Logistics Support to the Distribution Channel

The success of the distribution channel depends largely on the effectiveness and efficiency of logistic operations of the firm. Channel management is essentially involved in the control of prod­uct flow, information flow, promotional flow and ownership flow. However, the product flow and related information flow are taken care of by logistics management.

The channel cannot exist without an efficient flow of material across the channel structure so as to make available the right product at the right time and place. In a nutshell, channel manage­ment and the logistics management should go hand in hand for an efficient and effective physical distribution of products.

To achieve this goal, it is essential to tune logistic operations to the requirements of channel members, which can be systematically done through the following means.

1. Logistics Service-Level Requirement Planning

The channel members want good returns on the money they have invested and the effort they have put into the business. They are interested in the availability of goods at all times, without the risk of carrying inventory. They would want the risk element to be transferred to the manufacturer. On the other hand, the manufacturer does not want to bear the burden of inventory-carrying cost. The result is ‘pushing’ the inventory on the distribution channel. The logistics programs based on the ‘push’ philosophy do not give any benefits to channel members. They carry over stocks of the mate­rial that is not required by the customer. In turn, the firm’s cash flow is severely affected. To resolve this problem, the logistics manager should first study the requirements of channel members. Today, the requirement is frequent deliveries of small lots. While this will no doubt increase transporta­tion cost, it will drastically cut inventory cost. The stockist or wholesaler, on the other hand, prefers freight economies through bulk supplies and less frequent consignments. The logistics manager, through survey feedbacks, should try to understand the requirements of the channel member and fix the service standard for each category of channel members. The basis for determining the standard will be (1) channel members’ requirements, (2) the firm’s available or proposed logistical network, and (3) the trade-off between cost and service level. Hindustan Lever, for example, works on different logistical standards for supply of material to retail chains (Food World, Defence Can­teen Store), wholesalers and sub dealers. The cigarette giant ITC delivers material two times a day to its retailers against cash payment, while wholesale dealers are delivered materials by truckload twice a week. They have fixed the logistics service-level standard as per the actual requirements to avoid any inventory pile-up at various stages of distribution. Factory manufacturing programs are scheduled according to the requirements of the channel members, who forecast their demands with a 2 per cent plus/minus error margin, in close coordination with the logistics department.

2. Analyzing the Cost Benefits

The logistics program calls for proper deployment of the firm’s resources. For example, air trans­port may be used for faster delivery, but the transportation cost will be prohibitive in the case of low unit price products. The logistics manager has to take into consideration the implications of the proposed logistical program on the inventory levels to be maintained by the firm. A faster order-fulfilment cycle will have to be supplemented by a faster procurement, manufacturing and order processing and cash generation cycle. This may require additional resources to fine-tune the system to an optimum logistical program. Hence, logistical programs have to be designed and implemented in close coordination to reap maximum benefits with optimum cost. A firm want­ing to introduce a new product may think of developing an elaborate logistical network only after ascertaining the growth in the order inflow and product acceptance by the consumers. Initially, it may have to rely on the service providers’ network on limited counts and may have to pay a little more until sales volumes are built. The logistical program involving the use of air transportation for distribution of fresh flowers in the European markets may be justified on the grounds of the higher unit price it is fetching and the short shelf life of the product.

Just-in-time (JIT) delivery system may not be possible to implement without the IT backup and related supporting environment for procurement, manufacturing and inventory management. JIT system involves investments in building the supporting infrastructure and the organization culture to run it efficiently and effectively.

3. Programs Implementation and Monitoring

The implementation of the logistical programs requires managerial skills. Material movement at the planned velocity across the supply chain requires the coordination of various logistical components such as warehousing, transportation, material handling, inventory control, packaging and informa­tion flow. The configuration of the subsystems should be such that it should facilitate the easy move­ment of goods rather than create bottlenecks. The best way is to outsource the logistical function to the service provider having core competence in this area of operation.

Close monitoring of the programme through a regular feedback on deviations in delivery cycle time, inventory turnover ratio, service level, cost and productivity is a must to remove the bottle­necks that might not be visualized at the time of planning. A leading chemical company, earlier operating on credit sales to its dealers, changed over to a no-credit system and offering to them a higher compensation (commission) for buy, stock and sell of the products, changed its logistics program to suit the pull system. In turn their cash flow improved and inventory levels (both at factory and in the channel) plummeted. Now the deliveries are frequent, but the lot size is small. Even though transportation cost has gone up, the inventory-carrying cost has reduced drastically, resulting in overall gains.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.