Distribution System

Introduction: Basic Concepts of the Distribution System Distribution of goods and services plays an important role in the sales system. Distribution system varies from company to company and region to region. The distribution system gives strength to the company by helping to increase the reach of the product to various parts of the region, country or even in foreign markets. An effective distribution system helps in making available goods in the right quantity at the right time when they are required and giving a reasonable earning to those who are associated with the distribution system like wholesalers, retailers, departmental stores, etc.

Andersen Consulting Distribution Strategy Pyramid

A robust approach for reviewing distribution strategies across industries is summarised in the Andersen Consulting Distribution Strategy Pyramid, focuses on answering the following strategic questions Given the value proposition, who are the end customers and, therefore, what are the distribution objectives? What channel structure will achieve these distribution objectives at the lowest cost to serve? How do we manage our physical network to achieve objectives at lowest costs? What processes and organisation structure will help sustain the distribution networks performance?

This approach aims to Ensure that a companys distribution strategy is based on zero-based distribution objectives derived from end customer needs. Ensures complete integration across channel structure and supporting processes with the zero based distribution objectives and Results in the lowest cost to serve across product markets.

Setting Distribution Objectives What are distribution objectives? For a product market, they are defined in terms of availability of the product (for example, percentage of total outlets reached). Most companies do not explicitly set distribution objectives. Of those that do, distribution objectives often have no linkage to end customer requirements. Often companies fail to ask questions like, How many and what kind of outlets do I need, to be available to a given target audience and their buyer behaviour? There are also regional differences in category development to be taken into account. For instance, will extending distribution in a region with a low level of category development help boost sales? Finally, the objectives should take note of the marketing initiatives planned for the year.

The Andersen Consulting Distribution Strategy Pyramid

Distribution Objectives STRATEGY Channel Design Network Strategy

STRUCTURE

Intermediate Management

Warehouses and Transport

Materials Management

PROCESS

IT

Policies and Procedures

Facilities and Equipment IMPLEMENTATION

Channel Management

The Distribution Development Index (DDI) is defined as the availability of a brand/category in the market relative to that of a benchmark brand/category. The Category Development Index (CDI) is defined as the per capita consumption of the category in that market relative to the national per capita consumption of the category. The relative level of DDI and CDI will determine the extent of the opportunity to actually extend distribution

Developing Channel Design The Pyramid recommends a comprehensive review of channel structure from the perspective of achieving distribution objectives at the lowest cost.
Distribution Processes Setting/Achieving Distribution Objectives
Setting up distribution strategy with alternatives

Controlling Distribution TDC

Consistently lower inventory levels in changing demand

Inventory management through a periodic review of network Integrated supply chain planning

Demand forecasting based on consumer trend secondary

Setting distribution objectives in line with the demand potential

Lower inventories Lower trade spends (no attempts to boost sales where demand)

Monitoring of trade spends Monitoring of distributor

Achieving distribution objectives by ensuring the mix of direct coverage and reach.

right

Controlling trade spends Controlling distributor expenses and service evils to prevent distributors from making sales.

Developing Physical Network Strategy

Most companies take the location and capacities of their depots and manufacturing units as given. The Pyramid recommends a comprehensive optimisation exercise for the TDC of distribution. This requires the optimal channel design to be populated with a plan for the flow of goods and information in terms of the following How many facilities (manufacturing units/depots/CFAs) are needed and where? Which customers/regions and which product lines should be served from each facility? How much inventory should be maintained in each facility? The populated network needs to be optimised with respect to the total delivered cost of distribution. Using linear optimisation, several companies have managed to cut distribution costs by as much as 10-15%.

Reviewing Distribution Processes

Most companies do not monitor the ability of the distribution network to achieve distribution objectives, or the cost of distribution. The Pyramid recommends continuous monitoring of the ability of the distribution network to achieve objectives at the lowest cost through robust action oriented monitoring processes. A two step approach is required to formalise these principles. It is a one time exercise to bring the distribution system (strategy, structure, processes) in line with distribution objectives. Subsequently, annual reviews of the distribution system, as a part of the annual strategic planning process, should be undertaken.

Functions of Physical Distribution

In main, physical distribution functions may be listed as follows: Locational analysis Transportation Material handling Warehousing Packing Order processing Packaging Inventory control Customer sales service.