Ensuring proper merchandising (retail only)

9.

Ensuring adequate stocking levels

10.

Running reseller education

11.

Setting up motivational contest to reward sales

12.

Manage seeding programs.

Self Assessment Questions I State whether the following statements are True or False: 1. A Channel Marketing Manager is typically responsible for the sellthrough function. 2. Channel marketing is responsible for ensuring that product in distributor and reseller locations gets sold out.

6.4 Assessing Channel Performance The performance of a distribution channel can be assessed by considering a number of performance dimensions, including channel effectiveness, channel efficiency, channel productivity, and channel profitability.


Page No. 104


Unit 6

6.5 Marketing Channel Integration and Hybrid Channel System Many marketers resist integrating their customer communication efforts across online, offline, and retail sales channels. Why? They fail to see the value of integration or fear it muddies their message. Some believe it cannibalizes sales from one channel to another. Looking at it from the perspective of the consumer, however, choosing which channel to use when communicating with a marketer is entirely situational. An urgent request or need is likely to prompt a phone call. When in research mode, many look to the Web as their preferred source. And when a customer is ready to make a purchase decision, there typically is a need for some sort of physical interaction in the form of literature (such as a direct mail brochure) or contact with the product or service. How well a marketer integrates its mix of channels for prospects and customers will determine how well it delivers incremental benefit for all parties. To that point, here are current data to debunk common channel integration myths. Myth #1: Most loyal customers still prefer interacting via one channel. A marketer’s most loyal customer now uses at least two channels. An August 2004 report from Jupiter Research revealed that “consumers are influenced to spend $6 offline for each $1 they spend online,” indicating that loyalty can and does migrate across channels. It is a marketer’s mission, then, to use known information about individual customers (with proper optin methods) to meet individual channel preference needs. Myth #2: Most people shop and buy via the same channel. People use different channels for different reasons. Consider that, again according to Jupiter Research, “43% of Internet users bought products from a retailer’s offline store after viewing them on the seller’s Website.” Additionally, experience shows that television support for a direct marketing campaign Sikkim Manipal University

Page No. 105


Unit 6

can improve direct marketing response rates significantly. Each channel influences the others. Myth #3: Most people do not like direct mail. While each medium has its own strengths, surveys continue to show that consumers prefer direct mail over other forms of communication, including e-mail, telephone, and personal contact. Mail is considered less intrusive than other media. In a world where consumers are exposed to thousands of marketing messages daily, often it’s the message in the mailbox that has the power to rise above the chatter. The lesson here is not to be afraid to test direct mail to reach out to consumers and prospects alike. Myth #4: Online marketing cannibalizes offline efforts. An individual’s media preference influences receptivity to any given channel. The reality is that multi-channel contact can yield better overall results. People now regularly use a combination of media when considering and responding to an offer. Adding a response channel (such as the Web) can dramatically improve results. Remember that direct marketing buyers are more likely to have Internet access. The Internet has changed the face of direct marketing, but not by displacing channels or making them obsolete. Myth #5: Becoming a multichannel company does not require internal restructuring. Many companies are “siloed” when it comes to their marketing channels, making the sharing of information difficult, if not impossible. When embarking on a multichannel infrastructure, marketers must work to establish a customer-centric point of view and develop common offerings, transaction processing, customer service, messaging, and themes. There must not be conflicted branding and communication elements if a marketer is to drive a singular message home successfully. Myth #6: The 55-plus audience is not Web-savvy. The Web can be a viable channel for reaching audiences up to 69 years of age. “Young Sikkim Manipal University

Page No. 106


Unit 6

seniors” those ages 55 to 59 have a huge online presence, and “retiring seniors” (ages 60-64) experienced the birth of the Internet at their places of employment. These two groups alone accounted for more than 15.5 million Internet users as of 2003, according to an October 2003 Nielsen/Net Ratings report. Additionally, “retired seniors,” those 65-69, have good discretionary income, and most own computers; that same Nielsen/Net Ratings report indicated that some 9.5 million of them were using the Internet by 2003. Clearly the Internet can be a powerful tool for reaching senior audiences with a wide variety of messages. Myth #7: Each channel is a separate user experience. The opposite is in fact true: Multiple channels converge into a unified user experience. That is to say, if channels fail to offer a unified voice, look, and feel, a marketer is not acting as a multi-channel company and may disappoint or frustrate customers. A multi-channel user expects an integrated experience across all touch points with a brand or information source, and delivering on this expectation is the challenge for marketers. Self Assessment Questions II 1. ____________ expects an integrated experience across all touch points with a brand. 2. Online marketing cannibalizes _____________ 3. Many marketers resist integrating their _________ efforts across online.

6.6 Recruiting Channel Partners and Criteria Recruit Companies count on their channel partnerships to maximize profits, increase market penetration, and enhance customer satisfaction. Recruiting the right business partners is the key to developing or expanding your channel programs. Sikkim Manipal University

Page No. 107


Unit 6

CGS has developed, implemented, and managed recruitment programs seamlessly for some of the world's largest IT vendors. Business Partner Recruitment Readiness The importance of using well-defined criteria for identifying, qualifying, and recruiting business partners that align to your specific channel development initiatives cannot be overstated. CGS will work with you to clarify your recruitment goals and rank the desired competencies and business models you are seeking in potential new business partners. CGS will work with you to: 

Understand your specific recruitment goals and criteria for success



Define your compelling business partner program benefits, product positioning and messaging



Translate your business partner program benefits into a telemarketing script and outbound email messaging



Acquire business partner prospect lists and sorting business partner prospects that align to your specific recruitment objectives



Train the CGS business partner recruitment telemarketing sales team about your business partner programs and objectives



Create standardized documentation to streamline partner management



Develop collateral to market your business partner program and products to qualified business partner candidates



Establish metrics and reports for benchmarking the recruitment campaign performance

6.7 Motivating and Evaluating Channel Members Identifying, reaching and motivating key influencers may be the difference between effective and ineffective channels strategies. The importance of influencers in the purchase decision process arises from positive impact Sikkim Manipal University

Page No. 108


Unit 6

they have when they support a company’s products or services. A key influencer is defined as: “Any party(ies) which exerts significant influence over the purchase decision” Key influencers may be directly involved in the purchasing decision or indirectly influence the decision. Key influencers should be included in marketing channels strategies. It is important to note that key influencers are not always members of a company’s distribution channels. Their influence over a purchase is the reason they are important. Key influencers can impact the purchase decision of channel members when considering a purchase from a supplier and can also influence end customers when considering which channel member to buy from and the brand selected.


Page No. 109


Unit 6

Identifying Key Influencers Some examples of key influencers in marketing channels strategies... Industry

Key Influencers Include:

 Financial Services

 Accountants, Trade Unions

 Consumer Services and Entertainment

 Family and Friends

 Construction and Building Products

 Specifiers, Consultants, Builders and Architects

 Automotive Retail

 Supplier and Channel Members eg fitters

 Heavy Machinery

 Supplier (or Agent)

 Automotive Smash Repair

 Insurance Companies

 Computers

 Consultants

 Decorative Paints & Hardware

 Retailers and Store Staff

The examples above illustrate the influencer may be overt as in the building products industry or more subtle as in consumer services and entertainment industries. To more clearly identify key influencers and determine the best strategy to reach them it is necessary to: 

Talk to end customers and channel partners



Analyse business sources



Review sales by channel and market segment



Perform a marketing channels audit

Why Are Key Influencers Important? Companies often don’t recognise influencers’ importance or are unable to determine how to effectively reach them. The risks of neglecting influencers are expensive and the rewards from reaching them are significant.


Page No. 110


Unit 6

Rewards of Reaching and Motivating Key Influencers

Risks of Failing to Reach or Neglecting Key Influencers

More lead referrals, new and repeat customers

Potential loss of customers to suppliers who successfully reach key influencers

Improved sales and market share

Stagnant or declining sales and market share

Greater market power and channel member loyalty

Alienation of key influencers and reduced loyalty

Sustainable competitive advantage which differentiates from competitors

A disadvantage in the marketplace

Endorsements which enhance image and reputation

A deteriorating image and reputation

Reaching Key Influencers Problems and Obstacles A company may face several issues when trying to reach its key influencers: 1. Reluctance by a company to change its traditional business methods 2. The cost and logistics of dealing with all the industry’s key influencers 3. Key influencers don’t want to be too closely associated with a single supplier 4. Key influencers are already aligned with a competitor 5. A company is unable to differentiate itself as the best choice for key influencers 6. Key influencers do not respond to a supplier’s approach 7. The supplier does not understand the key influencer’s needs How to motivate key influencers By positively motivating key influencers companies will resolve many of the issues outlined above and ensure influencers’ commitment to their products or services. Tools which will help suppliers reach key influencers include: 

Training



Product and technical information


Page No. 111


Advertising and promotional support



Technical support and giveaways



Exclusive deals



Excellent customer service



Sponsorships



Recognition



Pricing, margins and discounts



Regular communication

Unit 6

Some key influencers require independence from suppliers but will respond to service and support motivators who meet their own business and professional needs. An example of this is in the computer industry where consultants are a key influencer. The consultant will identify the needs of a client and specify the system/s capable of fulfilling those needs. As consultants their reputations are at stake when preparing specifications and therefore need to have confidence in the products and suppliers they are recommending. The motivators in this case are excellent communication, technical information and training. Other Key Influencers do not require the same degree of independence from suppliers. e.g. building products. Effective motivators may include exclusive deals, advertising support and product and technical information. Three important steps are involved to include key influencers in a company’s channel strategy. These steps are:


Page No. 112


Unit 6

Reaching and motivating key influencers will enhance a company’s image and reputation and help it achieve a sustainable competitive advantage through loyalty.

6.8 Managing Channel Relationships Channel relationships are increasingly important in creating market value and sustainable competitive advantage. This elective provides an up-to-date perspective of the relationships among marketing channels using the channel relationship model (CRM). It looks at challenges and opportunities in the external channel environment, behavioral issues that beset channel relationships

(internal

channel

environment),

coordinations,

conflict,

cooperation, the economics of exchange and the development of channel relationships, including the implication of acquiring strategic partners. Topics covered 

Where mission meets market.



Channel roles in a dynamic marketplace.



Conventional marketing systems.



Marketing mix and relationship marketing.



Environmental scanning: managing uncertainty.



Legal developments in marketing channels.



Ethical issues in relationship marketing.



Global challenges and opportunities.



Channel climate.



Conflict resolution strategies.



Information systems and relationship logistics.



Cultivating positive channel relationships.



Transaction costs in marketing channels.



Vertical marketing systems.



Franchising: an emerging global trend.


Page No. 113




Long-term interfirm relationships.



The emerging role of strategic alliances.



Strategic implications for the twenty-first century.

The

traditional

partnership

between

manufacturers

Unit 6

and

electrical

wholesalers is marching steadily toward a rebirth.

The market's consolidation, emergence of new channels, difficulty in differentiating products, market share battles that ultimately drive efficiency gains and lower prices to customers, and the share garnered by European wholesalers is dramatically changing the electrical marketplace. These changes are forcing electrical distributors and manufacturers to rethink their partnership strategies. In the not-too-distant future, channel relationships will emphasize results, accountability and data over goodwill, relations and personal interactions; redefine or eliminate territory and product authorizations and restrictions; and add service revenue to the traditional compensation earned by distributors and manufacturers. Distributors and manufacturers must pay attention to these changes for several reasons. They still need each other — a truth all too often ignored. Also, companies that don't work to define a new partnership will find they must live with terms set by others. Worse, they may find themselves locked out as competitor’s partner up.


Page No. 114


Unit 6

Most importantly, these new partnerships will divide profits differently than before. New terms will be required to ensure the customer's spending is fairly allocated among supply-chain partners according to the investments made and costs incurred. To drive home the importance of reinventing distributor/manufacturer partnerships, this article will explore how several new strategies can change the roles, functions and responsibilities of manufacturers and distributors in their channel partnership. Distributors must sell value Too many distributors just position their companies as places to buy electrical

products.

