Sales, Distribution and Supply Chain Management

MK 0001Sales, Distribution and Supply Chain Management

Contents

Unit 1Personal Selling and Sales Management Overview 1

Unit 2Organizing the Sales Department 18

Unit 3Sales Force Management 28

Unit 4Directing and Controlling Sales Efforts 67

Unit 5Logistics of Distribution 78

Unit 6Channel Management 99

Unit 7Recent Trends in Channel Management 127

Unit 8Introduction to Supply Chain Management 135

Unit 9Planning and Designing Supply Chain 152

Unit 10Co-ordination in Supply Chain 164

Unit 11Issues Regarding Information Technology and Supply Chain 177

References 197

Edition: Fall 2007

BKID – B0773 8th Nov. 2007

Brig. (Dr). R. S. Grewal VSM (Retd.)Pro Vice ChancellorSikkim Manipal University of Health, Medical & Technological Sciences

Board of StudiesMr. Rajen PadukoneMember – Academic Senate, Sikkim Manipal UniversityMs. Vimala Parthasarathy Prof. K. V. VaramballyHOD DirectorConvener Manipal Institute of ManagementDepartment of Management & Commerce ManipalDirectorate of Distance EducationSikkim Manipal University

Prof. Raj Dorai Mr. JagadeeshIndustry Consultant and Assistant ProfessorVisiting Faculty, IBA, IFIM and BIM, Department of Management &Bangalore Commerce, Directorate of Distance

Education, Sikkim Manipal University

Mr. Umesh Maiya Mr. R. Ravindra RaoAssistant Professor Senior FacultyDepartment of Management & Commerce Manipal Institute of Management Directorate of Distance Education ManipalSikkim Manipal University

Content preparation TeamContent Writing and Compilation Dr. Tribhuvan J.Professor, Garden City CollegeBangaloreFormat Editing Language EditingMr. Umesh Maiya Mr. Sridhar BhattAssistant Professor Lecturer in EnglishDepartment of Management & Commerce Government College,Directorate of Distance Education UdupiSikkim Manipal University

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.

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.

SUBJECT INTRODUCTION

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

Sikkim Manipal University Page No. 1

Unit 1 Personal Selling and

Sales Management OverviewStructure:

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.



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



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



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



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.



2. Intermediaries: Free goods, discounts, advertising allowances, co-

operative 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



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.



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.


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



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-to-

person 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 long-

term 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.)



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



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



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.



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.



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.



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.



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.


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 _______.



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. 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.




SAQs I

1. False 2. True 3. False

SAQs II

1. True 2. True 3. 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



Unit 2 Organizing the Sales Department

Structure:

2.1 Introduction

Objectives

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


2.4 Sales Department Relations

2.5 Distributive Network Relations


2.6 Summary



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:


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

Explain the steps involved in building a winning sales organization.



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;



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.



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



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.



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



salesperson toward achievement. Sit down with each salesperson one-on-

one. 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.



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.



• 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.



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.




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.


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



Unit 3 Sales Force Management

Structure:

3.1 Introduction

Objectives

3.2 Principles of Personal Management

3.3 Recruiting Sales Personnel


3.4 Selecting Sales Personnel

3.5 Sales Personnel Training Programs

3.6 Motivating Sales Personnel


3.7 Compensating Sales Personnel

3.8 Managing Sales Expenses


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



3.1 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



focuses on this aspect while dealing with recruitment, selection and training

of sales personnel, in detail.

Objectives:


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.



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.



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



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.



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



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.



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 sales-

based incentives, bonuses are paid to store managers based on store



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.



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.



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.



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



relocated in order to enhance efficiency. The implementation of a three year

programme to improve training in head office will commence in 2007/08.



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;



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."



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.



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.



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



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



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.



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.



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 Web-

enabled environment?



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 e-

commerce, 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?



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:

Which salespeople get what Web credit?

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.

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



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 e-

commerce 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



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



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



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.



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 1Actions 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%



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



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



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.



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.



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.



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:

Thefirst 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.



• Thenext 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.



Antecedents communicate what you want participants to do.

Make sure you define objectives clearly. Promote rules and awards.

Createexcitement 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.Distributeconsistent 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 areaverage

performers. At either end are the top and bottom performers. Top

performers (10%) will always be at the top. They have theskills and are

self-motivated to consistently perform at a higher level.



The lower-end performers (10%) will always be at the bottom. Thereis 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.



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.



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 self-

confidence 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.



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.


1. What are the recruitment procedures? Explain.

2. Write a short note on Personal Management.

3. Explain sales personnel training programs.



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.


SAQs I


SAQs II

1. False 2. True 3. True

SAQs III

1. False 2. True 3. True

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



Unit 4 Directing and Controlling Sales Efforts

Structure:

4.1 Introduction

Objectives

4.2 What is a Sales Budget?

4.3 The Quotas

4.4 Sales Territories

4.5 Sales Control and Cost Analysis


4.6 Summary



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.



Objectives:


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.



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.



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



Current market share

Stretch targets

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



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



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 horses-

winning 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



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.



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.



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.



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.



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.


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.


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



Unit 5 Logistics of Distribution

Structure:

5.1 Introduction

Objectives

5.2 Communication and Logistics

5.3 Functions of Logistics Management


5.4 Customer Services, Data Mining/Data Warehousing

5.5 Elements of Logistics


5.6 Application of Technology in Logistics and Channel Information

Systems

5.7 The Process of Logistics

5.8 Strategic Management in Logistics


5.9 Domestic and Global Challenges before Logistics

5.10 Summary



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.