More

enlightened

companies

are

repositioning

themselves by selling custom, turnkey solutions that guarantee real, measurable, bottom-line impact for customers. On the vendor side, they are also repackaging their services to be sold upstream to their manufacturer suppliers. They are reinventing themselves to survive because the profit squeeze will not evaporate as the business cycle eases. Two factors drive this reality. The first is the continuing success of alternate channels such as catalog houses, big-box retailers, wire-and-cable distributors, energy-services companies and high-tech distributors. Alternate-channel companies focus on high-margin business and are happy to leave less profitable business for full-line distributors. Adding fuel to this fire, electrical distributors now see their traditional service functions being unbundled. For example, customers can now access product information over the Internet, bypassing an important role of the distributor's salesperson. Also, third-party logistics providers (3PLs) are assuming direct-shipment responsibilities and may even perform installation, repair and other activities. This second factor opens the door for new Sikkim Manipal University

Page No. 115


Unit 6

distributor strategies. If buyers are willing to unbundle traditional roles, they will consider new bundles if a strong case can be made for economic gain. Consider the following examples. Full-service Warranty Management Leading-edge warranty strategies go far beyond paperwork administration and field repairs. Rather, they seek to generate a bottom-line profit and to stand alone as a business. New warranty strategies do this by creating electronic databases of customer interactions and product performance, keeping up with shorter product life cycles, marketing extended warranties, and enhancing relations between manufacturers and distributors. If distributors can demonstrate that their customer base can be mined for new revenue and profits, they have a compelling case to pitch manufacturers. Reverse Logistics Distributors are discovering that after they deliver products to customers, they can create value by hauling other materials away. For example, commercial properties and factories need to get rid of recyclable materials, especially those requiring special handling like batteries or mercury-bearing lamps. Again, distributors can present a strong business case, independent of their traditional product offerings. Ultimate success depends on following through with bottom-line gains for customers. Manufacturers want a return on their investment in the distribution channel. Like it or not, new manufacturer strategies start in a different place questioning the cost of selling through distribution channels and wondering what returns are gained on their considerable investments. Few manufacturers expend the effort to understand the total costs of selling through specific channel partners. Even fewer go the extra mile to objectively compare those costs with real, measurable marketing returns. They are running blind, overstating the value of some partners and under Sikkim Manipal University

Page No. 116


Unit 6

investing in those best able to drive their strategies forward. There are two critical points. First, while calculating a return on channel investment isn't easy, it can be done. If it isn't, decision-making will continue to be ad hoc, uninformed and sometimes just plain wrong. When manufacturers calculate their return on investment in the distribution channel, they roll up channel investments (measured as discounts and rebates) from the product level to determine the cost of doing business with specific channel partners. People costs incurred for sales, marketing, channel management and product support are added to generate a total cost. Each partner's contribution to driving strategy is then investigated to complete the ROI. Returns should go beyond common measures such as sales, profits and share to consider broader contributions to marketplace objectives. As these new strategies are developed, manufacturers should consider new roles for those distributors that deliver excellent ROI. Thinking creatively, electrical manufacturers have many strategy opportunities that can be improved by effectively working with their distributors. Manufacturers and distributors typically share these competencies, creating the opportunity for new partnerships. Here are a few examples: Brand co-ordination and leverage The reputation of electrical products is greatly affected by the channel's performance. Poor availability, delivery, installation and problem resolution reflect negatively on the manufacturer even though it's the distributor that performs many of these activities. Customers want results and aren't interested in assigning blame. Going a giant step further, most electrical manufacturers neglect and under develop their brand equity. Some have confused the market by acquiring complementary products with overlapping brands. Great brand challenges Sikkim Manipal University

Page No. 117


Unit 6

exist ahead for electrical product manufacturers, and success will hinge on effective coordination with their channels. New roles will evolve and new measures of success will follow. Turnkey repair and maintenance These services create value by combining several competencies to offer customers hardwired guarantees of improved uptime and reductions in maintenance costs. In the automation arena, distributors do this by knowing the customer's application and performance requirements, capturing the customer's operational data electronically by factory automation equipment and offering predictive maintenance programs and repair parts acquisition. Strategies for success To

improve

their

partnerships

with

each

other,

distributors

and

manufacturers should consider these strategies: Emphasize results, accountability and data over goodwill, relations and personal interactions. For manufacturers, this means communicating exactly what is needed from partners, backed up with significant rewards and penalties for good and bad execution. Surprisingly, many manufacturers are afraid to make this commitment, worrying that they will offend their partners. Both parties can put teeth in measurement by tying compensation to performance results. They must also work together to share customer, sales and operational data. Distributors can lead from the middle by developing detailed supplier metrics that measure performance and by making sure senior management in strategic relationships keep informed of the results. Redefine or eliminate territory, market and product authorizations and restrictions. Limiting conflict is not the same as encouraging cooperation. As new strategies gain traction, customers will require that manufacturers Sikkim Manipal University

Page No. 118


Unit 6

and distributors work together in new ways. As a result, territory, market and product policies will fall by the wayside. These policies were once useful for coordinating efforts and limiting price erosion, but they must be reinvented if they are to survive. Manufacturers and distributors can start by examining the new requirements of serving large accounts. These customers are demanding consistent support and pricing across all of their locations. The mechanisms for ensuring these goals are met while limiting destructive behavior among partners are not yet clear, particularly since the mix of new services and traditional product sales is still evolving. Add service revenue to the traditional compensation earned by distributors and manufacturers. Services will grow because they fit an established trend

buying-power and supply-chain efficiencies eventually

flow to the customer. Services also stretch suppliers to add new competencies, or to look for partners with established track records. Because of all this, distributors and manufacturers should pursue service strategies, but they should avoid the knee-jerk tendency to go it alone. Going further, manufacturers should consider distributors when making outsourcing decisions. If functional compensation is part of the discount and rebate structure, service fees should be considered in the mix. Distributors should develop service offerings packaged for sale to manufacturers and customers. As they do so, they will be challenged to get involved in a part of marketing traditionally assigned to manufacturers new product development. In turn, this need creates an opportunity to expand the channel relationship to include partnering for joint service development. Electrical distributors should consider retooling their business model. New asset, cost and profit models will be required as profits earned through Sikkim Manipal University

Page No. 119


Unit 6

markup shift toward fees earned for services. New strategies are driving new channel relationships and redefining the long-standing terms of the manufacturer/distributor partnership. The early returns are in and the emerging terms of the partnership are evident. That's not to say there isn't a lot of work, frustration and even pain ahead. At times, each partner has viewed the other as underperforming, overcharging or lacking commitment. Because of this, many will be cautious and skeptical, and prefer to sit back and watch developments. However, if you aren't working to rewire your channel relationships, someone else will do it for you. And like all partnerships, if you are not involved at the start, you can bet you won't be happy at the finish.

6.9 Conflicts of Channel Management If you think adding new distribution channels will only result in increased sales volume, then think again. The consequence could be a spurt of channel wars. Welcome to a world where an infinite number of distribution channels are chasing a finite number of customers. The emergence of the Internet has added considerable complexity to distribution channels by offering a variety of e-market places such as B2B auctions (PEFA.com), reverse auctions (Freemarkets.com),

B2C

operations

(Amazon),

C2B

auctions

(Priceline.com), and C2C formats (Ebay.com). As a result, the various types of distribution channels available in industries such as airlines, financial services, music industry, publishing, and telecommunication services are exploding. And manufacturers who took pride in the integrity of their distribution channels with specific channels reaching specific customer segments are suddenly facing a dizzying array of choices.


Page No. 120


Unit 6

The addition of new distribution channels brings with it the potential for additional sales volume at the cost of greater channel conflict. A new channel, regardless of whether it is the Internet, an emerging low cost indirect channel, or a new manufacturer sales force will increase channel conflict. Channel conflict occurs because now there is another type of distribution channel that is perceived by the existing channels to be chasing after the same customers with the same brand. The fear of conflict with existing channels can paralyse a company. But on the other hand much of what channel members call channel conflict is healthy channel competition. Therefore the objective of conflict management should not be to eliminate channel conflict but rather manage it so that it does not escalate to destructive levels. From the manufacturer's perspective, channel conflict becomes destructive when the existing distribution channels react to channel migration by reducing support or shelf space for the manufacturer. For example, when Estée Lauder set up a website to sell its Clinique and Bobbi Brown brands, the department store Dayton Hudson reduced space on Estée Lauder products. In extreme cases, an existing distributor may drop the brand as happened when Levi's began expanding its distribution. Gap decided to stop stocking Levis and concentrate on their own Gap brands. Channel conflict becomes particularly destructive when parties take actions that hurt themselves in order to hurt the other party. For example, in 2002, Albert Heijn, the largest Dutch supermarket chain, boycotted some Unilever brands for sometime in order to retaliate against the manufacturer.


Page No. 121


Unit 6

While this was resolved quickly, it was an action that could have potentially hurt both parties. Albert Heijn would have lost some brands such as Bertoli mayonnaise and Cif cleaning products that have very high brand loyalty amongst Dutch consumers. As described below, several channel conflict management strategies exist, none of which is a panacea, but the judicious use of them can help avoid destructive conflict. These are part of the arsenal of any multi-channel marketer. Clear segmentation: The rationale for having multiple types of channels should always be built on a clear end user segmentation strategy. When the convenience store complains to the manufacturer about the prices at which Wal-Mart is selling their products, it has to be explained that there is no way that a convenience store can compete with Wal-Mart on prices for the price seeking customer. Instead the convenience store has to compete on saving the consumer time vis-à-vis travel, shopping and transaction processing, all at a reasonable price premium. They serve two different segments and each should be encouraged to specialise on its target segment. Of course, the brand owner should ensure that the number of distribution points that they have within a particular type of distribution channel is balanced against the size of the segment that the channel reaches. Dedicated products: Many designers who have pushed for sales through outlet stores have managed the conflict with their existing retailers by developing special products for these outlet stores. Similarly, many luxury brand companies, like Camus Cognac and Guylian chocolates, offer special pack sizes and products that are attractive to Sikkim Manipal University

Page No. 122


Unit 6

travellers at duty-free airports in order to minimise the conflict with their regular high street retailers. On the Internet, manufacturers can offer those SKUs which retailers are usually not willing to carry. At the extreme, some manufacturers dedicate different brands to different channels, sometimes referred to as channel brands. Expanding sales: Having a new 'hit' product helps facilitate channel migration. Goodyear managed the migration to the mass merchandisers with only a reasonable amount of conflict by simultaneously restricting the distribution of its new Aquatred tyre to the independent dealers. This allowed the independent dealer to protect their profit-ability and sales volume through the higher margin, higher value, Aquatred tyre. It is easier to expand channels when revenues are growing as existing dealers are less likely to see absolute declines in sales and profits. Dual compensation and role differentiation: Some manufacturers agree to compensate the existing channels for sales through the new channel. While it may be perceived as just buying off the support of the existing channels for the channel migration, it can be useful if the existing distribution is given a role to perform in support of the new channel. For example, when Allstate started selling insurance directly off the Web, they agreed to pay agents 2% commission if they provided face-to-face service to customers who get their quotes off the web. However, since this was lower than the 10% commission that agents typically received for offline transactions, many agents did not like it. Yet, it does help lower the negative backlash. Using the existing channel partner can be a useful complement.


Page No. 123


Unit 6

Equitable treatment: Some retailers will be upset that the prices at which they purchase from the manufacturer are higher than those charged to other retailers or the direct sales force. There is often the feeling that the manufacturer is favoring other channels at their expense. While one may never fully be able to overcome these concerns, the best antidote is to treat channels equitably and in a transparent manner. If the manufacturer's prices differ across channels, it should be based on the functions that the particular channel member performs. So, yes, Tesco and Wal-Mart receive lower prices, but it is because they engage in practices (buying large quantities, not demanding in-store help and promotions) that lower the manufacturer's cost to serve them. Final thoughts The temptation for manufacturers is always to expand the number of distribution points as it usually results in an immediate increase in sales. However, having too many channels chase too few consumers results in channels dropping the level of support to the brand. In the long run, this can have a deleterious impact on sales as well as brand image. On the other hand changing customer preferences modify industry structures. Traditional industry leaders have frequently neglected the fastest growing new distribution channels. A delicate balance must be maintained between moving too quickly and unleashing destructive channel conflict versus clinging too long to declining distribution networks. Self Assessment Questions III State whether the following statements are True or False: 1. Channel relationships are increasingly important in creating market value and sustainable competitive advantage. Sikkim Manipal University

Page No. 124


Unit 6

2. From the manufacturer's perspective, channel conflict becomes destructive when the existing distribution channels react to channel migration by reducing support or shelf space for the manufacturer. 3. The rationale for having multiple types of channels should always be built on a clear end user segmentation strategy.

6.10 Summary A channel to market is the method of getting your product into the customer’s (the end user’s) hand. Channel conflict occurs when the vendor (you) and the reseller, or different reseller types (retail, VAR, mail order, Internet) compete for the same business. Channel sale is the overall account liaison and is primarily responsible for selling product into distribution and the reseller channel (retail, VARs, system integrators). Channel marketing is responsible for ensuring that product in distributor and reseller locations gets sold out. A Channel Marketing Manager is typically responsible for the sell-through function. The performance of a distribution channel can be assessed by considering a number of performance dimensions, including channel effectiveness, channel efficiency, channel productivity, and channel profitability. Companies count on their channel partnerships to maximize profits, increase market penetration, and enhance customer satisfaction.

6.11 Terminal Questions 1. Explain the policies of marketing channels. 2. How is the channel performance assessed? 3. Describe in detail management of channel relationships. 4. Discuss the conflicts of channel management. Sikkim Manipal University

Page No. 125


Unit 6


2. True

SAQs II 1. A multi channel user 2. Offline efforts 3. Customer communication SAQs III 1. True 2. True 3. True Answers to TQs: 1. Refer to 6.2 2. Refer to 6.4 3. Refer to 6.8 4. Refer to 6.9


Page No. 126


Unit 7

Unit 7

Recent Trends in Channel Management

Structure: 7.1


7.2

Wholesaling

7.3

Retailing

7.4

Ethical and Social Issues in Sales and Distribution Management Self Assessment Questions I

7.5

Summary

7.6

Terminal Questions

7.7


7.1 Introduction Wholesaling refers to the activities involved in selling goods to organizational buyers who intend to either resell or use for their own purposes. Retailing consists of the sale of goods or merchandise for personal or household consumption either from a fixed location such as a department store or kiosk, or from a fixed location and related subordinated services. This unit discusses wholesaling and retailing, while throwing light on the ethical and social issues in sales and distribution management, taking an example. Objectives: After studying this unit, you will be able to: 

Explain the meaning of ‘wholesaling’.



Explain the meaning of ‘retailing’.



Bring out the ethical and social issues in sales and distribution with an example.


Page No. 127


Unit 7

7.2 Wholesaling Wholesaling refers to the activities involved in selling to organizational buyers who intend to either resell or use for their own purposes. A wholesaler is an organization providing the necessary means to: 1) allow suppliers (e.g., manufacturers) to reach organizational buyers (e.g., retailers, business buyers), and 2) allow certain business buyers to purchase products which they may not be able to purchase otherwise. According to the 2002 Census of Wholesale trade, there are over 430,000 wholesale operations in the United States. While many large retailers and even manufacturers have centralized facilities and carry out the same tasks as wholesalers, we do not classify these as wholesalers since these relationships only involve one other party, the buyer. Thus, a distinguishing characteristic of wholesalers is that they offer distribution activities both for a supplying party and for a purchasing party.

For our discussion of wholesalers we will primarily focus on

wholesalers who sell to other resellers such as retailers.

7.3 Retailing The term ‘retailing’ refers to ‘the activities involved in selling commodities directly to consumers’. Definition Retailing consists of the sale of goods or merchandise for personal or household consumption either from a fixed location such as a department store or kiosk, or from a fixed location and related subordinated services. Defined here as sales of goods between two distant parties where the deliverer has no direct interest in the transaction, the earliest instances of distance retailing probably coincided with the first regular delivery or postal


Page No. 128


Unit 7

services. Such services would have started in earnest once man had learned how to ride a camel, horse, etc. Why? When individuals or groups left their community and settled elsewhere, some missed foodstuffs and other goods that were only available in their birthplace. They arranged for some of these goods to be sent to them. Others in their newly adopted community enjoyed these goods and demand grew. Similarly, new settlers discovered goods in their new surroundings that they dispatched back to their birthplace, and once again, demand grew. This soon turned into a regular trade. Although such trading routes expanded mainly through the growth of traveling salesmen and then wholesalers, there were still instances where individuals purchased goods at long distance for their own use. A second reason that distance selling increased was through war. As armies marched through territories, they laid down communication lines stretching from their home base to the front. As well as garnering goods from whichever locality they found themselves in, they would have also taken advantage of the lines of communication to order goods from home. In commerce, a retailer buys goods or products in large quantities from manufacturers or importers, either directly or through wholesalers, and then sells individual items or small quantities to the general public or end-user customers, usually in a shop, also called a store. Retailers are at the end of the supply chain. Marketers see retailing as part of their overall distribution strategy. Shops may be on residential streets, or in shopping streets with few or no houses, or in shopping centers. Shopping streets may or may not be for pedestrians only. Sometimes a shopping street has a partial or full rooftop to


Page No. 129


Unit 7

protect customers from precipitation. Online retailing, also known as ecommerce, is the latest form of non-shop retailing. Shopping generally refers to the act of buying products. Sometimes, this is done to obtain necessities such as food and clothing; sometimes, it is done as a recreational activity. Recreational shopping often involves window shopping (just looking, not buying) and browsing and does not always result in a purchase.

7.4 Ethical and Social Issues in Sales and Distribution Management An example of how HP view this aspect has been given below: Awareness of social and environmental issues in the electronics industry supply chain is increasing among the public, our customers, NGOs, investors and the media. These stakeholders expect us to demonstrate that our long-standing commitment to global citizenship extends to our supply chain and to show evidence of improved performance and greater transparency in this area. Our supply chain SER program responds to these stakeholder expectations. Today, the majority of our products are manufactured for HP through alliances and partnerships. The global scope of HP’s supply chain and our value as a customer provide us the opportunity to impact the human rights, health, and safety, environmental and ethical performance of the businesses worldwide that constitute our supply chain. Our supply chain spans about 600 suppliers worldwide, with more than 300,000 workers at the supplier sites at which our products are made. The expectations we set for suppliers that manufacture HP's parts, components and products, are a key aspect of our social and environmental performance. Beyond product manufacturing, social and environmental Sikkim Manipal University

Page No. 130


Unit 7

impacts also occur during the transport of our products throughout our supply chain. These suppliers are the focus of HP's Supply Chain Social and Environmental Responsibility Program. Supplier's SER Conformance Requirements Essential to HP’s program is our Supply Chain Social and Environmental Responsibility (SER) Policy and HP’s Electronic Industry Code of Conduct, which commit us to work with our suppliers to ensure they operate in a socially and environmentally responsible manner. HP’s approach to implementing social and environmental responsibility in our supply chain is based on early, frequent, and proactive involvement with key suppliers to develop a partnership for improvement. To ensure that we minimize the social and environmental impact of our worldwide supply chain practices, we have: 

Implemented the use of a Supply Chain Social and Environmental Policy.



Adopted the use of the new Electronic Industry Code of Conduct, which formalizes

hp's

supplier

labor,

human

rights,

health,

safety,

environmental and ethical expectations. 

Re-emphasized HP's requirement for conformance with the product content restrictions covered in HP's General Specification for the Environment (GSE).



Strengthened our supplier contract and purchasing agreements to reflect our new expectations.



Communicated our SER conformance monitoring process.



Began auditing of our supplier's facilities.



Developed requirements for supplier performance reporting and corrective actions for non-conformance.


Page No. 131


Unit 7

Expanded performance results of supply chain SER conformance in HP's annual global citizenship marketing.

Our long-term commitment is to achieve sustained improvement by building our suppliers’ social and environmental capability. During 2006, we began training suppliers to increase their understanding of how raising their SER standards and practices will benefit their business. Partnerships Collaborative efforts within our industry are an effective way to leverage the work of each individual company or organization to raise supply chain standards. Suppliers generally work with several major corporate customers and receiving a consistent message from those customers is likely to have the greatest impact. Industry groups also enable participants to share resources and knowledge, standardize tools and processes, avoid duplication of effort and develop consistent approaches to the industry’s most difficult issues. Some of the key lessons we have learned from participating and benchmarking with various industry sector groups are: 

Multiple codes, surveys and audits increase costs and result in fatigue and fraud.



Programs cannot be managed from U.S. corporate headquarters and require a solid understanding of the local context.



Disagreement within an industry on a small number of issues can outweigh agreement on the vast majority of issues.



Inspection-only and enforcement-only approaches and lack of focus on management

systems

fail

to

create

long-term

behavioral

and

sustainable change. 

Approaches must be both top-down and bottom-up and must focus on addressing root causes of issues.


Page No. 132


Unit 7

A balance of internal and external monitoring and verification can provide the most long-term change; external monitors may not be granted equal access to facilities, they may lack influence due to their non-purchasing role and they do not have the same long-term responsibility to create change.



Standards for monitoring social and ethical compliance need to be formalized.



It is essential to integrate the SER program into business-sourcing decisions, from qualification through potential termination.



Capacity-building programs for suppliers are essential to success.

We have made considerable investments in recent years to establish partnerships, develop processes and build systems, enabling us to mitigate our SER impact and risks, affect change, and realize tangible business benefits. We invite other electronics companies as well as customers, shareowners, governments and stakeholders worldwide to share in developing sustainable solutions that protect workers’ rights, health, safety and the environment. Self Assessment Questions I 1. Wholesaling is defined as the activities involved in selling to __________ who intend to either resell or use for their own purposes. 2. According to the 2002 Census of Wholesale trade, there are over __________ wholesale operations in the United States.

3. A distinguishing characteristic of _____________ is that they offer distribution activities both for a supplying party and for a purchasing party. 4. The term __________ -refers to ‘the activities involved in selling commodities directly to consumers’


Page No. 133


Unit 7

5. In commerce, a retailer buys goods or products in large quantities from _____________, either directly or through wholesalers, and then sells

individual items or small quantities to the general public.

7.5 Summary Retailing consists of the sale of goods or merchandise for personal or household consumption either from a fixed location such as a department store or kiosk, or from a fixed location and related subordinated services. In commerce, a retailer buys goods or products in large quantities from manufacturers or importers, either directly or through wholesalers, and then sells individual items or small quantities to the general public or end-user customers, usually in a shop, also called a store. Shopping generally refers to the act of buying products. Ethical and Social Issues need to be taken care of in Sales and Distribution Management.

7.6 Terminal Questions 1. What is wholesaling? Explain. 2. Explain the retailing? Explain.

7.7 Answers to SAQs and TQs SAQs I 1. Organizational buyers 2. 430,000 3. Wholesalers 4. Retailing 5. Manufacturers or importers Answers to TQs: 1. Refer to 7.2 2. Refer to 7.3 Sikkim Manipal University

Page No. 134


Unit 8

Unit 8 Introduction to Supply Chain Management Structure: 8.1


8.2

Meaning and Definition of Supply Chain

8.3

Components of Supply Chain Self Assessment Questions I

8.4

Schools of Thoughts

8.5

The Process of Supply Chain Management

8.6

Objectives of Supply Chain Management Self Assessment Questions II

8.7

Summary

8.8

Terminal Questions

8.9


8.1 Introduction A ‘supply chain’ consists of all of the entities necessary to transform ideas into delivered products and services. Supply chain management directs and transforms a firm's resources in order to design, purchase, produce, and deliver high-quality goods and services. As goods and services flow from supplier to producer, to customer to final user, supply chain management is particularly concerned with the interfaces between organizations. One way to view supply chain management is as the management of linkages between organizations. The competitive and global nature of today's business environment dictates that this direction and transformation take place in a way that is as efficient and effective as possible. Continuing emphases on time, cost, and quality improvements have sharpened the need to co-ordinate and co-operate with Sikkim Manipal University

Page No. 135


Unit 8

trading partners around the world to achieve results that allow customers to be successful. Thus, supply chain management focuses on the integration of activities across several companies to manage the flow of products, services, people, equipment, facilities, and other resources. Supply chain management is also concerned with recycling, reuse, and final disposal of products. This unit throws light on various aspects of supply chain management. Objectives: After studying this unit, you will be able to: 

Explain the meaning of supply chain.



Name the components of supply chain.



Describe the process of supply chain management.



State the objectives of supply chain management.

8.2 Meaning and Definition of Supply Chain Defining SCM A supply chain includes all the processes that add customer-desired value to material and bring it to the customer. This value gets added at various stages of the journey that material takes till it reaches the customer. Supply chain encompasses all these value-adding stages. Supply chain literature is full of various definitions of supply chains. Given below are some of the famous SCM definitions: •

MIT official definition (Demystifying Supply Chain Management by Peter J. Metz from Supply Chain Management Review Winter 1998). "Integrated Supply Chain Management (ISCM) is a process-oriented, integrated approach to procuring, producing and delivering products and services to customers.


Page No. 136


Unit 8

ISCM has a broad scope that includes sub-suppliers, suppliers, internal operations, trade customers, retail customers and end users. It covers the management of materials, information and funds flows." •

Ganeshan and Harrison, Supply Chain Management "A supply chain is a network of facilities and distribution options that performs the junctions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers."

•

Ohio State University's Global SCM Forum "The integration of business processes from end user through original suppliers, that provide products, services and information that add value for customers."

•

Cisco "SCM aims to increase sales, reduce costs, and make frill use of assets by streamlining the interaction and communication of all participants along the supply chain. SCM solutions use networking technology to link suppliers, distributors, and business partners to better satisfy the end customer, while feeding real time data about customer demand into the partners' production and distribution processes. " Existence of so many definitions can be confusing and frightening. Several executives across companies often wonder whether they, their suppliers and their logistics providers are all reading the same book and same definition and whether they are all interpreting it the same way.

Supply Chain Types: In the course of research and industry study, the authors came across many definitions of supply chain and worse, several interpretations of supply chain. Based on the study, supply chains can be categorized as: 1.

Raw Supply Chains


Page No. 137


2.

Ripe Supply Chains

3.

Internal Supply Chains

4.

Extended Supply Chains

5.

Self-monitored Supply Chains

6.

Outsourced Supply Chains

7.

Production-oriented Supply Chains

8.

Financial-oriented Supply Chains

9.

Market-oriented Supply Chains.

10.

Unit 8

Value Chains (Complete Supply Chains).

Raw supply chains are the basic type that were loosely organized and mostly conformed to the legacy style. The departmental silos are still there but there is better co-ordination between them. This gave them better visibility into the company's operations than before. This is called a supply chain as there is some improvement over the processes followed otherwise. These so called supply chains are found in ancillary units and small scale industries. Ripe supply chains are the ones where companies thought this was fit and they have achieved all that there is to achieve. All the activities are done in an organized manner, companies have improved relationships with their suppliers and distributors and there was some amount of information flowing in through the chain. However, there are no other supply chain initiatives in the pipeline. These chains exist in the food sector. Internal supply chains are the most commonly found where the companies have implemented sophisticated enterprise resource planning packages and their internal operations are absolutely fine tuned and well co-ordinated. However, they have not brought their suppliers or distributors into their fold. These

companies

are

completely

besotted

by

achieving

internal

optimization. The companies in this category are from all sectors and include all types of companies. Sikkim Manipal University

Page No. 138


Unit 8

Extended supply chains are the internally optimized chains that extend well beyond the company's boundaries to include the suppliers and distributors into their fold. These companies, however, concentrate only on the top suppliers and the top distributors. In that sense, there is a partial integration. Websites and specific web pages are used to communicate with external partners. However, complete integration wherein one Enterprise Resource Planning talks to the other and exchanges information smoothly without human intervention is missing. Once again, this is a very commonly found supply chain spanning all sectors but specifically common in the automotive sector. Self-monitored supply chains are the ones where the manufacturing company takes the lead in bringing all partners in its fold and hence these supply chains are company-centric and not customer-centric. Although they are able to achieve a considerable speed to market, it is not because of total optimization. Outsourced supply chains are where the logistics partner (a 3 PL) usually takes

care

of

everything

– outbound logistics,

inbound logistics,

relationships, information flow, etc. They make decisions and they monitor the supply chain. This is very rare and is found to exist in some of the export houses. As there are only activities such as procuring and exporting (no production) this is the most feasible alternative. Production-oriented supply chains have a one point agenda: produce to optimize the capacity and labour. All other activities precede production. This is mostly found where low value items are made and sold through various channels. Hence, marketing and distribution are relatively the nonissues. Financial-oriented supply chain or more fondly known as "cash-to-cash cycle" chain provides a company with negative working capital (accounts Sikkim Manipal University

Page No. 139


Unit 8

receivables plus inventories less accounts payables). This leaves a company with high cash holding for use elsewhere. Goods flow quickly. Upon demand, they are converted or distributed and sold to customers who pay before the supplier's accounts payable is settled. This chain emphasizes a financial goal first, and then logistics and planning are built from that end. This was found in big companies particularly in the fastmoving consumer goods sector. Market-oriented supply chains or customer supply chains are the typical built-to-order type of chains that get triggered when the customer places an order. Most commonly found in computer hardware sector, and other sectors which are dominated by consumer tastes, these supply chains are highly responsive and agile. A value chain is the ultimate integration that is aimed at total optimization and not optimization in parts. These supply chains also addressed allied issues such as waste disposal, improving productivity, etc. Not very commonly found, but several companies have such ultimate supply chains on their agenda. What is SCM? Very simply put, SCM is a network of the manufacturer's suppliers, and suppliers' suppliers on the one hand and customers and customer's customers on the other hand. This network exists to ensure a free and smooth flow of information, goods, services and profits among all its participants. Every node or link stands to gain from this association. In supply chain parlance each player is a supplier and supplies to the next player either basic raw materials, or components or semi-finished products or the finished goods that manufacturer supplies to the distributor, who turn supplies them to the retailer and who then supplies to the end user. It is equivalent of a relay race where there are four players running one after the Sikkim Manipal University