Commercial organizations started a logistics department 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:


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.



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



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



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.



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.



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.



• 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 enterprise-

wide 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.



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 reg-

ular 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.



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.



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


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.



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


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.



Pipeline

Advantages

• Mass movement of liquids and gases.

• Low operating costs.

Disadvantages

• Limited applicability.

• Not widespread.


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



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 end-

customer 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



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.



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



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



• 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.



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, market-

place 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



documentation. Finally, managers must be diligent in developing

transportation performance measurements that will provide them with

quantifiable data necessary for increased productivity and competitive

advantage.


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.



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.


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.


SAQs I

1. True 2. True 3. False

SAQs II

1. Rail transportation

2. Sea transportation

3. Sea tankers

4. Air transportation



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



Unit 6 Channel Management

Structure:

6.1 Introduction

Objectives

6.2 Policies of Marketing Channels

6.3 Designing Marketing Channels


6.4 Assessing Channel Performance

6.5 Marketing Channel Integration and Hybrid Channel Systems


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


6.10 Summary



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).



This unit deals with the policies of marketing channels, designing channels,

assessing channel performance and managing channel relationships.

Objectives:


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



training/installation/consulting 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



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 high-

priced 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



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 sell-

through.

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



4. 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.



1. A Channel Marketing Manager is typically responsible for the sell-

through 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.



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 opt-

in 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



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



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.


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.



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



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.



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.



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 shareStagnant 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



Advertising and promotional support

Technical support and giveaways

Exclusive deals

Excellent customer service

Sponsorships

Recognition

Pricing, margins and discounts

Regular communication

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:



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.



Long-term interfirm relationships.

The emerging role of strategic alliances.

Strategic implications for the twenty-first century.

The traditional partnership between manufacturers 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.



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



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



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



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



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



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.



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.



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



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.



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.



1. Channel relationships are increasingly important in creating market

value and sustainable competitive advantage.



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.


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.




SAQs I

1. True 2. True

SAQs II

1. A multi channel user

2. Offline efforts

3. Customer communication

SAQs III


Answers to TQs:

1. Refer to 6.2

2. Refer to 6.4

3. Refer to 6.8

4. Refer to 6.9



Unit 7 Recent Trends in Channel Management

Structure:

7.1 Introduction

Objectives

7.2 Wholesaling

7.3 Retailing

7.4 Ethical and Social Issues in Sales and Distribution Management


7.5 Summary



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:


Explain the meaning of ‘wholesaling’.

Explain the meaning of ‘retailing’.

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

example.



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



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



protect customers from precipitation. Online retailing, also known as e-

commerce, 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



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.



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.



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.


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’



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.


1. What is wholesaling? Explain.

2. Explain the retailing? Explain.


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



Unit 8 Introduction to Supply Chain Management

Structure:

8.1 Introduction

Objectives

8.2 Meaning and Definition of Supply Chain

8.3 Components of Supply Chain


8.4 Schools of Thoughts

8.5 The Process of Supply Chain Management

8.6 Objectives of Supply Chain Management


8.7 Summary



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



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:


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.



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



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. 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.



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 non-

issues.

Financial-oriented supply chain or more fondly known as "cash-to-cash

cycle" chain provides a company with negative working capital (accounts



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 fast-

moving 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



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



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



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 cost-

economics. 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.



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.



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 company-

centric.



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.



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



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.



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



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.



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.


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



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.


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?


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



Unit 9 Planning and Designing Supply Chain

Structure:

9.1 Introduction

Objectives

9.2 Supply Chain Integration

9.3 Forecasting in Supply Chain


9.4 Managing Demand and Supply

9.5 Network Design


9.6 Summary



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:


Explain supply chain integration.

Explain forecasting in supply chain.

Describe the way of managing demand and supply.



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.



Stevens makes an interesting comment 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 co-

ordinated 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.



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



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



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



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



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.



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,



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



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



graphics, workstation technology and 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.


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.



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.


1. Explain supply chain integration.

2. Describe forecasting in supply chain.

3. Describe the way of managing demand and supply.


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



Unit 10 Co-ordination in Supply Chain

Structure:

10.1 Introduction

Objectives

10.2 Partnering in Supply Chain

10.3 Obstacles in Supply Chain Co-ordination


10.4 Managerial Leverages to Achieve Co-ordination

10.5 Outsourcing and Supply Chain

10.6 Supply Chain Performance


10.7 Summary



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.



Objectives:


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



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.



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



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.



1. The post-transaction elements of customer service are generally

supportive of the product while in use



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-to-

end 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



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



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



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.



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-the-

art 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-relatedreasons

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



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.




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.


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.




SAQs I

1. True 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



Unit 11 Issues Regarding Information

Technology and Supply Chain

Structure:

11.1 Introduction

Objectives

11.2 Technology in Supply Chain Management

11.3 E-business and Supply Chain


11.4 Summary



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:


Explain the use of technology in supply chain management.

Explain Electronic Data Interchange.



Explain IT based supply chain operations.

Describe the E-business applications.

Explain E-Procurement and E-Collaboration.

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



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



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.



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.



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.



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 enterprise-

wide 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



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.



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.



• 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



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.



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



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.



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 e-

marketplaces 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 e-

marketplaces 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,



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,



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 e-

business 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.



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



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



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.



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.



and retrieve data.



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.


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.


SAQs I

1. True 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



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Homewood, IL: Irvin

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Chain Management: Cox town Publishers, Aurangabad.

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Logistics Industry Almanac:

Sales, Distribution and Supply Chain Management

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