Page No. 140


Unit 8

other. The first one hands the baton to the next, who then tries to maintain and even improves upon the performance of the earlier runner and passes on the bents so derived to the next player and the process goes on till all the players have performed. The race cannot be won by best performance of any single player. It is to be a collective effort, a joint endeavour. They supply to the second set of nodes (suppliers supplier), which represent the second tier of suppliers. They add value to the basic materials procured from the first tier of suppliers and pass them on to the next nodes who are the key suppliers. These key suppliers add more value to the material procured by them and supply it to the manufacturer. He procures the different types of raw materials, components and manufactures the finished product that he is known for. He then supplies (he is also a supplier to the next set of nodes) the finished product to the next tier of supplier who is more popularly known as the distributor. The next set of nodes, i.e. the distributor, supplies the finished products to the retailers. They add value by supplying the right product at the right time in the right quality to the retailer who is the buying arm of the customer. A retailer exists to supply the finished product to the customer, the end user. He is the face of the manufacturer and as mentioned earlier, the buying arm of the customer. He is the first contact point with the customer and to a large extent, responsible for sales volumes. And finally, there is the customer who buys a product for use. All the nodes and the entire supply chain exist for this customer. If the customer is happy with the product, service and quality it will be reflected in the sales figures and profits. That is the first step in obtaining a customer order, followed by production, storage and distribution of products and supplies to the customer site. Managing the chain of events in this process is known as supply chain Sikkim Manipal University

Page No. 141


Unit 8

management. Effective management must take into account co-ordinating all the different pieces of this chain as quickly as possible without losing quality or customer satisfaction, while still keeping costs down. In addition, the key to the success of a supply chain is the speed with which these activities can be accomplished and the realization that customer needs and customer satisfaction are the very reasons for the network. Reduced inventories, lower operating costs, product availability and customer satisfaction are all benefits which grow out of effective supply chain management. This is a hypothetical example and hence the supply chain looks simple and uncomplicated but in reality when the manufacturer typically buys thousands of products from hundreds of suppliers and distributes the finished product through another large set of distributors, things become quite intricate and complex. It is therefore very important to identify each and every node that constitutes the suppliers and make them participate in the information flow and smooth product flow. Even one small bit of information loss could lead to loss of sale. The situation becomes more complicated when the company makes and distributes several products and each product necessitates a detailing of its supply chain.

8.3 Components of Supply Chain Management SCM is the most dominant paradigm in contemporary business and is emerging to be one of the most powerful creators of sales and revenue growth and soundly based and sustainable competitive expansion. As we are entering the twenty-first century, the rapidly-exploding liberalised global market-place is creating enormously diversified customers, products and services. Organisational, informational and managerial demands are being redefined. The new millennium is creating new conditions and an entirely Sikkim Manipal University

Page No. 142


Unit 8

different type of challenge, which are being manifested in innovative supply chain developments. Several developments of the last 50 years are the fundamental drivers of new vitality throughout industry and commerce that are the launching pad for the new millennium- an integrating process based on flawless delivery of basic and customized services; systematic effort to provide integrated management to meet customer needs and expectation from the suppliers of raw materials through manufacturing to end-customers. Management of material and information flows, both in and between facilities such as vendors, manufacturing and assembly plants and distribution centers. The first driver is demonstrated by a remarkable behavioral change in the top management of global companies. This has dramatically altered the way people think, learn, decide, act and believe in how they can improve their responsiveness towards their clientele groups. The second driver is concerned with the principle that 'making products better is the way to retain customers'. To win differentiated advantages, the business has not only to make and deliver them quicker and cheaper, but what is being done must be done everywhere in the extended enterprise. The third driver is the urgency of the discipline of supply chain costeconomics. This challenges the kind of corporate strategy and planning whereby companies still do not know what things really cost. The ambiguous costing concept has been primary reason for the kind of ‘slash and burn’ cost reduction and control that have created islands of separation. The fourth driver is that the creation of value has become an international business language. The value innovation concept has created a process of management, which discards traditional management processes. Sikkim Manipal University

Page No. 143


Unit 8

The fifth driver is today's widespread managerial recognition of the u necessity for fact-based decision making. Fact-based decision making is the principal driver at every stage of the management process to empowerment and accountability. In summary, five forces of change are driving the new opportunity taking competitive advantages through supply chain management: 1. The first force deals with the fundamental shift in customer expectation 2. The second force is a corollary to the first, i.e. the basic change marketplace. 3. The third force of fundamental change in value perception is the demand an emphasis in closer supplier-manufacturer-customer partnering. 4. The fourth force is the challenge of the rapidly-emerging new technology and products. 5. The fifth force has to do with the business performance metrics. The ensuing chapters attempt to highlight the essentials of supply chain in an integrated manner. Self Assessment Questions I State whether the following statements are True or False: 1. SCM is a network of the manufacturer's suppliers, and suppliers' suppliers on the one hand and customers and customer's customers on the other hand. 2. Ripe supply chains are the internally optimized chains that extend well beyond the company's boundaries to include the suppliers and distributors into their fold. 3. Self-monitored supply chains are customer-centric and not companycentric.


Page No. 144


Unit 8

8.4 Schools of Thoughts Historical Background The working of the economic system by which goods and services are supplied to consumers involves four basic market functions: production, distribution, exchange, and consumption. Logistics assists in the efficient performance of each of these functions. Production transforms raw materials into finished goods (i.e., it creates form utility). In doing so, a long and intricate logistical chain is activated to bring the material together in the proper quality and quantity at the right time in support of the productive process. The function of distribution places raw materials in the hands of producers, and finished goods in the hands of consumers when and where wanted (i.e., it creates time and place utility). Transportation comes into play as a key element in this chain; but getting goods where and when needed involves much more than just the services of carrying products from here to there. The function of exchange transfers goods from the wholesale to the retail links in the chain, while consumption ends the process. All this might sound simple enough; but when the consumer is regarded as the "king", the sheer enormity of the logistical task can boggle the imagination. Apparently, logistics has been woven into the very fabric of modern life. How else could the seemingly insatiable public appetite for automobiles, houses, television, stereo sets, household appliances and entertainment be satisfied? Traditionally, materials management was responsible for various aspects related to material flow within an organization. Materials management includes the services of transportation, inventory management, the acquisition of materials (or purchasing), the storage of materials once acquired, and the handling of the materials while in the process of manufacture. Physical distribution continues the process.


Page No. 145


Unit 8

Physical distribution also includes transportation, but this time, out-bound from the plant or storage facility to the customers. The management of the finished goods inventory is included here, along with the protective packaging of goods to reduce damage in transit (marketing handles the type of packaging designed to attract purchasers and sell products), and storage and materials handling. Traditional management saw physical distribution playing a key role in creating and maintaining brand loyalty and market share. Effective physical distribution involved addressing the issues of inventory, transportation, warehousing/ storage, and communications. Logistics, thus, bridges the gap between consumer demand and producer supply, although the consumer can include both the individual user of a product and the user of raw materials or finished goods produced by someone else. Prior to World War II, businesses were generally small enough to solve their logistical problems by the personal experience and intuition of their personnel. Input materials were both cheap and plentiful, and the means of hauling everything around were readily available. World War II, with problems involving the movement of huge quantities of supplies and large troop units under the most adverse conditions, raised logistics from glorified troubleshooting to a distinct technical field. Rising interest rates and the oil embargo-induced leap in energy bills focussed the attention of businesses on the costs of their operations. Suddenly, cost control became an important element in profitability, and logistics took its place in cost control systems. As the 1980s approached, the legal and regulatory climate in which business operated became more complex. Logistics quickly became involved in every major function of management. Planning, for example, involves looking ahead to determine the most Sikkim Manipal University

Page No. 146


Unit 8

efficient (i.e., cost or profit-effective) way of achieving company objectives. This would require an orderly flow of materials into and out of a company, while at the same time achieving a low-cost operation. Similarly, organising brings together tasks and a mixture of human and material resources to achieve company objectives. As corporate enterprises become larger and more complex, an easy error to fall into is forgetting that a business is frequently greater than the sum of its organizational elements. Responsibilities become fragmented into smaller and smaller specialties. The members of these small, concentrated units are then judged how well their fragment performs, rather than how much of contribution the fragment makes to the total operation of the firm. For example, customer service gets assigned to sales; production goes to manufacturing, and inventory control gets split between purchasing and warehousing. Almost instantly the problems of the trade-off arise. Sales wants the best possible customer services, but this noble aspiration requires high inventories for the desired instant response to customer orders. Production must also be flexible to meet sudden shifts in demand. Thus, if sales get what it wants, the performance of manufacturing, purchasing and warehousing deteriorates due to the high cost of carrying large inventories and scheduling irregular production runs in the factory. What manufacturing really wants is a nice, long, uninterrupted production run. Unfortunately, this too requires large inventories, what may be an unacceptable loss of flexibility in meeting changing customer demand, and some delay in filling customer orders that arrive just as a production run is started to refill a depleted finished goods inventory. The result is frequently sub-optimization. Each organizational element strives for perfection in its own area of responsibility without regard for the impact on the total company system. Sikkim Manipal University

Page No. 147


Unit 8

Against this background, it may be necessary to review the concept of value. Customer service is concerned with making the product available to the customer. There is no value in a product or service until it is in the hands of the customer. Availability, in itself, is a complex concept, impacted by many factors that may include delivery frequency and reliability, stock levels and order-cycle time. Ultimately, customer service is determined by the interaction of all those factors that affect the process of making products and services available to the buyer. Customer service may be seen as a way in which value is added to the product-service package purchased by the customer. Value becomes the amount a customer is willing to pay for the product/service provided by a supplier. Value added is the difference between what the customer pays and the cost of providing the service. The supplier must approach the problem from the stance which simply asks: if we provide this service, will the marginal cost be exceeded by the marginal revenue it earns? The issue confronting the retailer is which of the services to select and which to provide internally. This is the classical make or buy decision. During the early eighties, customer service was seen as an opportunity to develop competitive advantage. Typically, the services offered were generic, i.e. there was no major attempt at differentiation. However, by the mid to late eighties, information availability made it possible to differentiate customer service offers; and selective service packages began to form the basis of specific supplier/ distributor relationships. Today, this is further eased by availability of enterprise wide information systems such as enterprise resource planning (ERP). The service emphasis for most companies implied a focus on minimizing costs around a pre-determined level of service achievement. For some Sikkim Manipal University

Page No. 148


Unit 8

organizations, a view emerged which suggested that customer service, if viewed as a means by which the overall package could be differentiated, should be seen as a revenue or profit centre activity.

8.5 The Process of Supply Chain Management If logistics management is to exert a large influence on strategy, a structured or formal approach to making this contribution is necessary. This structured approach is available through the concept of the supply chain. The concept of the supply chain is not new. The practitioners' views concerning supply chain management (SCM) are much the same as of integrated logistics. The major difference seems to be that supply chain management is the preferred name for the actualization of integrated logistic theory and enabled through the development in information technology (IT). As somebody has put it: supply chain management is simply a loop; it starts with the customer and it ends with the customer. Through the loop flow all materials and finished goods, information, and even all transactions. It requires looking at the business as one continuous process. This process absorbs

traditionally

distinct

functions

as

forecasting,

purchasing,

manufacturing, distribution, and sales and marketing into a continuous flow of business interactions. Gone are the functional silos of corporate activity; instead, they are restructured as a seamless pipeline that stretches between a company's suppliers and its customers. The cost of making information available to more people has steadily gone down while the physical costs of business such as facilities and inventory have steadily risen. IT has been important to the development of the logistics activity, not only because of the fact that costs have decreased, and accuracy and frequency have become accepted, but, more importantly, information offers the facility to co-ordinate activities and to opt for control by information. Sikkim Manipal University

Page No. 149


Unit 8

8.6 Objectives of a Supply Chain The most important objective is unification of all the functions and activities that are required throughout the product life cycle from lust to dust. This unification or integration allows a smooth passage of information and products throughout the system. Managing the complete product life cycle includes managing the design, source, make and delivery. The principal objectives are: •

To reduce the physical supply chain links;

•

To define supply chain responsibilities to a specific core service competency; and

•

To decrease the time and cost of getting end user customer products in volume to markets worldwide.

Self Assessment Questions II 1. Supply chain management is a loop; it starts with the __________ and ends with the customer. 2. The service emphasis for most companies implied a focus on _____ around a pre-determined level of service achievement. 3. __________ is the difference between what the customer pays and the cost of providing the service.

8.7 Summary A supply chain includes all the processes that add customer-desired value to material and bring it to the customer. Integrated Supply Chain Management (ISCM) is a process-oriented, integrated approach to procuring, producing and delivering products and services to customers. SCM is a network of the manufacturer's suppliers, and suppliers' suppliers on the one hand and customers and customer's customers on the other Sikkim Manipal University

Page No. 150


Unit 8

hand. This network exists to ensure a free and smooth flow of information, goods, services and profits among all its participants. The concept of the supply chain is not new. The practitioners' views concerning supply chain management (SCM) are much the same as of integrated logistics.

8.8 Terminal Questions 1. Define ‘supply chain’. 2. What are the components of supply chain? 3. Describe the historical background of supply chain management. 4. Describe the process of supply chain management. 5. What are the objectives of supply chain management?

8.9 Answers to SAQs and TQs SAQs I 1. True 2. False 3. False SAQs II 1. Customer 2. Minimizing costs 3. Value added Answers to TQS: 1. Refer to 8.2 2. Refer to 8.3 3. Refer to 8.4 4. Refer to 8.5 5. Refer to 8.6


Page No. 151


Unit 9

Unit 9

Planning and Designing Supply Chain

Structure: 9.1


9.2

Supply Chain Integration

9.3

Forecasting in Supply Chain Self Assessment Questions I

9.4

Managing Demand and Supply

9.5

Network Design Self Assessment Questions II

9.6

Summary

9.7

Terminal Questions

9.8


9.1 Introduction The objective of the supply chain concept is to synchronise the service requirements of the customer with the flow of materials from suppliers, such that the apparent contradictory situation of conflicting goals of high customer service, low inventory investment and low operating costs may be balanced (or optimized). It follows that the design and operation of an effective supply chain is of fundamental importance. This unit throws light on forecasting in supply chain and managing demand and supply. Objectives: After studying this unit, you will be able to: 

Explain supply chain integration.



Explain forecasting in supply chain.



Describe the way of managing demand and supply.


Page No. 152


Unit 9

9.2 Supply Chain Integration Stevens (1989) proposed a model in which the balance within the supply chain involved functional trade-off. The development of an integrated supply chain requires the management of material and information flows to be viewed from three perspectives: strategic, tactical and operational. At each level, the use of facilities, people, finance and systems must be co-ordinated and harmonized as a whole. The focus at the strategic level should develop: •

Objectives and policies for the supply chain in order to achieve competitive superiority.

•

The physical components of the supply chain.

•

A statement of customer service intent by the product market, customer group, or perhaps by a large customer.

•

An organisation structure capable of bridging the functional barriers and thereby, ensuring an integrated value delivery based supply chain.

The tactical perspective focusses on the means by which the strategic objectives may be realized. Objectives for each element of the supply chain provide the directions for achieving balance within the supply chain. The tactical perspective involves identifying the necessary resources with which the balance may be achieved. The third phase is supply chain development in which the supply chain strategy and plans for implementation are evolved. The strategy should be examined to ensure that the relevant customers (and customer service expectations) have been identified and that this is consistent with management's perception of market development trends. Implementation plans require a time-phased program for resource allocation throughout the supply chain.


Page No. 153


Stevens

makes

an

interesting

comment

Unit 9

concerning

supply

chain

development. While the impetus for the development of the strategy may be a top-down approach, its success is likely to be achieved by a bottom-up approach. •

Stage 1 is a situation in which the company approaches supply chain tasks in discrete decisions with responsibility lodged in each of the task centers. The result is usually a lack of control across the supply chain function because of organizational boundaries preventing the coordinated decisions from achieving an overall customer service objective.

•

Stage 2 of development is typified by the functional integration of the inward flow of goods through materials management, manufacturing management and distribution. The emphasis is usually on cost reduction rather than on performance achievement and is focused on the discrete business functions with some attempts at achieving internal trade-off between, for example, purchasing discounts and inventory investment, and perhaps, plant operating costs and batch volumes. Customer service is reactive.

•

Stage 3 accepts the necessity of managing the flow of goods to the customer by integrating the internal activities. At this stage, integrated planning is achieved by using systems such as distribution requirements planning (DRP), JIT, manufacturing techniques, etc. This level of internal integration is essential before the company can consider integrating customer demand in an overall demand management activity. IT becomes an effective enabler in this process.

•

Stage 4 extends the integration to external activities. In doing so, the company becomes customer oriented by linking the customer's procurement activities with its own procurement and marketing activities.


Page No. 154


Unit 9

The value chain/supply chain management approach enables a company to respond to market changes. However, for the full potential to be realised, the connection and inter-relationships between the component parts of the supply chain must first be identified, and an integrated system designed to ensure that the system which evolves can be managed such that customer product and service expectations may be met cost-effectively. Christopher (1992) gives the following reasons for not following the integrated supply chain view: •

Few managers retain a grasp of a process from one end of the pipeline to the other. As a result, the way things get done can reflect convenience for doers, a desire to protect functional boundaries and a lack of understanding of the consequences, both up and down streams of individual processes.

•

Initiatives for change are largely functional and seldom reflect the total cost of the system. So, for example, manufacturing based on JIT may simply push inventory back on to the suppliers or into finished goods warehouses. On some occasions, this can actually increase the total cost and also reduce flexibility.

•

Their custodians as a means of providing breathing space and as a way of providing some hidden flexibility respond to protect lead times. Individual functional lead times inevitably contain some slack, and where these become embodied in a company's processing systems, and then they are institutionalized.

Perhaps, in addition, there is a maturity aspect where it is only companies that have gained experience from implementing best practices successfully, that gain the knowledge and confidence to move forward. The developments in ERP, IT and business process re-engineering (BPR) have


Page No. 155


Unit 9

motivated many organisations to pursue the theme of integration vigorously. IT is fast becoming an enabler in integration. This structured approach to the design of supply chain results in an organisation that is an appropriate mix of the company's own capabilities with those of partners or suppliers in a relationship enabled by IT that is appropriate to the strategy of the business. Make versus Buy This is indeed a strategic decision. The organisational focus today is concentrating on core competencies and outsourcing of the non-critical components. These decisions could be taken based on a number of factors such as capacity, leverage that an organisation gets by outsourcing, quality and confidence in working with the vendor, etc. One area that needs to be addressed is the development of a total cost model for the make/buy decision. The information in this establishes the key criteria upon which to make the sourcing decision. It is seen that having a supplier that can work in a simultaneous engineering way with the company is a key aspect in order to avoid costs associated with unnecessary design complexity and proliferation. This may mean having a supplier which can provide simultaneous engineering input through a guest engineer who works on site as a new product development team member or has the relevant IT to be able to effectively achieve the same. In addition, the direct labour element indicates that choosing a supplier that has competitive direct labour hour rates is also important. In considering suppliers which are in off-shore areas with low labour rates, the need for simultaneous engineering needs to be taken into account; but in addition, the effect of other issues such as labour rate inflation and any challenges associated with overseas sourcing would also need to be considered in a structured manner. In doing this, critical elements to be actively managed in Sikkim Manipal University

Page No. 156


Unit 9

preparing the organisation for the shift in disciplines and values that is likely to progressively accompany become a networked organisation through outsourcing and using IT aggressively. The challenge for the modern manufacturing company is to maintain a holistic approach to the management of the changes necessary for remaining competitive on an international basis. In order to do this, it is necessary to keep up-to-date with the tools and techniques that are available and to apply them in a holistic manner such as by taking a systems engineering approach to examine the complete supply chain. Typically, strategic decisions are required for warehousing, transportation, IT solutions and 'make versus buy'.

9.3 Forecasting in Supply Chain Supply Chain Constituents These are the elements that are the backbone of SCM. These are the support structures on which the SCM rests and functions effectively. The most important and vital element is information. All the activities within a supply chain get triggered with a single piece of information that the customer

desires

the

product.

Hence

capturing,

analyzing

and

disseminating the right information is the key to the success of any operation. An efficient SCM system has the capacity to capture and disseminate the right information to the right people at the right time or in real time. The next vital constituent is supply or everything that will cause a flawless or efficient supply of basic materials to the production facilities. This includes relationship with suppliers. Companies must carefully select suppliers for basic materials. When choosing a supplier, focus should be on developing velocity, quality and flexibility while at the same time reducing costs or maintaining low cost levels. In short, strategic decisions should be made to Sikkim Manipal University

Page No. 157


Unit 9

determine the core capabilities of a facility and outsourcing partnerships should grow from these decisions. Production is the next key constituent of SCM. Production relates to making what the customer wants. Hence this key component takes decisions related to what and how many products to produce, and what, if any, parts or components should be produced at which plants or outsourced to capable suppliers. These strategic decisions regarding production must also focus on capacity, quality and volume of goods, keeping in mind that customer demand and satisfaction must be met. Operational decisions, on the other hand, focus on scheduling workloads, maintenance of equipment and meeting immediate client/market demands. Quality control and workload balancing are issues which need to be considered when making these decisions. Distribution both into the production facility and out of the facility can contribute significantly towards enhancing the competitiveness of the manufacturer. It is a cost centre that can contribute effectively by maintaining high service levels. Reaching the customer on time without compromising on quality and other features of the product are vital. Modes of transportation to be used, frequency of distribution, etc. are some of the key decisions that require to be taken based on the field situation. Supply stock (inventory) is another key constituent of SCM. Achieving a fine balance between overstocking and understocking is the biggest challenge of SCM. The situation becomes extremely critical as there are numerous points or echelons through which the product passes and spends some time before embarking on its next journey. And till it reaches its penultimate point, i.e. the customer, its existence is not justified. The entire investment that has gone into making the product and distributing realized only after the customer pays for the product. Therefore the faster it happens, the better it Sikkim Manipal University

Page No. 158


Unit 9

is for the company. So it is important that the product moves swiftly through the various stop-overs and this is true not for one or two products, but for all the products of the company. Excess inventory is caused when these products spend more time than required at one particular point and finally a stage comes when they may remain stagnant. Hence this is one extremely critical area in SCM and finding an appropriate solution is the key to achieving flexibility and agility in the market. Self Assessment Questions I State whether the following statements are True or False: 1. Production is not a key constituent of SCM.

2. Achieving a fine balance between overstocking and understocking is the biggest challenge of SCM.

3. Distribution both into the production facility and out of the facility can contribute significantly towards enhancing the competitiveness of the manufacturer.

9.4 Managing Demand and Supply Essentials of Supply Chain Management – Value Chain for Supply Chain Management: Much of the interest in the developing areas of logistics as a discipline has been focussed upon the interrelation of functions, activities, companies and cultural intermediaries within developing partnerships and alliances. A useful analytical model, with which to explore the tasks and roles within the overall process of delivering customer satisfaction, is the value chain. The value chain (Porter, 1985) identifies the linkages and interdependencies between (and among) suppliers, buyers, intermediaries and end-users. Its primary benefit is the ability to examine these linkages and identify the value that is created for customers (or that which may be created), and how this, in turn, Sikkim Manipal University

Page No. 159


Unit 9

creates competitive advantage for a company. The value may take the form of selling an undifferentiated product at below the competitors' price, or it may be that the value takes the form of unique benefits that justify premium pricing. Thus, Porter's argument is that the value chain may be used to identify and understand the specific sources of competitive advantage and how they relate to creating added value for customers. The value chain provides a systematic way of component companies within an overall pipeline or supply chain. It has been shown to be of practical use in determining how to achieve and maintain competitive advantage in a dynamic marketplace. Business often refers to customer value and added value without providing corresponding definitions or understanding of what value is to the customer. Indeed, value for money is probably the most frequent question to appear on trade and consumer research questionnaires. But what is value? Clearly from a logistics strategy viewpoint, a detailed understanding of value is necessary. Furthermore, there may well be a range of definitions as the customers' expectations for or of value vary from one market segment to another. Thus, value may be quality, exclusivity, convenience or possibly service response (an intrinsic value); the common denominator is cost to the customer. This raises an interesting view concerning how the delivery of value may be affected. Kotler (1994) shows how this approach may be used in the context of marketing. Clearly, the value delivered to the customer is a function of all three items. The primary activities of the company combine in specific producer service combinations which meet the criteria specified by individual customers or the criteria, which although a little flexible, do meet the needs of a specific customer segment. Pricing and sourcing are important elements in the package as they reflect specific aspects of the product. Pricing reflects a negotiated overall value (value for both supplier and customer) while Sikkim Manipal University

Page No. 160


Unit 9

sourcing reflects the tasks involved in producing both the tangible product and the intangible service package that differentiates and increases the value added to the tangible element of the product package.

9.5 Network Design Analysis of a Supply Chain Structuring the supply chain requires an understanding of the demand patterns, service level requirements, distance considerations, cost elements and other related factors. It is easy to see that these factors are highly variable in nature and this variability needs to be considered during the supply chain analysis process. Moreover, the interplay of these complex considerations could have a significant bearing on the outcome of the supply chain analysis process. When organizations explore the applications of IT solutions, implementers must ask several critical questions focused around the proper alignment of information technology tools and the perceived increase in enterprise productivity and serviceability. Perhaps, the most important decision is to identify the scope of business problems to be solved. This step will significantly narrow the range of possible IT solutions and ensure that the effort is focused around core business issues. Equally important is charting the effect IT implementation will have on the organisation and its capabilities, In fact, the more encompassing the implementation, the more levels of learning and adjustment are required to utilize it. The alignment of the organisation with the proposed IT system impacts the enterprise in three ways. To begin with, the integrated process requires managers to restructure the culture and capabilities of their organisations around values promoting continuous improvement and teamwork. Second, integrated IT systems enable the organisation to not only rethink traditional enterprise information flows but also to leverage new information such as Sikkim Manipal University

Page No. 161


graphics,

workstation

technology

and

Unit 9

network-to-network

computer

integration. Finally, the effective application of new information technologies requires a redefinition of the goals and skills of the enterprise's people resources. The early response to the issue of managing the supply chain included having a fully integrated business. Some of the early Western vehicle manufacturing companies were structured in this manner where the input to the factory was virtually the raw materials and the output was the finished product. However, the driving forces for global manufacturers have ranged from becoming a tiered global supply system in the West to a Japanese Kereitsu based company supply system; although examples of near fully integrated factories still exist in developing countries. Self Assessment Questions II 1. The effective application of new information technologies requires a redefinition of the goals and skills of the enterprise's ________.

2. The _________ provides a systematic way of component companies within an overall pipeline or supply chain.

9.6. Summary The development of an integrated supply chain requires the management of material and information flows to be viewed from three perspectives: strategic, tactical and operational. The organisational focus today is concentrating on core competencies and outsourcing of the non-critical components. The challenge for the modern manufacturing company is to maintain a holistic approach to the management of the changes necessary for remaining competitive on an international basis.


Page No. 162


Unit 9

An efficient SCM system has the capacity to capture and disseminate the right information to the right people at the right time or in real time. Production is the next key constituent of SCM. Production relates to making what the customer wants. The strategic decisions regarding production must also focus on capacity, quality and volume of goods, keeping in mind that customer demand and satisfaction must be met. Operational decisions, on the other hand, focus on scheduling workloads, maintenance of equipment and meeting immediate client/market demands. Quality control and workload balancing are issues which need to be considered when making these decisions.

9.7 Terminal Questions 1. Explain supply chain integration. 2. Describe forecasting in supply chain. 3. Describe the way of managing demand and supply.

9.8 Answers to SAQs and TQs SAQs I 1. False 2. True 3. True SAQs II 1. People resources

2. Value chain

Answers to TQs: 1. Refer to 9.2 2. Refer to 9.3 3. Refer to 9.4


Page No. 163


Unit 10

Unit 10

Co-ordination in Supply Chain

Structure: 10.1


10.2

Partnering in Supply Chain

10.3

Obstacles in Supply Chain Co-ordination Self Assessment Questions I

10.4

Managerial Leverages to Achieve Co-ordination

10.5

Outsourcing and Supply Chain

10.6

Supply Chain Performance Self Assessment Questions II

10.7

Summary

10.8

Terminal Questions

10.9


10.1 Introduction Developing an effective supply chain is not easy. A company must have the right technology and the support of the best suppliers for it to work. Supply chains can be tremendous assets to companies and their vendors, but they often come with a price. Businesses must be willing to change their attitudes, their routines, and their ideas of how things need to run. A failure to do this means that not only will the supply chain fail, but the businesses involved will likely lose a great deal of money in the process. This unit throws light on obstacles in supply chain co-ordination and managerial leverages to achieve co-ordination while discussing the need for outsourcing in supply chain management.


Page No. 164


Unit 10

Objectives: After studying this unit, you will be able to: 

Explain the concept of partnering in supply chain.



State the obstacles in supply chain co-ordination.



Explain the managerial leverages to achieve co-ordination.



Explain the need for outsourcing in supply chain management.

10.2 Partnering in Supply Chain The following are the imperatives for the growth of supply chain (Hicks, 1999): •

Enhanced Customer Expectations

•

Pressure for Quick Response

•

Impact of Globalisation

•

Organisational Integration

Enhanced Customer Expectations: Increased competition has led to greater emphasis on customer service. Customer service may be defined as the consistent provision of time and place utility. In other words, the product has no value until it is in the hands of the customer at the time and place required. Customer service has received considerable importance owing to the recognition that if a product or service is not delivered to a customer when he needs it, the sale will be lost to a competitor if he offers a close substitute. Customer service could be examined under three headings: pre-transaction elements, transaction elements and post-transaction elements. The pre-transaction elements of customer service relate to corporate policies or programmes; for example, written statements of service policy, adequacy of organisational structure and system flexibility. The transaction elements are those customer service variables directly involved in Sikkim Manipal University

Page No. 165


Unit 10

performing physical distribution; for example, product and delivery reliability. The post-transaction elements of customer service are generally supportive of the product while in use; for instance, product warranty, parts repair service, procedures for customer complaints and product replacement. SCM clearly offers potential to address these concerns. Pressure for Quick Response Most customers today expect a quick response to their request. The pressure for quick response is due to shortened product life cycles, customer's drive for reduced inventories and volatile markets, making reliance on forecasts dangerous. Several complex activities occur across the entire supply chain - order acceptance, procurement of materials and components, manufacturing and/or assembly, distribution, cash realization and after-sales support. The key to quick response is pipeline management, a process where the manufacturing and procurement lead times are linked to the needs of the market place. Pipeline management seeks to meet the competitive challenge of increasing the speed of response to those market needs.

10.3 Obstacles in Supply Chain Co-ordination Developing an effective supply chain is not easy. A company must have the right technology and the support of the best suppliers for it to work. However, even once that obstacle has been overcome, another major issue may still loom ahead: finding real cost-reduction in the supply chain. Unfortunately, the unanticipated costs of running the supply chain often surprise managers and force companies to make some tough decisions. Thankfully, understanding what causes or drives these costs is half the battle.


Page No. 166


Unit 10

There are actually six main causes of cost problems in supply chains. Usually a supply chain will not exhibit all of these problems but they commonly do have a combination of numerous ones since many of them are related. One of those causes is simply that the business and its partners have not clearly thought about what they are doing. Anyone who has ever put together a supply chain knows that it is a truly ambitious endeavor that is truly worth doing right. However, many companies lack sufficient direction to accomplish such a goal. Along those same lines is a second cause: confusion. When so many different elements come together, confusion is almost inevitable initially, especially if there was not enough planning, training, or communication among those elements. Another problem deals with the way supply chain success is measured. Too many companies continue to use outdated financial yardsticks as the sole indicator of the success of a project or of the business. This approach does not work for supply chains since its main goal is not necessarily to only to improve profits but to balance supply and demand among all of the chain's elements. Using profits and revenues as the main unit of success measurement means that many partners may begin to sacrifice quality or to make other drastic changes which seem to help the bottom line but which destroy the supply chain's foundation. A third cause of extra costs involves barriers. Those already involved with supply chains probably already understand that small changes are magnified at each level of the supply chain. A minor price cut at the distributor level may be a major problem for vendors supplying the raw materials. In order to minimize these effects, businesses must be able to overcome the barriers that exist between each separate organization involved in the supply and between the different departments operating within one's own company. Unfortunately crossing these boundaries is not Sikkim Manipal University

Page No. 167


Unit 10

always as easy as it sounds. However, dealing with these situations before they arise and choosing supply chain partners who are open to that level of collaboration can help alleviate many of these problems. Finally, supply chains often suffer because either one or several links in the chain are unable or are resistant to change or when attempts are made to make everyone involved in the link adhere to strict guidelines. Being willing to adapt and to be flexible is one of the biggest challenges supply chain partners must face. An insistence that the status quo be the way to go will ultimately cost all parties involved a great deal and might actually destroy the supply chain. While there are a number of ways to avoid these cost problems, they all boil down to one thing: take pre-emptive action. When a supply chain waits for a problem to arise and then deals with it, the consequences have already occurred and the damage may not be able to be reversed. Instead, companies need to sit down with their supply chain partners and discuss issues like flexibility, barriers, metrics, and direction. By going over these concepts in advance, the companies can ensure that everyone is on the same page and that anyone who is not willing to be part of the group can get out before they get too deeply involved. Overall supply chains can be tremendous assets to companies and their vendors, but they often come with a price. Businesses must be willing to change their attitudes, their routines, and their ideas of how things need to run. A failure to do this means that not only will the supply chain fail, but the businesses involved will likely lose a great deal of money in the process. Self Assessment Questions I State whether the following statements are True or False: 1. The post-transaction elements of customer service are generally supportive of the product while in use Sikkim Manipal University

Page No. 168


Unit 10

2. A supply chain should wait for a problem to arise and then deal with it.

3. Supply chains often suffer because either one or several links in the chain are unable or are resistant to change.

10.4 Managerial Leverages to Achieve Co-ordination Major Trends in Supply Chain Management are: •

Co-makership

•

Use of Third Party Logistics

•

Principle of Postponement

•

Use of ERP/DRP Techniques

Co-makership Co-makership is defined as the development of a long-term relationship with a limited number of suppliers on the basis of mutual confidence. The common benefits of co-makership are shorter delivery lead times, reliable delivery promises, less schedule disruption, lower stock levels, faster implementation of design changes, fewer quality problems, stable competitive prices and higher priority given to orders. The basic philosophy of co-makership is that the supplier should be treated as an extension of the customer's factory with the emphasis on continuity and a seamless end-toend pipeline. The trend towards co-maker ship should increase with the growth in trend towards outsourcing. The principle of co-makership can be extended in both directions in the supply chain – upstream to customers and downstream to distributor retailers and even end users. Use of Third Party Logistics Outsourcing operations like storage, transportation, delivery, etc., improve service levels, enhance flexibility and reduce costs. Outsourcing also helps to reduce investments in assets like trucks and warehouses, and enables organizations to access new technologies more easily and even penetrate Sikkim Manipal University

Page No. 169


Unit 10

new markets. However, certain issues need examination. The service provider may offer the same service to a competitor to recover the investment costs and hence, the pay off may not materialize. The organization’s image is closely linked to that of the service provider, Hence, a decision to use third party logistics should be based on the organisation's needs, the service provider's capabilities, the terms and conditions, and the resulting pay off. Principle of Postponement Organisations can determine the appropriate point in the supply chain at which the product is completed in its saleable form. Delaying the final labelling, assembly or packaging until the last moment is known as principle of postponement. The objective of this principle is to minimize the risk of carrying finished product inventory at various points in the supply chain by delaying product differentiation to the latest possible moment before customer purchase. Stocking and transportation cost savings are attained by keeping products at the highest echelon level as possible and by moving goods through the supply chain in large, generic quantities. Some examples of postponement are – delaying the labeling process till the customer's order is received, shipping products in bulk and transferring them to smaller containers at warehouses, delaying final assembly until actual receipt of a customer's order, and stocking petroleum, paints, etc., in unblended state and performing blending operations against actual orders. However, postponement should not lead to a compromise on the desired service level. Use of ERP/DRP Techniques Enterprise Resource Planning (ERP) systems are information integrators and they help to bind various business processes in an enterprise. ERP also helps in the streamlining and re-engineering of various processes. It helps in focusing on value-added activities and eliminating the non-value adding Sikkim Manipal University

Page No. 170


Unit 10

activities. Because of tremendous developments in information technology (IT), ERP has led to improvements in various activities related to in-bound logistics, transportation, materials management, accounting, finance, etc. DRP is a tool which estimates inventory requirements at stocking locations, and ensures that supply sources are able to meet the demand. DRP incorporates policies on safety stocks and information as well as the relation between demand forecasts, inventory levels, and manufacturing and distribution schedules. The logic used is analogous to material requirements planning. The manufacturing lead times, in turn, are linked to manufacturing schedules. DRP assists not only in short-term distribution planning, but also in anticipating future production and distribution resources so as to match supply and demand. It helps to quickly adjust to vagaries of the market place with minimum inventories. Its potential is particularly significant in a multi-echelon

environment

owing

to

its

approach

to

incorporate

dependencies at various echelon levels. Since minimal inventories are held, DRP can be viewed as a key requirement for a just-in-time production and logistics system.

10.5 Outsourcing Logistics Outsourcing, listed by Harvard Business Review as one of the most important management concepts of the past 75 years, has become a readily accepted means of increasing performance of non-core supply chain activities. Outsourcing allows organizations to focus on their core competencies, to provide a differentiated level of customer service, and to take advantage of greater operational flexibility. As late as the 1990s, companies only trusted themselves and as a result they kept a firm grip on everything-procurement and production as well as the supply or distribution of the finished products to the markets. Companies Sikkim Manipal University

Page No. 171


Unit 10

believed that they could do everything better than anybody else and this belief also applied to the logistics sector. The business enterprises owned a fleet of trucks and had extensive warehouses of their own. However, in the course of the years, industry began to get away from this full autonomy in the field of logistics. The importance of having an outsider catering to the services without companies bothering to take care of the fleet, their maintenance, etc. was overwhelming indeed to consider outsourcing. Traditional transportation, warehousing and transshipment services were increasingly subcontracted to specialized forwarding companies that assumed 1 the responsibility for transporting the goods and managing the warehouses. With the emergence of IT and information systems and its subsequent application to logistics, the sector then took another leap forward. Companies with

the

technological

tools

that

provided unhindered

information needed to make processes more effective. In the past, the supply of production facilities and the markets had to be safeguarded by keeping high inventory levels. With the advent of the new technologies, production losses and supply bottlenecks could be avoided through perfectly co-ordinated procurement, production and distribution networks. The problems, however, persisted as the supply chains found in many companies were not capable of meeting these requirements. The use of more flexible production processes while at the same time cutting down inventories meant that the service providers had to manage to deliver the materials to the assembly lines exactly when they were needed in order to ensure a smooth production flow. As a result, Justin time delivery as well as electronic shipment tracking at the national level became established standards among the major logistics service providers.


Page No. 172


Unit 10

The other side of the spectrum, the customer was becoming more and more demanding and was refusing to accept what the companies were making for him. He wanted to dictate not only the product but also the quantity, quality and place of delivery. This put more responsibility and onus on logistics providers. As a result, the logistics companies considerably improved their internal workflows by establishing hubs (transshipment centres where product flows are bundled and distributed) and by introducing state-of-theart traffic routing systems. Outsourcing of logistics became an industry norm. Reasons for Outsourcing Logistics: There are several reasons why companies outsource – strategic reasons, financial reasons and service related reasons. Financial reasons

Strategic reasons

Service-related reasons

Asset release

Non core

Flexibility

Cost reduction

Access to the best in breed capabilities

More service focused

Consolidation

Ability to use flexible manufacturing systems

To become more agile and responsive

Exert greater control on supply chain

10.6 Supply Chain Performance The following are the performances of supply chain: a) Supply chain management Several companies wanting to globalize their operations need help in designing their global supply chain. They have little or no understanding of the markets they want to venture into. Usually such a 4PL is a global company having clients and relevant experience in several countries. This gives them not only the required skill to handle international operations but they also provide necessary infra-structural support required for handling Sikkim Manipal University

Page No. 173


Unit 10

such operations. This gives company’s confidence to venture out in unknown markets. b) Consolidation and vendor services International forwarding, documentation and compliance are a vital requirement and can prove to be very difficult and challenging especially for small companies who do not possess much relevant experience in the field. 4PLs with their wide network and capacity make this process easy by consolidating merchandise, information and documents close to the origin or sourcing locations. c) Warehousing and distribution The core competency of businesses engaged in manufacturing is manufacturing and they need a solution that will allow them to focus on that without having to bother about warehousing and distribution issues. 4PLs, by providing customized warehousing and distribution solutions improve inventory management, reduce operating costs and speed order cycle times and most importantly allow companies to focus on their core competency. d) Global freight management Most of the leading logistics providers provide comprehensive transportation and forwarding services. This gives them international purchasing power to negotiate. The best rates are from top-rated carriers. e) Manufacturing support Manufacturers can reap the benefits of just-in-time inventory management by utilizing the specialized facilities, high technology capacity of the 4PL. f) IT solutions IT is another constantly evolving area which requires constant updating. 4PL with their reach and understanding of global trends take up the responsibility of providing the best practices and innovative applications of proven supply chain technologies. This automatically creates a competitive advantage for the company's business. Sikkim Manipal University

Page No. 174


Unit 10

Self Assessment Questions II

1. ______________ allows organizations to focus on their core competencies. 2. _________ is a tool which estimates inventory requirements at stocking locations, and ensures that supply sources are able to meet the demand. 3. _____________ as well as electronic shipment tracking at the national level have become established standards among the major logistics service providers.

10.7 Summary Increased competition has led to greater emphasis on customer service. Customer service may be defined as the consistent provision of time and place utility. Co-makership is defined as the development of a long-term relationship with a limited number of suppliers on the basis of mutual confidence. The common benefits of co-makership are shorter delivery lead times, reliable delivery promises, less schedule disruption, lower stock levels, faster implementation of design changes, fewer quality problems, stable competitive prices and higher priority given to orders. Outsourcing operations like storage, transportation, delivery, etc., improve service levels, enhance flexibility and reduce costs.

10.8 Terminal Questions 1. What is partnering in supply chain? 2. Describe the obstacles in supply chain co-ordination. 3. Describe the managerial leverages to achieve co-ordination. 4. Explain the need for outsourcing in supply chain.


Page No. 175


Unit 10


2. False

3. True

SAQs II 1. Outsourcing

2. DRP 3. Justin time delivery Answers to TQs: 1. Refer to 10.2 2. Refer to 10.3 3. Refer to 10.4 4. Refer to 10.5


Page No. 176


Unit 11

Unit 11

Issues Regarding Information Technology and Supply Chain

Structure: 11.1


11.2

Technology in Supply Chain Management

11.3

E-business and Supply Chain Self Assessment Questions I

11.4

Summary

11.5

Terminal Questions

11.6


11.1 Introduction The focus of management has to change over time. In recent years, conducting business has become increasingly complex. The various factors leading to this development are: increasing product variety and volumes, increasing competition, shrinking product life cycles and growing customer demands. To manage this complexity effectively on a real time basis for a business, information sharing across functions and locations has become critical. Flexibility and responsiveness have become key business drivers for the 21st century, forcing businesses to orient themselves along processes instead of functions. It is in this aspect of management that the use of information technology assumes a greater significance. Objectives: After studying this unit, you will be able to: 

Explain the use of technology in supply chain management.



Explain Electronic Data Interchange.


Page No. 177




Explain IT based supply chain operations.



Describe the E-business applications.



Explain E-Procurement and E-Collaboration.

Unit 11

11.2 Technology in Supply Chain Management Supply chain management, enabled by advances in technology, aims to develop a technical infrastructure linking technology and people, in an effort to align advances in Information Technology (IT) with the capability of the organisation for facilitating customer satisfaction. This integration is aimed at leveraging information tools to address the following business concerns: flexibility and variety; quality; responsiveness, and edging toward agility. IT Solutions The developments in IT have resulted in many possible alternative solutions for managing the supply chain effectively. Some of the major developments in IT which are transforming the supply chains today are as follows: 1. Electronic Data Interchange (EDI) 2. Intranet/Extranet 3. Data Mining/Data Warehousing/Data Marts 4. E-commerce Electronic Data Interchange (EDI) EDI is defined as the inter-company computer to computer communication of standard business transactions in a standard format that permits the receiver to perform the intended transaction without human intervention. In the EDI environment, a computer can directly use the data sent by other computers in electronic form. Other communication technologies such as FAX and email are not considered to be a part of EDI because they do not support automation facilities and information sent using such communication has to be rearranged or rekeyed into a computer for further use. EDI Sikkim Manipal University

Page No. 178


Unit 11

involves three basic processes: 1. Directing and gathering data from different application programmes; 2. Converting

data

from

propriety

formats

(used

by

application

programmes) to standard formats (as transmitted by the communication network) and reversing this process at the other end; and, 3. Actual transmission of data between trading partners over a communication network. EDI is the inter-organisational exchange of business documentation in a structured machine processable form. It consists of standardised electronic message formats (called transaction sets) for common business documents such as requests for quotations, purchase orders, invoices, shipping notices and other standard business correspondence documents. These electronic transaction sets enable the computer in one company/organisation to communicate with the computer in the other organisation without actually producing paper documents. All human efforts required to sort and transport the documents are eliminated. In the case of EDI, it is not necessary for the sender and the recipient to have an identical document processing system. The buyer generates a purchase order and passes the data through a special translator software that converts it into the standard agreed form of data format or transaction set. The translator also wraps the document in an electronic envelope that has identification indicating for which department in the seller's organisation the message is intended. The communication programme then dials the VAN and places it in the correct mailbox. The seller's computer modem then calls the VAN, retrieves everything and distributes every thing in the mailbox to the appropriate departmental computers. An EDI facility provides various functions. The basic function is to provide compatibility between different systems; the interchange facility translates Sikkim Manipal University

Page No. 179


Unit 11

codes and formats operated by the individual companies, allowing easier and direct data exchange without the need for rekeying. EDI provides a function known as store and forward. This allows businesses that operate different time-cycles to use EDI without changing their approach. For example, if a manufacturer wishes to send orders on an ad hoc basis, but the supplier wants to accept orders weekly, the store and forward facility will receive the orders, store them and release them to the supplier when timetabled. Transmission of the data is through a communications network. For example, for a company, an EDI service, called EDICT uses the company's own data network known as INFOTRAC; the network covers 95 per cent of businesses on a local call basis. The final function offered is application support. For EDI to function effectively, the provider has to understand the industries it is working with and must support the users. The benefits of EDI are becoming very apparent despite being relatively new in India. One of the obvious benefits is cost. However, cost is not the key benefit. EDI has much more to do with the overall improvements of return on investment and, for many users, has made a significant impact on sales revenues, giving those that use it a new form of competitive advantage and new forms of relationships between manufacturers and suppliers. EDI also has an effect on investment, particularly investment in the form of inventory, because it cuts down on errors in document processing and reduces the transmission time of documents. Many of the benefits that have been achieved have been specific to particular companies. Some companies, as part of their stance, deliberately put themselves forward as technological leaders – using EDI can enhance that stance. Others use it as a competitive tool in their industry. Sikkim Manipal University

Page No. 180


Unit 11

If implemented properly and utilised efficiently, a fully integrated EDI solution adds speed and efficiency to business process enabling the organisation to maximise resources, minimise waste and increase customer satisfaction. Intranet/Extranet competitive pressures are ever-increasing in global manufacturing environments. Assemblies are becoming more complex while product cycles are getting shorter. These factors combined with the requirements for ISO 9000 certification drive, the requirements for systems that document processes and distribute factory information. Intranet is a means of distributing information. It also allows real time feedback to flow from the manufacturing area to design and engineering groups. It is the internal web of an organisation. The intranet allows the user to share data through messaging by publishing it electronically over the network for access to all. An intranet allows internal users to access data from external sources, while restricting access to it from those outside. When access to intranet is extended to external users such as channel partners, clients, customers and suppliers it becomes an extranet. Different members in the supply chain have different access powers and a unique identification. The process web intranet system enables additional functionality in several areas. Benefits of Intranet/Extranet •

It facilitates two way communications between the manufacturing floor and other areas of the plant

•

It allows distribution of many categories of information. These can be presented with a common look and feel, eliminating user-interface proliferation

•

It ensures a common process for multiple functions and enhances overall performance.


Page No. 181


Unit 11

Data Mining/Data Warehousing and Data Marts The explosion of data stored has caused a corresponding explosion in the need to analyze it. Traditionally, such data has been used only for the common queries as given by a user. However, with so much of it, there has been an increasing desire to mine it for more meaningful and useful information. Thankfully, along with the increasing amount of data, there has been a great increase in the computational power of computers (see the chapter on Data Mining and Warehousing for details). This has made techniques such as data mining, which might at one time have been too computationally expensive, quite plausible. The excitement being generated in this field can be explained by the tremendous potential benefits that could come about from the implementation of a successful system. Data mining results include: •

Associations, or when one event can be correlated to another event

•

Sequences, or one event leading to another later event (a rug purchase followed by a purchase of curtains)

•

Classification or the recognition of patterns and a resulting new organization of data (for example, profiles of customers who make purchases)

•

Clustering, or finding and visualizing groups of facts not previously known;

•

Forecasting, or simply discovering patterns in the data that can lead to predictions about the future.

The data warehouse concept is gaining acceptance in part because of the possibility of fruitful data mining. The data warehouse is designed to store and retrieve data. Data warehouses are built to contain enterprise-wide information collected from multiple operational sources. In using a data Sikkim Manipal University

Page No. 182


Unit 11

warehouse, businesses want to examine problems or possible problems and determine their causes. To do this, they need data from multiple systems. For example, in order to determine whether or not a drop in sales was due to too many salespersons being on vacation, the data warehouse needs to contain information from both the product database and the personnel database. Technologies such as the internet and intranet, along with data mining tools need to be employed to ensure that all users can get the information they need and when they need it. A data warehouse typically has highly summarized views of the enterprisewide information along with the detailed information that are used by various levels of management. In contrast, a data mart contains department or division-wide information. They can be cheaper to deploy and operate than a data warehouse, but they can become isolated pools of data that are not consistent with the rest of the organisation. Attempts to tie multiple data marts together to create a data warehouse can be expensive and complicated. E-Commerce ERP and EDI have gained tremendous importance as the world is gearing itself towards strong business process integration. And the time is near for the paper-based business to give way to electronic business when suppliers and customers will transact electronically. Once isolated economies are now slowly integrating into a global village. This is also because suppliers are working hard to offer products/services at lower and lower prices. To offer at lower and lower prices, cost saving, and cost cutting is essential. By reducing and even eliminating inventory and distribution costs dramatically, the total cost of products/services lowered by electronic commerce. In many cases, online prices will be lower than what Sikkim Manipal University

Page No. 183


Unit 11

consumers find elsewhere. As the wired situation is increasing, it can create higher levels of operational efficiency, which basically reduces cost and saves money for the end consumer. As the supply and demand positions move online, demand can be aggregated in real time. The website, www.onsale.com, for online auctions aggregates supply by grouping all kinds of things for auctioning and then offers people for bidding. On the other hand, www.priceline.com aggregates price bids of people for products/ services. What happen actually are a much more real supply and real demand match, which take a lot of waste out

of

the

value

chain?

Websites

like

www.247customer.com,

www.planetcustomers.com even provide third party customer response. IT-enabled Supply Chain The internet has vastly expanded the value of the goods and services business trade electronically. The internet era has revolutionized commerce, making electronic commerce a reality. The major force of electronic commerce is driven by the fact that it results in lowering purchasing cost, a reduction of inventories, lowering cycle time, more efficient and effective customer services, lowering sales and marketing cost and new sales opportunities. E-commerce has three dimensions. 1. Reach is about access and connection. It means simply how many customers a business can access or how many products it can offer. Reach is the most visible difference between electronic and physical businesses, and it has been the primary competitive differentiation for business thus far. 2. Richness is the depth and detail of the information that the business gives the customer or collects about the customer. Richness holds enormous potential for building close relationships with customers in a future dominated by e-commerce. Sikkim Manipal University

Page No. 184


Unit 11

Affiliation is about whose interests in business it represents. Until now, affiliation hasn't been a serious competitive factor in physical commerce because, in general, no company ever devised a way to make money by taking the customer’s side. E-retailers with navigational functions are shifting their affiliation towards customers. Traditionally, manufacturers and retailers must find ways to fight, co-opt, or imitate their e-commerce competitors' affiliation strategies. Improved productivity, faster financial flows, improved quality, improved customer service, reduced costs, shortened supply chain, faster product development, reaching new markets, improvement in cash flows etc. are the advantages of IT. IT has helped in making the supply chain faster, flexible and responsive. An organisation needs to invest in IT carefully to make its supply chain more responsive. Various flows in supply chain such as material, information and money can be effectively managed through IT. Specifically: •

Strategic decisions on the supply chain design can increase customer satisfaction and save money at the same time – the classic win-win situation through IT.

•

By sharing information, supply chain partners are able to respond more rapidly to known demand and to do so with less inventory in the system as a whole and, hence, at lower cost.

•

Reduction of operating costs by proper coordination of the planning of various stages of the supply chain is enabled through IT.

•

By minimising the need for excess parts and simplifying the overall design, it will be easier for companies to customise or vary the product according to each customer's needs and requirements.

•

Rapid introduction of a new or modified product is possible through IT.


Page No. 185


•

Unit 11

Greater product customisation, or manufacturing to order, would come at relatively low unit cost through IT.

•

There is sharing of planning and scheduling information due to collaboration and integration among departments within the company and outside departments. This is something that is highly correlated to the supply chain performance.

•

Effective inventory management, having just the right amount of the right merchandise on the shelves for just the right amount of time minimises overstocking and markdowns, and so boosts profitability. This is possible through IT.

•

Detailed analysis of item performance, what-if scenario evaluation, and exception reporting and handling is facilitated through IT.

IT and supply chain The application of IT to the logistics function has had a major impact on added value in the value chain. One particular application, Electronic Data Interchange (EDI), has added to the value input with: •

More accurate and rapid information flows,

•

Improved logistics system productivity,

•

Closed trading relationships,

•

Improved cash flows, and

•

A reduction in forecasting errors.

Equally, it may be said that EDI would not function adequately, if at all, without the benefits of electronic point of sale (EPOS) data capture. EPOS enables real and live transactional data to be used (through the facility of EDI) to manage production operations and inventory allocations and levels. Hindustan Lever Ltd. (HLL) is an excellent example of a value delivery system. By using an integrated combination of information systems and EDI Sikkim Manipal University

Page No. 186


Unit 11

systems, it has managed to delay the finishing of the product until the very last moment. With the advent of the internet, the supply chain is becoming more and more customer centric. The value chain concept is an ideal vehicle from which this notion can be developed. The benefits of using this concept are: •

It identifies the roles and tasks to be undertaken in the total process of customer satisfaction.

•

Having identified roles and tasks, they may be evaluated in cost terms, and decisions made concerning trade-off potential and the extent to which intermediaries may be involved.

•

The analysis may be used to determine more accurate costs for providing the service requirements of customers using an activity-based costing methodology.

The key to the development of the supply chain concept has been the rapid progress made by information and the fact that the cost of making information available to more decision makers has steadily decreased, while concurrently, the physical costs of business such as facilities and inventory have steadily risen. Another

major

influence

accompanied

these

phenomena—the

developments made in just-in-time (JIT). The change in manufacturing philosophy brought about by the Japanese Kanban (just-in-time) concept, which was specifically devised to eliminate waste (any activity or process which does not directly add value to the product service), has clear implications for logistics. For example, holding excess inventory was seen as wasteful and, therefore, companies should minimize, even eliminate inventories. JIT introduced the commitment to short (but consistent) lead times, minimum levels of inventory but, at the same time, optimal levels of customer service. Sikkim Manipal University

Page No. 187


Unit 11

The rationale behind the concept is that stocks of components (or finished items for resale) should be planned to arrive only at the time they are actually needed. In effect, it saves money on downstream inventories by placing greater reliance on improved responsiveness and flexibility. Hence, quick response (QR) systems (the distribution equivalent) are attractive. The implications for distribution management are not difficult to identify. Clearly, there is an information requirement here, and the development of EPOS and EDI has made the concept of minimal stocks/optimal service much more feasible.

11.3 E-business Applications E-business applications in SCM can be divided into three basic categories— e-commerce, e-procurement and e-collaboration applications, all of which support supply chain integration over the Internet. E-business applications are centred in the information hub and also run on various other parts of the supply chain. E-Commerce The many tasks of e-commerce begin when a customer places an order. However, they go beyond the initial business-to-customer (B2C) transaction to include internal processing as well as the multiple business-to-business (B2B) transactions that occur in the back-end of the supply chain. Imagine this scenario: a customer places an order, the order begins a series of transactions throughout the chain – first the order must be quickly and accurately processed (within the information hub), next comes the interaction with the many other members of the supply chain. Next, the software must process other transactions such as tracking the status of orders and recording performance measures linked to the supply


Page No. 188


Unit 11

chain, such as lead time, quality and inventory turnaround. Some of the many tasks of e-commerce applications are: 1. Executing orders by customers – connects the information hub with the customers. 2. Communication between the members of the chain – connects the hub with back-end members of the chain. 3. Electronic and instantaneous order tracking. 4. Remote sensing, testing and diagnosis of problems in various parts of the chain. 5. Recording useful performance data about the supply chain. A classic case where all of the above has been significantly achieved is Amazon.com, the most successful internet-based enterprise that sells books, medicines, toys, electronic items, etc. online to a global customer base. Not only does the site take care of personal likes and dislikes of each unique visitor to the web-site, but it processes and delivers the product in record time. The entire supply chain is well oiled and moves at breakneck speed. E-Procurement The procurement process is that process by which a manufacturer procures products from suppliers. The volume of products exchanged in the procurement process is enormous and the Internet helps to manage the complexity of this process. Many companies, such as Ariba, Free Markets, etc. offer web-based procurement tools that link manufacturers and suppliers, or buyers and sellers, into real-time product exchange communities – virtual, dynamic markets. Internet procurement solutions automate all steps of the procurement process – acquisition to order, as well as the payment transactions.


Page No. 189


Unit 11

Currently, many industries, electronics, chemical, foodstuffs, etc. have electronic marketplaces available for buying and selling. For example, chemconnect.com is a global marketplace for chemical, plastic, feedstock and related products that offers information, expertise, e-commerce tools and global trading community that companies in diverse industries need to streamline transactions and reduce costs. Chemconnect has active network of trading partners—more than 9000 member companies from 150 countries (at the time of writing this book) can access reliable market information, reduce process inefficiencies, and improve profitability. Firms using such tools need e-procurement software, linked to the marketplace. Such marketplaces allow the companies to accurately assess the market, get quotes from the best of the best vendors from different parts of the world, streamline negotiation process, provide adequate support in getting the best market price, managing and hence minimizing risks, if any, and finally automating order processing and fulfillment. The software includes sophisticated data storage, marketplace management and monitoring tools – part lists, quote lists, decision-making, ordering and order change tools, for example, and logistic/payment tools that drastically cut down on time and effort spent on procurement. The popularity of such emarketplaces and corresponding procurement tools is on the rise and according to an estimate of the research firm Gartner group by 2005, more than 500,000 companies will be participating in business-to-business emarketplaces as buyers and/or sellers, developers and managers of B2B marketplaces. E-Collaboration Businesses thrive on effective and flawless collaboration between its employees and with its suppliers, franchisees, distributors, dealers, Sikkim Manipal University

Page No. 190


Unit 11

stakeholders and customers. E-collaboration allows companies to share information, collaborative planning and collaborative product development. Collaborative planning provides a means for implementing group decision making; decision making in a cost-effective way, because it considers every part of the chain. Enterprises across the chain can effectively exchange the necessary knowledge to make wise decisions for the whole chain. Essentially, e-collaboration technology allows for real-time sharing of product sales forecasts, replenishments plans and as a result, it can closely match supply and demand across the whole chain. Ultimately, the collaborators can jointly reduce inventory costs and raise customer service levels. Product life has become shorter and shorter as technology improves at increasing rates – this is called quick product roll-over. E-collaboration solutions enable real-time contribution from engineers, product developers and front-end representatives to new products. Furthermore, e-collaboration software allows for quick change-over to new suppliers and manufacturers to facilitate the changes in products. E-collaboration has brought the major benefits of the Internet to engineering and product development. For instance, to invigorate strategic relationships with

key

customers,

Sun

Microsystems

has

deployed

web-based

collaborative planning tools that help to manage product life cycles, exchanging information with customers about promotions, product status, orders and shipments. Results: reduced lead times and improved inventory turns have boosted customers’ satisfaction and made supply chain operations more efficient. There are many advantages of the Internet-enabled supply chain. The Internet-based

supply

chain

is

a

self-fulfilling

prophecy. While it

revolutionizes SCM and makes the vital tasks associated with SCM simple, Sikkim Manipal University

Page No. 191


Unit 11

the Internet is also the cause of the exponentially more complex supply chain that exists today. The global nature of Internet has provided businesses with a global market for suppliers, manufacturers, and customers and the larger the spread and reach, the more complex the nature of the business and hence SCM. However, benefits such as quick returns, speedier optimization and all-round efficiency benefits which ebusiness applications offer are necessary and unmatched by older technology. The next future trend in SCM, will transcend it to a completely different level to "intelligent supply chain (SC) with intelligent information centre". These intelligent SCs will have the capacity of doing automated translation of quantitative data into better supply chain performance. The Internet evolution has made massive quantities of useful data about the supply chain available. However, it remains a challenge to systematically analyze this data and quickly implement the resultant changes into the supply chain. Some of the most influential business leaders have made some very bold statements about the Internet and e-commerce. For example, General Electric (GE) is a company that has launched very aggressive e-commerce initiatives. So aggressive, in fact, that Jack Welch, well-known CEO of GE, was quoted in Fortune magazine as saying "within 18 months, all of our suppliers will supply us on the Internet or they won't do business with us." General Motors (GM) is putting more emphasis on E-commerce with the creation of e-GM, a group which will have oversight response sibilates for all of GM's Internet-based activities. Initially, the group will have a staff of 200 with the objective of making GM a major force in e-commerce. The scope of their activities will include everything from product development, supply chain management, car sales, marketing and even the on-board communication and information system in automobiles. Sikkim Manipal University

Page No. 192


Unit 11

Even more intriguing is the rapid evolution of the digital marketplace. Recently, i2 Technologies announced TradeMatrix.com which will eventually allow buyers and sellers to transact in a single intelligent, multidimensional marketplace that connects multiple trading exchanges. This will allow buyers to consolidate orders from multiple vendors and subsequently provide for the effective integration of the final logistical activities. The key is putting intelligence into the super portal so that customers can get their information their way. Top Remarks on SCMS This is a collection of some of the statements made by the doyens of industry and academician on SCM. This gives a good insight into the minds of people who have made new rules and evolved new processes. Our supply chain process was very well-executed, but we had an opportunity to increase our efficiency, make the process paperless and provide a single system of record that we and our suppliers could share. – Eric Michlowitz, Dell's Director of supply chain e-business solutions As always the challenge for top management is setting the right priorities, allocating appropriate resources, and of course, achieving the required results. – Michael Donovan, President of R. Michael Donovan Co. leading SCM Consultant. In the future, firms won't necessarily compete. Instead, entire supply chains will compete against other supply chains. By developing relationships and efficient flow patterns from suppliers to customers, the company can both attain efficiencies and seek innovations. – John Chambers, CEO at Cisco, said in the early 1990s. It's the complete antithesis of how companies used to do business, which Sikkim Manipal University

Page No. 193


Unit 11

was engineering and maybe marketing, sit down and figure out what products to build. They would design it, engineer it and build it and then figure out how to sell it. In the new e-commerce model, it is completely the other way around. For example, Dell asks their customer what they want, within a set of boundaries off course, and then figures out how to build it. So, it's a complete pull model instead of a push model. – Christopher S. Selland, Vice President of Customer Relationship Management and Internet Computing Strategies at the Yankee Group. Often, companies attempt to achieve supply chain excellence but only focus on perhaps one or two supply chain building blocks – and not on all dimensions needed for top performance. There are five key dimensions of supply

chain

management

that

are

needed

to

achieve

superior

performance. These

include

strategy,

infrastructure,

process,

organization

and

technology. Each dimension includes at least three questions that an organization should answer as it strives to achieve supply chain excellence. Supply chain principles primarily tell us three things. One, if a company can compress its lead times and raise quality and accuracy at every stage, service will improve and cost will fall out of the business. Two, organizations should take a process view rather than a functional view of the operation. Three, working across functional boundaries to integrate business processes is the future. Change in die supply chain can be focused on improving the characteristics of supply in the context of the goals that have been set for service and or changing the service objectives. Companies must look beyond conventional methods when seeking to justify investments to improve their supply chain. Too frequently, organizations take a one-dimensional approach that centers on IT's ability to process Sikkim Manipal University

Page No. 194


Unit 11

transactions more effectively. The more compelling arguments underscore the investment's hard benefits – the impacts of an IT-enhanced supply chain on ROI, net income and cash flow. Self Assessment Questions I State whether the following statements are True or False: 1. The procurement process is that process by which a manufacturer procures products from suppliers. 2. E-collaboration software allows for quick change-over to new suppliers and manufacturers to facilitate the changes in products. 3. E-collaboration technology allows for real-time sharing of product sales forecasts, replenishments plans and as a result, it can closely match supply and demand across the whole chain. 4. EDI, stands for Entrepreneur’s Data Interchange.

11.4 Summary The developments in IT have resulted in many possible alternative solutions for managing the supply chain effectively. EDI is defined as the inter-company computer to computer communication of standard business transactions in a standard format that permits the receiver to perform the intended transaction without human intervention. EDI is the inter-organisational exchange of business documentation in a structured machine processable form. The basic function is to provide compatibility between different systems. The data warehouse concept is gaining acceptance in part because of the possibility of fruitful data mining. The data warehouse is designed to store and retrieve data.


Page No. 195


Unit 11

The global nature of Internet has provided businesses with a global market for suppliers, manufacturers, and customers and the larger the spread and reach, the more complex the nature of the business and hence SCM.

11.5 Terminal Questions 1. What is Electronic Data Interchange? 2. Explain, in detail, IT based supply chain operations. 3. Describe, in detail, the E-business applications. 4. Explain E-Procurement and E-Collaboration.


2. True

3. True

4. False

Answers to TQs: 1. Refer to 11.2 2. Refer to 11.2 3. Refer to 11.3 4. Refer to 11.3


Page No. 196


Unit 11

Reference: 1.

Albaum, G., J.Strandskov, E. Duerr, and L.Dowd 1994, International Marketing and Export Management, 2nd Edn Addison Wesley Publishing Company, Massauchusetts.

2.

Arnold, David 2000, Seven Rules of International Distribution, Harvard Business Review, 78 (6), November- December,

3.

Cateora,

P.R 1990, International Marketing, Seventh edition,

Homewood, IL: Irvin 4.

Louis W. stern and Adel I. EL-Ansary 1982, Marketing Channels, 2nd edn, Prentice Hall, Englewood cliffs, NJ.

5.

Rosenbloom, Bert 1990, ‘Motivating Your International Channel Partners;, Business Horizons, March-April.

6.

Jim Miller, Strategic Supply Chain Management: The Five Disciplines for Top Performance, Cisco Publishers. NewYork.

7.

Michael 2006, ‘Supply Chain Management: Strategies and Realities’ – Sterling Publishers. New Delhi.

8.

Andrew Royalton,

1999, “Privatization, Globalization and Supply

Chain Management: Cox town Publishers, Aurangabad. 9. 10.

James B. Ayers, 2006 Handbook of Supply Chain Management – Jack W. Plunkett, 2006, “Plunkett's Transportation, Supply Chain & Logistics Industry Almanac:


Page No. 197

Sales, Distribution and Supply Chain Management

Recommend Documents